Clifford Chance

High-profile cases, such as Purdue Pharma in the United States and Link Funds Solutions Limited in the United Kingdom, highlight the challenges of restructuring companies facing large-scale litigation exposures.

In this post, we explore the Spanish approach to addressing insolvency in these situations, focusing on how the tools provided by Spanish Insolvency Law can be leveraged to ensure the continuity of a business.

International case studies: Purdue Pharma and Link Fund Solutions Limited – Insights for EU Member States

In recent times, we have seen a few examples worldwide where debt restructuring tools have been deployed to confront the challenges posed by multi-party litigation.

In fact, one of the most significant legal milestones in 2024 in the debt restructuring sector was the US Supreme Court’s decision on the Purdue Pharma restructuring plan. The company, facing substantial lawsuits over its marketing of the opioid OxyContin, sought to resolve its financial distress through a Chapter 11 restructuring under the US Bankruptcy Code. Purdue’s plan included provisions aimed at releasing certain non-debtor third parties from potential liability.

In June 2024, the US Supreme Court concluded that non-consensual releases of these third parties through Chapter 11 are not expressly permitted under existing US bankruptcy law. Although the decision may make it more difficult to resolve mass torts in bankruptcy, Chapter 11 can still be used effectively to resolve large-scale litigations.

Another noteworthy example from the United Kingdom is the Link Fund Solutions Limited case, where the company resolved complex group litigation relating to its role as authorised corporate director of the LF Woodford Equity Income Fund using a scheme of arrangement. The scheme settled disputed claims of approximately 250,000 creditors, and importantly did not involve the company making any admission of liability in the event that the scheme was not to succeed. In the end, the scheme received the support of almost 94% support by number, and 96% by value, by the scheme creditors; and the UK Court approved the scheme in the face of opposition from certain creditors and consumer groups and determined that a proposed appeal had no realistic prospects of success.

Link's scheme was structured so as maximise the amount that Link could pay under the scheme, and brought what would otherwise have been lengthy litigation to a much earlier resolution. A key innovation in this case was the "Third Party Litigation Deed," which allowed creditors to retain claims against third parties while releasing LFSL from liability.

Although these scenarios are specific to the United States and the United Kingdom, their underlying dynamics—massive liabilities caused by mass claims—are increasingly relevant to companies in the EU.

In recent years, consumer litigation has surged across EU Member States. Meanwhile, the introduction of collective redress mechanisms under the Representative Actions Directive (EU) 2020/1828 is expected to make this type of large-scale litigation more common.

Building on the examples mentioned above, EU businesses facing collective or mass litigation should integrate the local tools available for managing financial distress into their broader strategy to confront this situation.

In jurisdictions where these tools have not yet been widely employed in similar contexts, it may be valuable to draw on established precedents in other regions for innovative solutions and to adapt them to the local legal framework.

The Spanish legal framework: A tailored approach depending on the nature of the claim

Although recent reforms have brought Spain's legal framework for insolvency and restructuring closer to those of the United States and the United Kingdom, significant differences persist.

Current pre-insolvency legislation excludes the restructuring of debts arising from damages claims. However, it does not preclude the restructuring of other claims, such as reimbursement actions arising from contractual nullity or similar legal obligations, which may also result from collective or mass litigation.

Provided the aforementioned exclusion, companies facing collective redress claims may require specialised tools to effectively manage insolvency and sustain their economic activities.

One such tool is the sale of productive units, which offers a viable mechanism for maintaining operations, while addressing liabilities. This approach becomes particularly effective when it is implemented through a prepack concursal, a structured process that maximises the value of the business at the initial stage of insolvency proceedings.

Leveraging the prepack: Key advantages

The prepack concursal offers two critical advantages for businesses in financial distress due to mass litigation:

1. Encapsulation of Debt: Most liabilities, with certain exceptions, remain with the original company, ensuring that the buyer of the productive unit is not burdened by past claims.
2. Asset Transfer: The business and its operational assets are transferred to a new entity, preserving economic value and continuity.

This mechanism safeguards employment and ensures the continued viability of economic activity. However, it is crucial to note that the release from liabilities is only effective if the buyer is not closely related to the insolvent entity.

Conclusion

Collective and mass litigation present both legal complexities and significant financial risks, often culminating in insolvency. Taking early action is essential to address these challenges effectively.

Pre-insolvency mechanisms are poised to become increasingly important in this context. Anticipating their use and aligning a strategy with the client’s objectives will be key to achieving success in these high-pressure situations.

In regions where these mechanisms remain largely unexplored, proven precedents from other jurisdictions can foster innovative solutions