Distressed M&A and Insolvency Proceedings in Spain

Distressed M&A

Distressed M&A transactions — mergers and acquisitions of companies in financial difficulty — represent one of the most demanding and, at the same time, most attractive segments of the company sale market. In Spain, the insolvency framework reformed by Law 16/2022 has widened the range of tools available for restructuring or transferring a business in crisis, creating new opportunities both for investors and for business owners seeking an orderly exit.

We analyse the key mechanisms of distressed M&A in the Spanish context: what a distressed transaction is and is not, how it interacts with insolvency proceedings, when a sale of a productive unit is preferable, and how to structure the acquisition correctly to minimise risk.

When the crisis is essentially financial and the business remains viable, an alternative to a sale is first to attempt a debt restructuring and refinancing.

What is a distressed transaction?

A distressed transaction is one in which the sale or restructuring is negotiated of a company going through significant financial difficulties: insufficient liquidity, breach of bank covenants, imminent or already declared insolvency. They are also known as special situations.

It is important to distinguish these transactions from ordinary M&A deals: the price is set at a discount to the value under normal conditions, timelines are shorter, access to information is more limited and the pressure on the parties — especially the seller — is structurally greater.

Note: Not every distressed transaction involves insolvency proceedings. A company in crisis can be acquired before insolvency is declared (out of court), during the insolvency process or even afterwards. Each scenario has radically different legal, tax and due diligence implications.

The distress spectrum: from pre-insolvency to formal proceedings

Distressed transactions do not form a homogeneous block. They are spread along a continuum according to the severity of the financial situation, and Spanish law modulates the level of protection available at each stage.

The notice of opening of negotiations: the legal shield

Before reaching formal insolvency proceedings, the company can notify the commercial court that it has opened negotiations with its creditors. This procedural step, regulated in the Spanish Insolvency Act (TRLC), immediately activates a triple shield of protection that most business owners are unaware of until it is too late:

• Stay of enforcement: Individual enforcement actions — both judicial and extrajudicial — over the assets necessary for the continuity of the business are stayed. Attachments in progress are suspended and pressure from financial and trade creditors is temporarily neutralised.
• Suspension of the duty to dissolve for losses: If net equity has fallen below half of the share capital, the notice suspends the obligation to dissolve the company or increase capital, shielding directors from joint and several liability for subsequent corporate debts.
• Suspension of the duty to file for insolvency: A window of time is obtained to structure a competitive sale process or negotiate a restructuring plan without the pressure of the statutory two-month deadline.

Practical implication: The notice of opening of negotiations is the most valuable and most under-used tool in Spanish pre-insolvency. Its mere filing can radically change the terms of negotiation with creditors. The right moment to activate it is at the stage of imminent insolvency, not once the company has already defaulted on payments across the board.

Characteristics and risks of distressed transactions

Main characteristics

• Discounted price: The buyer acquires the business or the assets below their value under normalised conditions. However, this discount incorporates risks that are hard to quantify and must be explicitly modelled before setting the price.
• Speed: The seller's shortage of cash and, in insolvency cases, the procedural deadlines force a fast negotiation. Due diligence concentrates on the essentials, with a risk of incomplete or asymmetric information.
• Restructuring strategy: The buyer does not merely acquire; it must have a concrete plan to stabilise operations, renegotiate with key suppliers and customers, and restore the financial viability of the business.
• Specialised investors: Distressed M&A attracts turnaround funds, vulture funds, distressed debt funds and private equity firms with special-opportunities divisions. Generalist PE funds rarely take part in these transactions.

Risks to be managed

• Hidden liabilities: Undeclared tax debts, employment contingencies, pending litigation or guarantees granted without being reflected in the accounts. Due diligence must be exhaustive precisely where information is scarcest.
• Operational continuity: The departure of key staff, the loss of supply contracts or the withdrawal of credit lines can materialise rapidly during the sale process.
• Clawback actions: The insolvency administrator can challenge acts carried out during the suspect period (the two years prior to insolvency) that are detrimental to the estate, including transfers at below-market prices.
• Reputational risk: In mid-market SMEs, public exposure of the insolvency situation can damage commercial relationships essential to the future viability of the business. This effect has a measurable cost.

The rigorous quantification of these hidden liabilities and contingencies is precisely the purpose of a specialised financial and tax due diligence, and of economic, financial and forensic expert reports where there are indications of irregularities.

Insolvency proceedings: the legal framework in Spain

Insolvency proceedings are regulated in the Consolidated Text of the Insolvency Act (TRLC), thoroughly reformed by Law 16/2022 to transpose the European Restructuring and Insolvency Directive (2019/1023). Its primary purpose is to preserve viable businesses and to liquidate only when there is no alternative solution.

Types of proceedings

• Voluntary insolvency: Filed by the debtor itself when it foresees or is already in a situation of insolvency. The debtor generally retains management of the business under the supervision of the insolvency administrator (supervised management).
• Involuntary insolvency: Petitioned by one or more creditors when the debtor has defaulted on payments generally for more than three months. It usually entails the suspension of management powers and direct management by the insolvency administrator.

