Business Crisis and Restructuring: Options Under the New Pre-Insolvency Framework

Business Crisis and Restructuring

Companies can face crises driven by internal or external factors that affect their profitability and viability. Corporate restructuring is a key process to recover stability and adapt to new market conditions. There are different strategies for tackling a crisis, which may involve financial, operational and strategic adjustments.

But before turning to the strategies, it is worth framing the context, because it has changed fundamentally. The transposition of Directive (EU) 2019/1023 through Law 16/2022, reforming the Spanish Insolvency Act (TRLC), has replaced the old liquidation-driven inertia with a preventive ecosystem aimed at preserving viable businesses. For the business owner, the practical consequence is decisive: there are now legal tools to act well before insolvency, and using them in time is the difference between reordering the balance sheet and losing the company.

In 2024, Spain recorded 9,015 insolvency proceedings (22% more than the previous year) and almost 29,000 company dissolutions. The vast majority of insolvent companies are SMEs: around half have turnover below €250,000 and only 3% exceed €5 million. Behind these figures lie the withdrawal of the pandemic-era ICO state-guaranteed loans, cost inflation and rising interest rates, which have left many SMEs with accumulated debt and no liquidity to renegotiate their liabilities in the traditional way.

There is a factor that is rarely quantified: the “insolvency stigma”, which can almost instantly destroy a significant part of the market value of a company's assets through the loss of customer and supplier confidence. Avoiding liquidation is not only a legal matter: it is value preservation.

Types of Business Crisis

a) Financial Crisis

A financial crisis occurs when a company struggles to meet its payment obligations due to liquidity problems, high debt or falling revenue. The main drivers include:

• Excessive leverage: growth built on excessive debt can lead to difficulties servicing it.
• Negative cash flow: when revenue fails to cover operating and financial costs, the company enters an insolvency spiral.
• Lack of access to credit: a company with a heavy debt burden or weak performance may find its ability to obtain financing restricted.
• Poor investments: acquiring illiquid assets or making unprofitable investments undermines the ability to respond to a crisis.

Solutions for a financial crisis:

• Refinancing and debt restructuring through agreements with creditors.
• Capital increases with existing or new investors.
• Sale of non-strategic assets to improve liquidity.
• Optimising the cost structure to improve profit margins.

b) Structural Crisis

This type of crisis occurs when a company's business model is no longer competitive due to market changes, technological innovation or flawed strategies. Examples include:

• Shift in market demand: products or services that are no longer attractive to consumers.
• Disruptive competition: new companies or technologies offering more efficient alternatives.
• Lack of investment in innovation: the company fails to update itself or adapt to sector changes.
• Lack of a differentiation strategy: no clear value proposition to stand out from competitors.

Solutions for a structural crisis:

• Outsourcing processes to reduce costs.
• Redefining the business with a new strategy of products or services.
• Investment in new technologies and innovation.
• Diversification into emerging markets or alternative segments.

c) Operational Crisis

An operational crisis arises from deficiencies in the company's internal management, affecting efficiency and profitability. Possible causes include:

• Lack of control over operating costs: unnecessary spending or poor use of resources.
• Supply-chain weaknesses: problems in logistics, procurement and warehousing.
• Inefficient organisational structure: weak leadership, bureaucratic processes or unproductive teams.
• Poor talent management: lack of incentives, high turnover and low staff motivation.

Solutions for an operational crisis:

• Internal restructuring and value-chain optimisation, with the support of an outsourced CFO when there is no internal finance function.
• Implementing best practices in talent management.
• Cost reduction and control through efficiency improvements.
• Digitalisation and automation of production and administrative processes.

Viability diagnosis: act 24 months ahead, not 2 months too late

The great novelty of the current framework is that it rewards anticipation.

The law classifies distress into three objective scenarios, each with different tools and protection. Knowing which one the company is in determines what its directors can do:

The difference between the first and last rows is the difference between keeping control and losing it. That is why early warning is the first task. Negative working capital (current assets below current liabilities) is the most basic signal: short-term resources do not cover immediate debts. From there, managing working capital through alternative financing — factoring to mobilise receivables, reverse factoring to order payments — helps sustain cash without overloading bank debt. The early-warning models of the Bank of Spain and the Association of Registrars help place a company inside or outside the pre-insolvency risk perimeter.

The Independent Business Review (IBR) in covenant negotiation

When debt is spread across several banks, any cash-flow strain threatens compliance with covenants (net-debt/EBITDA or debt-service-coverage ratios). A breach entitles lenders to demand early repayment. Here the Independent Business Review (IBR) is the key tool: an independent financial adviser assesses the reasonableness of the business plan, certifies the real capacity to generate cash and validates debt sustainability before the banking syndicate. That external validation neutralises the lenders' mistrust, lowers the perceived risk premium and creates the technical consensus needed to renegotiate grace periods, haircuts or the amortisation profile.

