Insolvency proceedings and restructuring plan: a company's options when facing insolvency

When a company's debts exceed its capacity to pay, or threaten to do so, the law offers tools that go beyond liquidation. Law 16/2022 of 5 September, which thoroughly reformed the Consolidated Insolvency Act (TRLC) —approved by Royal Legislative Decree 1/2020— transposed Directive (EU) 2019/1023 on preventive restructuring frameworks and considerably broadened the range of available options. Understanding which one fits each situation is the decision that marks the difference between an orderly exit and a more costly, uncertain process.

The trigger: current and imminent insolvency

Article 2 of the Act defines insolvency as the state in which the debtor cannot regularly meet its enforceable obligations. The 2022 reform gives legal weight to imminent insolvency: the situation in which, without yet reaching that state, it is objectively foreseeable that the debtor will be unable to meet its obligations regularly within the following three months. This extension is crucial because it widens the scope for early action —before the constraints of formal insolvency reduce the available options.

The practical warning signs are: operating cash flow insufficient for the next two months' payments, a debt service coverage ratio below 1x, the imminent maturity of financing lines with no identified alternative, or the start of enforcement by significant creditors.

First route: the restructuring plan

The 2022 reform introduced the restructuring plan (Book Two of the Act, Articles 616 to 697) as a pre-insolvency tool that allows the company to negotiate with its creditors, reach an agreement and —where there is a majority agreement— impose it on dissenting creditors through court confirmation.

The notice of the opening of negotiations

The process begins with a notice to the court that the debtor has opened negotiations with its creditors (Article 583 of the Act). This notice has an essential effect: for the following three months —extendable— it stays creditors' ability to start or continue enforcement against the assets and rights affected by the plan. It is the "temporary shield" that allows negotiation without the pressure of simultaneous enforcement.

Content and majorities of the plan

The plan may provide for write-downs, deferrals, debt-to-equity conversion, transfer of assets in payment or any other restructuring measure agreed between the parties. Creditors are grouped into classes according to the nature of their claims (secured, unsecured, subordinated) and the plan requires the qualified majority set by the Act for each affected class.

The cram-down: court imposition on dissenters

Where the plan is approved by the required majority but one or more creditors or classes vote against it, the court may, under certain conditions, confirm the plan and impose it on the dissenters (cram-down). This mechanism —one of the most significant of the 2022 reform— makes it possible to overcome the blockage of a minority creditor that, under the previous regime, could prevent any negotiated solution. The fundamental condition is that dissenting creditors should not be treated worse than they would be in a liquidation (best interest of creditors test).

Second route: insolvency proceedings

Where pre-insolvency restructuring is not viable or does not arrive in time, insolvency proceedings —Book One of the Act— are the procedural channel for ordering the company's liabilities and satisfying creditors as efficiently as possible.

The application: voluntary or compulsory

Insolvency may be applied for by the debtor itself (voluntary) or by its creditors (compulsory). The insolvent debtor is obliged to apply within the two months following the moment it knew or ought to have known of its state of insolvency (Article 5 of the Act); failure to do so may result, in the classification stage, in the insolvency being classified as culpable, with the consequences that entails for the directors.

Assets and liabilities of the estate

Insolvency classifies and treats the debtor's assets in an orderly manner:

• Assets of the estate: the debtor's assets and rights at the time of the declaration, plus those acquired during the proceedings.
• Body of claims: the claims recognised by the insolvency administrator, classified as claims against the estate (costs of the proceedings and the debtor's obligations during the insolvency), claims with special preference (secured by mortgage or pledge), claims with general preference (among others, wages and public claims up to certain limits), ordinary claims and subordinated claims (those of a shareholder holding more than 5% of the capital, those notified late, or those of specially related parties).

Arrangement and liquidation

Insolvency may be resolved through an arrangement —an agreement reached with ordinary creditors that may provide for a write-down of up to 75% and a deferral of up to ten years— or through the liquidation of the assets. An arrangement is the natural solution where the company is viable but needs a write-down to recover; liquidation, where there is no possible viability. Breach of the arrangement may open liquidation and give rise to a classification stage.

The special procedure for micro-enterprises

The 2022 reform added to Book Three of the Act a special, simplified procedure for micro-enterprises —those with fewer than fifty employees and liabilities not exceeding five million euros. The procedure is quicker and less costly, and can be conducted entirely online.

How we support you at RCM Legal

The main mistake we see in restructuring matters is acting too late. The sooner the financial situation is analysed —before liabilities become unmanageable and assets deteriorate— the greater the room to negotiate reasonable terms with creditors and to protect what can be protected: the value of the business, its activity and, where relevant, employment. The pre-insolvency restructuring plan is only effective if it is triggered while there is still room; in insolvency proceedings, that room is already narrower.

We advise on viability analysis, on choosing the most appropriate route for each situation, on negotiating the restructuring plan with creditors and on representation in insolvency proceedings before the Commercial Court. If your company is going through financial difficulties or wishes to get ahead of a situation of insolvency, set out your case as early as possible.