The out-of-court payment agreement is a pre-insolvency mechanism that allows distressed companies to negotiate haircuts, deferrals, or both with their creditors without entering formal insolvency proceedings. We explain its requirements, phases, and advantages.
When a company faces financial difficulties and can no longer meet its payment obligations normally, the first image that comes to mind is formal insolvency proceedings — a judicial process that is lengthy, expensive, and frequently stigmatising. However, Spanish law offers an alternative mechanism that is less well-known but extraordinarily useful: the out-of-court payment agreement (acuerdo extrajudicial de pagos, or AEP). At Blue Mountain, we have participated in numerous transactions where the AEP has been the tool that saved a viable company going through a liquidity crisis.
The out-of-court payment agreement is regulated in Book Two of the Consolidated Text of the Spanish Insolvency Act (Royal Legislative Decree 1/2020), specifically in articles 631 to 694. This mechanism was originally introduced by Law 14/2013 on support for entrepreneurs and was substantially amended by Law 16/2022 reforming the insolvency act, which transposed Directive (EU) 2019/1023 on preventive restructuring frameworks.
The AEP is a pre-insolvency procedure — that is, it takes place before and as an alternative to formal insolvency proceedings — allowing the debtor to negotiate with creditors an agreement that may include haircuts (reductions in debt), deferrals (extensions of payment terms), debt-for-equity swaps, or payments in kind, without the need for full judicial proceedings.
Both natural persons (self-employed individuals) and legal persons (companies) that find themselves in a state of actual or imminent insolvency may apply for an AEP, provided they meet certain requirements.
Legal persons. The company must be capable of reaching a payment agreement with its creditors. Insurance companies, credit institutions, and entities belonging to a group that presents consolidated accounts where any group company fails to meet the requirements are excluded.
Viability assessment. Although the law does not explicitly require it, practice has consolidated the expectation that there is a reasonable viability of the underlying business. An AEP is not an instrument for artificially prolonging the life of an unviable company; it is a tool for giving time and breathing room to a viable company that has a liquidity or liability-structure problem.
Manageable liabilities. The law sets a liability threshold for access to the AEP: the initial estimate of total liabilities cannot exceed five million euros. This limit has been subject to debate, as it excludes medium-sized companies with debt levels that, while significant, could potentially be resolved through a creditor agreement.
The procedure begins with an application by the debtor to the commercial registrar (for legal persons) or to the notary (for natural persons). The application must include an inventory of assets and rights, a list of creditors with their claims, a proposed payment plan, and a viability plan.
The registrar or notary appoints an insolvency mediator from the list of the Registry of Mediators and Mediation Institutions of the Ministry of Justice. The mediator is a key figure in the proceedings: their role is to facilitate negotiation between the debtor and its creditors, verify the viability of the proposal, and supervise compliance with the agreement.
Filing the application produces immediate protective effects for the debtor.
Stay on enforcement. Creditors included in the application cannot initiate or continue enforcement actions against the debtor’s assets during the negotiation period. This moratorium is fundamental because it allows the debtor to negotiate without the pressure of seizures, auctions, or mortgage enforcements that could destroy the company’s value.
Protection from the duty to file for insolvency. While the AEP is being processed, the debtor is not obliged to file for formal insolvency, eliminating the pressure of the two-month legal deadline from the moment insolvency becomes known.
Court notification. The mediator notifies the competent commercial court of the opening of proceedings for monitoring purposes.
The insolvency mediator convenes a meeting of the debtor’s creditors within a maximum of two months from their appointment. Before the meeting, the mediator sends creditors the proposed agreement together with the payment plan and viability plan.
The agreement proposal may include:
Deferrals. Extensions to the payment of debts for a period not exceeding ten years.
Haircuts. Reductions in the amount of debt. The reformed 2022 legislation does not set a percentage limit on haircuts, although creditors will rarely accept haircuts that imply a recovery lower than what they would obtain in formal insolvency proceedings.