Business Restructuring Strategies

1) Financial Restructuring

Financial restructuring involves adjustments to the debt structure and the management of economic resources to ensure long-term stability. Key strategies include:

• Debt refinancing: renegotiating terms, interest rates or requesting grace periods to ease financial pressure.
• Seeking new investors: attracting private capital or turning to funds specialised in distressed situations.
• Sale of strategic assets: disposing of non-essential assets to generate liquidity.
• Working-capital optimisation: improving the management of inventory, collections and payments to maintain healthy cash flow.

2) Operational Restructuring

The aim is to make the company more efficient by eliminating inefficiencies and improving internal processes. Measures include:

• Production optimisation: continuous-improvement methodologies to reduce waste and raise productivity.
• Review of the organisational structure: redefining responsibilities, cutting bureaucracy and improving internal communication.
• Talent-management improvements: training and retaining key staff, with performance-based incentives.
• Technology implementation: digitalising processes and automation to cut costs and improve efficiency.

3) Strategic Restructuring

When the company needs a change in its business model or market positioning, strategies may include:

• Diversification of markets or products: exploring new opportunities to reduce dependence on a single segment.
• Strategic alliances: partnerships with other companies to share resources and reduce risk.
• Change in the value proposition: adapting to new consumption trends or emerging technologies.
• Reviewing pricing and distribution strategy to improve profitability and competitiveness. If the problem is structural, a full strategic restructuring is preferable to financial patches.

Restructuring Plans: the new centre of pre-insolvency

The reform replaced the old, rigid refinancing agreements with restructuring plans, a far more versatile instrument for reordering liabilities, assets or the company's own organisation to secure its continuity. Three mechanisms are worth understanding.

Class formation and cram-down

The plan groups creditors into classes according to their insolvency ranking in a hypothetical liquidation. Secured creditors form one class; public-law claims (Tax Authority, Social Security) must form a separate class with limited impairment. To obtain court confirmation of a plan and extend it to dissenting creditors — the cram-down — it must be approved by the required majorities in each class. If consensual (all classes), there is wide latitude in distributing the surplus; if non-consensual, strict fairness tests apply.

APR vs. RPR: the SME advantage

Here is a point that specifically benefits the family business and the founding shareholder:

• Absolute Priority Rule (APR, art. 655.2.4 TRLC): a dissenting class cannot be forced to accept the plan if a junior class — or the shareholders themselves — retain value before the senior class has been paid in full.
• Relative Priority Rule (RPR, art. 684.4 TRLC): an exception designed for SMEs. It softens the APR and allows confirmation of non-consensual plans provided the dissenting class is treated at least as favourably as classes of its rank and better than junior ones. Its great advantage: it lets founding shareholders retain a minority stake in exchange for their management or key knowledge, without having to first repay 100% of the affected debt.

Spanish case law has validated this flexibility for SMEs; the Transbiaga case (Commercial Court No. 1 of San Sebastián, 23 November 2023) is often cited as a reference for the fit of the RPR against the control of dissenting financial creditors.

Debt capitalisation and limits on dragging shareholders

The plan may contemplate dragging shareholders into operations such as the capitalisation of claims (debt-to-equity swap), but within strict limits. Recent doctrine requires the mandatory going-concern valuation report by an independent expert and recalls the force of article 301 of the Spanish Companies Act: claims converted into equity must be liquid, due and payable, which prevents the offsetting of disputed claims. Corporate restructuring is thus subject to a rigorous principle of the reality of contributions.

Interim financing and new money: the safe harbour

One of the biggest obstacles in a crisis is obtaining urgent liquidity while the plan is being negotiated. The law protects those who provide it through two figures: interim financing (immediate funds to sustain operations during negotiation) and new money (resources envisaged in the plan). Their dual protection:

• Immunity from claw-back actions (safe harbour): if the plan is confirmed by the court, those contributions and their guarantees cannot be challenged or rescinded in a subsequent insolvency.
• Priority ranking in liquidation: if the restructuring fails, 50% of this financing is treated as a claim against the estate (priority payment) and the remaining 50% as a generally privileged claim.

An important caution for shareholders: if the financing is provided by a Specially Related Person (PER) — controlling shareholders, directors — the law tightens the quorum (the plan must affect more than 60% of liabilities, versus the usual 51%) and excludes the related party's claims from the approval majorities. Capitalising one's own distressed company therefore usually requires structuring the operation through vehicles or specialised advisers to secure confirmation.

Restructuring Options in a Business Crisis

1) Divestment

Divestment means selling assets or parts of the business to focus on the most profitable areas. It is a viable strategy when: unprofitable business lines are identified; resources are needed to strengthen the core operation; or there are buyers interested in specific units of the company.

