Insolvency proceedings are not the end of the road. This guide analyses the real options available to an insolvent company in Spain: from pre-insolvency through to productive unit sales, including creditors' agreements and liquidation.
Insolvency proceedings are among the most feared words in Spanish business vocabulary. They evoke failure, loss of control, stigma. And yet, insolvency proceedings are a legal procedure designed to protect — to protect the company, its employees, its creditors, and the economic fabric as a whole.
In this guide, we analyse the real options available to a company facing insolvency in Spain. Because insolvency is not necessarily the end of the road; in many cases, it is the beginning of the solution.
Spanish Insolvency Law defines two types of insolvency:
Current insolvency. The company cannot regularly meet its enforceable obligations. It is not necessary for it to have defaulted on all its debts — it is sufficient for the non-compliance to be widespread and not merely isolated.
Imminent insolvency. The company anticipates that it will be unable to meet its obligations regularly and punctually within the next two years. This concept allows action to be taken before the crisis becomes irreversible.
The business owner’s legal duty is to file for insolvency within two months of becoming aware of current insolvency. Failure to comply with this duty can generate personal liability for the director — making the decision both urgent and delicate.
Spanish legislation offers several tools for resolving insolvency without resorting to formal proceedings. These pre-insolvency tools are, in most cases, preferable to full proceedings.
The notification to the court that negotiations are being initiated to reach an agreement with creditors (Article 583 TRLC) grants the company a three-month protection period during which guarantees cannot be enforced nor individual enforcement actions initiated. It is a temporary shield that allows negotiation without the pressure of legal actions.
The pre-insolvency notification is not public (it is not recorded in the Commercial Registry) and does not entail the opening of any court procedure. It is a negotiating tool, not an insolvency procedure.
Introduced by the 2022 reform, the restructuring plan allows the modification of debt — financial, commercial, tax — with the approval of qualified majorities of creditors, confirmed by the court. It is the most flexible and powerful mechanism in the pre-insolvency arsenal.
Designed for debtors with moderate liabilities, it is processed before an insolvency mediator and allows deferral and haircut agreements to be reached without direct court intervention. If it fails, it automatically leads to simplified consecutive insolvency proceedings.
If pre-insolvency channels do not work or are not viable, the company enters formal proceedings. The procedure has several clearly differentiated phases.
This is the diagnostic phase. The judge appoints an insolvency administrator who prepares an inventory of the company’s assets and a list of claims against it. The administrator analyses the financial position, assesses the business’s viability, and issues a report that will form the basis for subsequent decisions.
During the common phase, the company continues operating. The debtor retains administrative powers under the insolvency administrator’s supervision (voluntary insolvency) or loses them in favour of the administrator (involuntary insolvency, when filed by creditors).
If the company is viable, a creditors’ agreement is sought — an agreement with creditors that allows continuity. The agreement may include haircuts (debt reduction) and deferrals (payment postponement). It must be approved by creditors and confirmed by the court.
The content of the agreement is flexible. It may include debt-to-equity conversion, asset transfers in payment, corporate restructuring operations, or any other measure that enables the company’s future viability.
A successful agreement allows the company to exit proceedings, comply with the agreed payment schedule, and continue its activity normally. It is the best possible outcome in insolvency proceedings.
If no agreement is reached, or if the agreement is breached, the company enters liquidation. Liquidation involves the orderly sale of the company’s assets to pay creditors according to the legal priority order.
Liquidation does not necessarily mean closure. The sale of productive units — organised sets of assets and employees that allow an activity to continue — is an increasingly used tool that can save the business even if the holding company is wound up.
The sale of productive units deserves its own section because it is probably the most effective mechanism for preserving business value in insolvency proceedings.
The concept is simple: instead of selling the company’s assets separately (machinery, property, inventory), they are sold as an organised set that allows the buyer to continue the activity. The productive unit includes assets, contracts, and, crucially, jobs.
For the buyer, acquiring a productive unit in insolvency proceedings offers significant advantages: a price generally below market value, the ability to select which assets and contracts to take on, and a special employment succession regime that allows some flexibility.
For employees, the sale of the productive unit is normally the best possible news within insolvency: their jobs are preserved, even though the employer changes.
At Blue Mountain, the acquisition of companies or productive units in distressed situations is one of our investment lines. Our experience allows us to rapidly assess viability, structure the bid, and negotiate with the insolvency administrator and the court.
One of the reasons many companies reach insolvency proceedings too late is the stigma. In Spanish business culture, insolvency is associated with the personal failure of the business owner. This stigma has real consequences: the owner postpones the decision, creditors lose time and money, and employees suffer unnecessary uncertainty.
The reality is that many viable companies end up in insolvency due to circumstances not attributable to the business owner: the loss of a client due to external factors, a pandemic, a sector crisis, a regulatory change. Insolvency proceedings are not a moral judgement on the business owner — they are a legal procedure for managing a financial situation.
Countries with a more mature insolvency culture — the United States with its Chapter 11, the United Kingdom with its Administration — have understood that facilitating the restructuring of viable companies benefits the entire economy. Spain has made significant progress with the 2022 insolvency reform, but cultural change is slower than legislative change.
An aspect of particular concern to business owners is personal liability. Insolvency law provides for proceedings to be classified as either fortuitous or culpable. If classified as culpable, the company’s directors may be ordered to cover the insolvency shortfall with their personal assets.
Grounds for culpability include having aggravated the insolvency through intent or gross negligence, failure to maintain proper accounts, failure to file annual accounts, or failure to file for insolvency on time. The best protection against a culpable classification is to act diligently: maintain proper accounting, file accounts, apply for insolvency when required, and cooperate with the insolvency administrator.
If you recognise signs that your company is approaching insolvency — persistent cash-flow tension, inability to meet maturities, continued deterioration of margins — do not wait. The available options are infinitely broader when action is taken early.
Seek specialist advice. Not the generalist lawyer who handles the company’s commercial matters, but professionals specialising in restructuring and insolvency who know the available legal tools and have experience negotiating with creditors.
Evaluate pre-insolvency options. In most cases, there are alternatives to full proceedings that are faster, cheaper, and less damaging to the business.
Consider bringing in a partner. An investor specialising in special situations can provide the capital and management capability the company needs to emerge from the crisis.
And if proceedings are unavoidable, face the process with professionalism and transparency. Well-managed insolvency proceedings are not the end — they can be the beginning of a new chapter for the company, with a restructured financial position and a more robust business model.
The first step is always the hardest. But it is also the most important. Let’s talk.
By Blue Mountain Capital
By Blue Mountain Capital
By Blue Mountain Capital
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