Debt-for-equity conversion. Transformation of claims into equity stakes in the company, converting creditors into shareholders. This mechanism is particularly relevant when the company has a viable business but an unsustainable capital structure.
Payment in kind. Transfer of debtor assets to creditors in total or partial satisfaction of their claims.
For the agreement to be approved, it must obtain the favourable vote of creditors representing at least 60% of the liabilities that may be affected by the agreement. If the proposal includes haircuts exceeding 25% or deferrals exceeding three years, the approval threshold rises to 75%.
Secured claims (mortgages, pledges) receive special treatment: they are not affected by the agreement unless the holder votes in favour.
Public-law claims (tax authorities, social security) are also not bound by the agreement, which constitutes one of the mechanism’s main limitations. Negotiation with the tax administration must be conducted through separate channels (deferrals, instalment plans).
Once the agreement is approved, the insolvency mediator supervises its compliance. If the debtor fully complies with the agreement, the affected claims are extinguished on the agreed terms. If the debtor defaults, any affected creditor may apply to the court for a declaration of formal insolvency.
Speed. The AEP can be completed in three to four months, compared with the twelve to twenty-four months typical of formal insolvency proceedings. This speed is crucial for companies whose value deteriorates rapidly with uncertainty.
Cost. AEP costs are significantly lower than those of formal insolvency. There is no insolvency administration, mediator fees are moderate (regulated by tariff), and legal costs are reduced as there are no full judicial proceedings.
Confidentiality. Although the AEP application is communicated to the court and published in the Public Insolvency Registry, the procedure has a much lower public profile than formal insolvency. This reduced visibility mitigates the reputational impact on the company, which is one of the most destructive effects of insolvency.
Business continuity. The AEP is designed to preserve business activity. The debtor retains control of management throughout the procedure (there is no intervention or suspension of powers) and the objective is to reach an agreement that allows business continuity with a sustainable liability structure.
Effects on shareholders. Unlike formal insolvency, where directors may be held personally liable through insolvency qualification proceedings, the AEP does not include a qualification procedure. This significantly reduces personal risk for directors and shareholders.
Liability threshold. The five-million-euro limit excludes many middle-market companies that could benefit from the mechanism.
Public claims excluded. The inability to include tax and social security claims in the agreement limits its effectiveness when these claims represent a significant proportion of total liabilities.
Dependence on consensus. The AEP requires the favourable vote of at least 60% of affected liabilities. If a significant creditor opposes it, the agreement can be blocked.
Risk of consecutive insolvency. If the AEP fails — because the required majority is not reached or because the debtor breaches the approved agreement — the debtor is driven into consecutive insolvency proceedings, which carry a more severe regime than ordinary insolvency.
From the perspective of an investor like Blue Mountain, companies that are in an AEP process or that could benefit from one represent specific investment opportunities.
Capital injection as part of the agreement. An investor can participate in the AEP by contributing fresh money to finance the payment plan in exchange for an equity stake. This new money receives privileged treatment in the event of subsequent insolvency (claim against the estate), reducing the investor’s risk.
Claim acquisition. Acquiring claims against the debtor at a significant discount allows the investor to participate in the AEP negotiation from a position of strength and, where appropriate, convert those claims into equity.
Post-agreement acquisition. A company that has successfully completed an AEP and restructured its liabilities can be an attractive acquisition candidate: it has a viable business (demonstrated by the approval of the viability plan), a cleaned-up financial structure, and frequently a management team motivated by having overcome the crisis.
The out-of-court payment agreement is an underutilised mechanism in Spain. Many business owners and their advisors are unaware of its existence or perceive it as an inevitable step towards formal insolvency. In reality, the AEP is a powerful and flexible tool that, applied in time and with proper advice, can save viable companies going through financial difficulties. The key is to act early — before the cash position becomes irreversible — and to present creditors with a proposal that is better than the alternative of formal insolvency. When these conditions are met, the AEP works.
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
By Dirk Manuel Martens Jiménez
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