2) Insolvency Proceedings (and how to avoid them)

If the company cannot meet its financial obligations, it may resort to a court restructuring process through insolvency proceedings. This allows debt to be temporarily frozen, a viable payment plan to be negotiated with creditors, the company to be protected from seizures and lawsuits, and recovery measures to be implemented under court supervision. That said, liquidation must be the last resort: under the current pre-insolvency framework, the priority is to avoid insolvency proceedings by acting in the likelihood-of-insolvency phase, while the directors retain all their powers.

3) Internal Turnaround

When the crisis is not extreme, the company may opt for an internal recovery plan based on cutting non-essential costs, improving operational efficiency, adjusting market strategy to increase revenue and, where appropriate, restructuring the management team for stronger leadership.

Distressed M&A: pre-pack, sale of the productive unit and the Social Security risk

When liabilities are unsustainable and reordering the debt is not enough, the route to preserving viable activity is to sell the business or its autonomous branches (distressed M&A). The law offers the Sale of the Productive Unit (VUP), which allows the acquisition of the assets and contracts of the productive branch free of the insolvent company's debts, and the pre-pack (arts. 224 ter to septies TRLC), which allows an independent expert to be appointed to run a competitive buyer-search process at the pre-court stage, preserving confidentiality and continuity, so that the judge can award the unit immediately when insolvency is declared, avoiding the value erosion of ordinary proceedings.

The difference between buying shares and buying the productive unit is enormous in a distressed situation:

The biggest practical obstacle for the distressed investor is the conduct of the Social Security General Treasury (TGSS). Although EU case law (CJEU judgment of 28 April 2022) limits joint-and-several liability to employees actually subrogated, in administrative practice the TGSS tends to apply broad business-succession criteria and transfer the entire prior debt to the buyer.

To mitigate this, a well-advised buyer should: carry out a thorough due diligence of the contingent Social Security liability; build the full cost of prior labour debt into the worst-case business plan and adjust the offer down proportionately; and structure the price with escrow holdbacks to cover possible transfers of liability.

Conclusion: anticipation and early advice

Business crises can threaten a company's continuity, but with proper management they can become opportunities for improvement. Restructuring requires a thorough analysis of the situation and effective strategies across the financial, operational and strategic domains. The key to success lies in adaptability and timely decision-making to ensure long-term viability.

The current pre-insolvency framework rewards those who act early and penalises those who deny the crisis. Boards should abandon late reaction and adopt predictive financial control — monthly monitoring of working capital and cash generation — renegotiate covenants preventively with the support of an IBR, use the flexibility of the RPR to avoid complete dilution, ring-fence liquidity injections through a court-confirmed plan and, in distressed M&A, rigorously model the risk of labour-liability transfer. Acting in time not only protects the company: it also shields the directors' personal liability.

If your company is going through a complex situation and may need restructuring, Maraz Corporate Finance can help. Contact us for a no-obligation preliminary viability assessment: let's talk about your case.

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance

Frequently Asked Questions about business restructuring

What is a restructuring plan and how does it differ from insolvency proceedings?

A restructuring plan is a pre-insolvency tool introduced by Law 16/2022 that allows a viable company to reorder its liabilities before falling into insolvency, with the directors retaining their management powers. Insolvency proceedings, by contrast, are a court process reached once insolvency is already actual, with greater intervention and a far higher reputational cost.

When should a company start restructuring its debt?

As early as possible. The law allows action in the “likelihood of insolvency” phase, with a horizon of up to 24 months. The earlier the action, the more powers the directors retain and the more negotiating options exist. Waiting for actual insolvency triggers the duty to file within two months and drastically reduces room for manoeuvre.

What is the Relative Priority Rule (RPR) and why does it benefit SMEs?

It is an exception designed for SMEs that softens the absolute priority rule. It allows confirmation of a non-consensual restructuring plan while letting founding shareholders keep a minority stake in exchange for their management or key knowledge, without having to first repay 100% of the affected debt. It avoids total dilution in favour of financial creditors.

What is an Independent Business Review (IBR)?

It is an independent review of the business plan, prepared by an external financial adviser, that certifies to the banking syndicate the company's real capacity to generate cash and sustain its debt. It is key to renegotiating covenants and preventing banks from declaring early repayment of loans.

What is the risk of buying a productive unit from an insolvent company?

The main unwritten risk is the transfer of Social Security debt: although the VUP transfers assets free of insolvency liabilities, the TGSS tends to apply broad business-succession criteria and claim the prior debt from the buyer. That is why a thorough labour due diligence and a price structured with escrow holdbacks are essential.

Can a shareholder inject money into their own distressed company and recover it with priority?

Yes, but with conditions. Interim financing and new money enjoy safe-harbour protection from claw-back and priority repayment if the plan is court-confirmed. However, when provided by a specially related person (a controlling shareholder), the law tightens the quorum (more than 60% of liabilities) and excludes their claims from the majorities, so the operation should be structured with specialised advice.