A pre-insolvency mechanism that allows a debtor to negotiate a debt restructuring with creditors outside the courtroom, facilitated by a designated mediator.
Formal insolvency proceedings are costly, slow, and destroy value. Every professional in the restructuring world knows it. The out-of-court settlement emerged as a faster, less invasive alternative for companies that need to restructure their debt but whose situation does not justify the expense and stigma of a full judicial process. It remains underutilised in many markets — and represents a window of opportunity for investors who can identify viable businesses trapped in liquidity problems.
An out-of-court settlement (known in Spain as an acuerdo extrajudicial de pagos, or AEP) is a pre-insolvency procedure that allows a debtor to negotiate a payment plan with creditors outside the judicial arena, with the involvement of a court-appointed mediator. Its purpose is to avoid formal insolvency when the situation is manageable through an orderly debt restructuring.
The process is built around three elements:
Not every company qualifies. Under Spanish law, there are eligibility requirements — including caps on total liabilities, a requirement that the debtor be in a state of actual or imminent insolvency, no prior economic crime convictions, and no prior settlement within the preceding five years.
A critical protective effect kicks in once the mediator appointment is requested: a temporary shield activates that prevents creditors from initiating or continuing enforcement proceedings against the debtor’s assets during the negotiation period (typically three months). This breathing room allows the company to negotiate without the pressure of imminent seizures.
| Aspect | Out-of-court settlement | Formal insolvency |
|---|---|---|
| Venue | Extrajudicial | Court-supervised |
| Cost | Low (mediator fees) | High (administrator, lawyers, court fees) |
| Duration | 2-4 months | 12-24 months (or longer) |
| Stigma | Minimal | Significant |
| Maximum haircuts | Up to 75% | Unlimited (per composition) |
| Maximum deferrals | Up to 10 years | Up to 10 years |
The principal advantage is speed and reduced reputational damage. A company negotiating an out-of-court settlement maintains far more constructive relationships with its suppliers, customers, and banks than one in formal insolvency. The stigma attached to insolvency remains severe in many markets: suppliers often cut off deliveries the day after a formal filing, which can destroy a viable business overnight.
Out-of-court settlements create investment opportunities in two ways:
Direct investment in the company. An investor can inject the capital needed to execute the settlement payment plan, acquiring a stake in the business in return. By intervening before formal insolvency, the investor accesses a business with its commercial relationships intact, its team operational, and its reputation preserved. The entry price is significantly below the company’s normalised value, because the business owner is negotiating from a position of financial weakness.
Distressed debt acquisition. A sophisticated investor can purchase claims against the debtor from creditors who prefer to collect now (at a discount) rather than wait for the settlement outcome. This allows accumulation of a creditor position and a voice in the negotiation.
A food distribution company in southern Spain with 22 employees and 8 million in revenue enters difficulty after losing two major contracts and suffering a string of customer defaults. Overdue liabilities total 1.8 million euros across suppliers, banks, and tax authorities.
The owner requests the appointment of a mediator. With the mediator’s help, a proposal is presented: a 40% haircut on trade creditors with a three-year payment schedule for the remainder, full maintenance of tax obligations under a five-year deferral plan, and a refinancing of bank debt with a twelve-month grace period.
In parallel, Blue Mountain evaluates the business and offers a 500,000-euro capital injection in exchange for 60% of the equity. The capital covers the working capital needed to maintain operations and finances the initial settlement payments. The original owner retains 40% and continues as commercial director.
Creditors accept because the alternative — formal insolvency with probable liquidation — would yield significantly less recovery. Eighteen months later, the company has stabilised revenue at 7 million, won two new customers, and is meeting payment schedules on time.
Statistics are modest in Spain. Most settlements end up transitioning to formal insolvency because companies seek help too late. The key to success is early action: activating the process while the company has liquidity problems but its underlying business remains viable. Waiting until the situation is desperate dramatically reduces the probability of success.
Not automatically. Unlike formal insolvency, where the administrator may assume management functions, in an out-of-court settlement the debtor retains administration of the business. The mediator facilitates negotiation but does not manage the company. However, if the settlement involves the entry of an investor as part of the plan, the owner will need to cede the agreed stake.
If no agreement is reached, or if the debtor subsequently defaults on its commitments, the mediator will request the declaration of consecutive insolvency proceedings. These proceedings open directly in the liquidation phase (skipping the composition phase), except where an early composition proposal exists. This is a real risk that must be weighed before initiating the process.
If you wish to explore a potential collaboration or present an investment opportunity, we invite you to contact us. We guarantee absolute confidentiality in all our conversations.