Insolvency ·
Likely insolvency: why waiting is the most expensive decision
Spanish insolvency reform allows companies to act before they stop paying. In practice, most arrive at the firm once that window has already closed.
The reform of the Spanish Insolvency Act introduced a change of approach that has yet to sink in among businesses: the central instrument of insolvency is no longer formal insolvency proceedings but the restructuring plan, and it can be triggered at a far earlier stage than most business owners believe.
Three distinct situations
The legislation draws a precise distinction between three moments, and the tools available in each are very different:
- Likely insolvency: it is foreseeable that the company will not be able to meet its obligations over the next two years. The company is paying normally today.
- Imminent insolvency: it is expected to be unable to meet obligations within the next three months.
- Current insolvency: it can no longer meet its due obligations as they fall due.
Only in the first situation does the company retain genuine negotiating capacity: it has cash, it keeps its suppliers, it has not accumulated tax or wage arrears, and its creditors still see value in it continuing. It is also the only stage at which a restructuring plan can be designed without the pressure of an immediate maturity.
What a restructuring plan allows
The plan can modify the composition, terms or structure of assets and liabilities: write-downs, extensions, debt-for-equity swaps, transfer of assets in payment, sale of business units. Its decisive advantage over a purely contractual arrangement is court approval, which extends the plan’s effects to dissenting creditors within a class once the statutory majorities are reached, and can even cram down entire classes where additional requirements are met.
Notice of negotiations
Notifying the court that negotiations have opened triggers a protected period — extendable — during which enforcement against assets necessary to the business is stayed, the duty to petition for insolvency is suspended, and termination of contracts with reciprocal obligations on the sole ground of the notice is restricted. It is a temporary shield designed precisely for negotiating, and it is underused.
Why companies arrive late
The reasons are almost always the same, and none of them is legal: the expectation that the next quarter will correct the trend, reluctance to disclose the position to the banks, and the perception that approaching an insolvency lawyer amounts to accepting closure. The result is that by the time the matter reaches the firm there is accumulated tax and social security debt, late wages and strategic suppliers that have cut off supply. At that point the range of solutions has narrowed sharply and the director has, in addition, triggered their own personal liability.
Signs that justify a review
A review is worthwhile where several of these circumstances coincide: recurring month-end cash pressure, successive deferrals with the tax authorities, breach of banking covenants, loss of a client representing a substantial share of turnover, or net assets approaching half the share capital.
None of them means the company is doomed. All of them mean that the time to decide is now, while the options remain open.
This article is for general information only and does not constitute legal advice. Every situation requires individual analysis.