Alternatives to insolvency proceedings: the sale as a solution

Insolvency proceedings have become synonymous with business failure in Spain. It is an unfair perception — insolvency is a legal procedure designed to protect both the company and its creditors — but it is a deeply rooted perception with practical consequences: many business owners delay filing until it is too late, when rescue options have been exhausted and liquidation is the only possible outcome.

According to data from the General Council of the Judiciary, in 2024 more than 8,400 insolvency proceedings were filed in Spain, a 12% increase over 2023. Of those proceedings, approximately 90% ended in liquidation — meaning the company ceased to exist. Only 10% achieved a creditor agreement that allowed the company to continue operating.

These figures reveal a critical truth: by the time a company enters formal insolvency, the probability of survival is very low. The key, therefore, is to act before reaching that point. And the alternatives do exist.

Alternative 1: Sale of the productive unit

The sale of a productive unit — that is, the transfer of a set of assets, contracts, and employees that constitute a functioning business — is one of the most effective mechanisms for preserving value in a distressed company. Unlike a standard company sale, where shares change hands, the sale of a productive unit involves the transfer of specific assets and liabilities, allowing the buyer to acquire the business without inheriting the company’s problematic debts.

This structure has several advantages for the distressed business owner. First, it allows the viable part of the business to continue operating under new ownership, preserving jobs and commercial relationships. Second, the proceeds from the sale can be used to partially satisfy creditors, reducing the business owner’s personal exposure. Third, it provides a clean exit from a deteriorating situation.

For the buyer, acquiring a productive unit from a distressed company can represent an exceptional opportunity: the assets are typically acquired at a significant discount, the workforce is experienced and motivated (they want the business to survive), and the competitive position of the business may remain intact despite the financial difficulties of its previous owner.

Alternative 2: Refinancing

When a company’s difficulties stem primarily from a mismatched capital structure rather than from an unviable business model, refinancing can be the appropriate solution. Refinancing involves renegotiating the terms of existing debt — extending maturities, reducing interest rates, or converting debt into equity — to give the company the breathing room it needs to recover.

Spanish law provides a specific framework for refinancing agreements through articles 596 to 630 of the Consolidated Insolvency Act. A homologated refinancing agreement offers the debtor protection against individual enforcement actions by creditors and can, under certain conditions, bind dissenting creditors.

The success of a refinancing depends on three factors: the underlying viability of the business, the willingness of creditors to negotiate (which increases when the alternative is worse — typically, insolvency and liquidation), and the quality of the viability plan presented to support the agreement.

Alternative 3: Entry of a financial partner

For companies that have a viable business but lack the capital or expertise to execute a turnaround independently, bringing in a financial partner can be the most constructive solution. This partner — whether a family office, a special situations fund, or a strategic investor — contributes fresh capital, management expertise, and credibility with creditors.

The financial partner’s entry can take multiple forms: a capital increase that dilutes existing shareholders, the acquisition of a majority stake at a price that reflects the distressed situation, or a hybrid structure that combines equity and subordinated debt.

From the business owner’s perspective, this alternative involves giving up control (or a significant portion of it) but preserving the business, protecting employees, and maintaining a stake in the future upside if the turnaround succeeds. It is rarely the easiest option emotionally, but it is frequently the most rational one.

Alternative 4: Out-of-court payment agreement

The out-of-court payment agreement (AEP) is a pre-insolvency mechanism that allows debtors to negotiate haircuts and deferrals with their creditors without full judicial proceedings. It is faster, cheaper, and more confidential than formal insolvency, and it is designed specifically for companies whose total liabilities do not exceed five million euros.

The AEP can include debt reductions, payment extensions of up to ten years, debt-for-equity conversions, and asset transfers. It requires the approval of creditors representing at least 60% of affected liabilities (75% for more aggressive proposals).

How to decide which alternative is right

The choice between alternatives depends on several objective factors:

Viability of the underlying business. If the business model is sound and the problems are primarily financial, refinancing or a financial partner entry may be the best options. If the business model itself is failing, a sale of the productive unit may be the only way to preserve value.

Urgency. If the company has weeks rather than months, the options narrow. A productive unit sale can be executed relatively quickly. Refinancing and AEP proceedings take longer and require creditor cooperation.

Creditor composition. If the company’s main creditors are banks, refinancing is typically feasible — banks prefer to restructure rather than liquidate. If the main creditors are the tax authorities and social security, the options are more limited because public creditors have less flexibility to negotiate.

Owner’s objectives. Some owners want to stay involved; others want a clean exit. Some prioritise preserving the business and its employees; others prioritise maximising the financial outcome. The right alternative depends not only on the company’s situation but also on the owner’s personal priorities.

The cost of waiting

The most common mistake we observe in distressed situations is not choosing the wrong alternative — it is waiting too long to choose any alternative at all. Every month of delay narrows the options, erodes value, and increases the probability that the only remaining outcome is liquidation.

The business owners who achieve the best outcomes in distressed situations share a common trait: they recognised the gravity of the situation early, sought professional advice promptly, and took decisive action while they still had options. The worst outcomes invariably belong to those who hoped the problem would resolve itself.

If your company is facing financial difficulties, the time to act is now. Not next quarter. Not when the situation becomes critical. Now — while you still have alternatives.