Effects relevant to M&A

• Stay of enforcement: The declaration of insolvency stays individual enforcement actions, including mortgages and attachments, offering room to put together a negotiated solution.
• Haircuts and deferrals: The composition agreement with creditors can include reductions of principal and extensions of terms. Significant haircuts can make a distressed M&A transaction viable that would otherwise be economically impossible.
• Restructuring plans (Law 16/2022): Before insolvency, the company can negotiate a plan which, with the required majorities, can be approved by the court and become binding even on dissenting creditors (cross-class cram-down). They also allow trade creditors, not only financial creditors, to be affected, and groups of companies to be restructured through a single application.
• Legal certainty for the buyer: Court supervision materially reduces the risk of a subsequent challenge to the transaction.

The sale of a productive unit (VUP): the central mechanism

The sale of a productive unit (VUP) is the legal instrument most widely used in Spanish in-court distressed M&A. It allows a set of assets, contracts and employees linked to an autonomous economic activity to be transferred, without the need to transfer the entire company or assume the insolvency liabilities.

Advantages for the buyer

• Ring-fenced liabilities: As a general rule, the buyer does not assume the pre-insolvency debts included in the estate's liabilities.
• Contractual continuity: Contracts with customers, suppliers or public authorities can be assigned to the buyer, save for change-of-control clauses.
• Employees: The unit's workers are transferred to the acquirer with their accrued rights, although the judge may authorise changes to terms and conditions in the authorisation order itself.
• Speed: Once the VUP is approved by the judge, the transfer can be executed in very short timeframes, which is critical for businesses with a strong operational-continuity component.

The TGSS conflict: the main risk not written into the judge's order

The most underestimated risk in acquiring a VUP is the clash between the court's delimitation of succession and the administrative practice of the Social Security Treasury (TGSS).

The TRLC gives the insolvency judge the power to delimit the scope of business succession. However, the TGSS, relying on article 142.1 of the General Social Security Act and article 44 of the Workers' Statute, systematically exercises its administrative power to pass joint and several liability for all of the insolvent company's prior debt on to the acquirer, regardless of what the insolvency order establishes.

This conflict has been addressed by the Supreme Court (Administrative Chamber, judgment no. 6037/2025), which has confirmed that the commercial judge's delimitation does not bind the TGSS's powers of self-enforcement. Consequently, an acquirer that takes over the insolvent company's employees assumes a real risk of joint and several liability being passed on for prior Social Security debt.

How to manage this risk:

Before closing the transaction:

• Obtain up-to-date debt certificates from the TGSS for all the workers who are to be transferred.
• Model the downside scenario, assuming the full pass-through of employment and Social Security liabilities, as a condition of the offer.
• Negotiate with the TGSS before closing a payment-by-instalments agreement or a zero-debt certificate, where possible.

Other specific risks

• Tax debt: The Spanish Tax Agency (AEAT) can claim the transferor's tax debts from the acquirer if it finds there has been business succession. Specific tax due diligence is essential.
• Intuitu personae contracts: Administrative licences, public contracts or exclusivity agreements may not be transferable without the authorisation of the competent authority.

Share deal vs asset deal in distressed transactions

The choice of acquisition structure has very different legal, tax and practical implications in distress contexts. In most Spanish mid-market cases, the asset deal or the in-court VUP is the structure preferred by buyers, since it allows liabilities to be delimited more precisely.

The hive-down as an alternative to the VUP

When the company has several lines of business with differing degrees of viability, an efficient alternative is the hive-down: the segregation and contribution in kind of the viable business line to a new company (NewCo), in accordance with Royal Decree-Law 5/2023.

This mechanism makes it possible to isolate the operating business from the insolvent company before the transfer, facilitating a cleaner acquisition for the buyer. The NewCo is set up free of historical liabilities, which eliminates the risk of business succession in its most onerous form. It is particularly useful in groups of companies with mixed activities where only part of the business is viable.

Due diligence in a distressed environment

Due diligence in a distressed transaction is qualitatively different from that of an ordinary deal. The information available is incomplete, time is short and post-closing surprises can be materially significant.

Priority areas of attention

• Financial: Verification of actual financial debt (including default interest and cancellation fees), analysis of the minimum operating cash required, and normalisation of EBITDA removing the effects of the distress.
• Tax: Debts to the AEAT and the TGSS, ongoing inspections, and assessment of the risk of business succession if an asset deal or VUP is chosen.
• Employment: Outstanding salary arrears, ongoing employment litigation, active temporary lay-off schemes (ERTEs) and the status of employment claims according to the insolvency administrator.
• Legal: Key contracts with change-of-control or insolvency-termination clauses, the status of administrative licences, and the register of attachments and charges over essential assets.
• Operational: Dependence on critical suppliers, risk of customer flight during the process, and the real condition of machinery, IT systems and facilities.

Managing information risk

In distressed environments, the accounts may not faithfully reflect the real situation: overstated assets (obsolete inventory, unprovisioned bad debts) and understated liabilities (unclaimed supplier debts, unrecorded contingencies). A rigorous adjustment of the real balance sheet before structuring the price is essential. Determining the real value of the business, cleansed of the effects of distress, is the task of an independent business valuation.

When it may be advantageous to resort to insolvency proceedings

The financial literature and market experience are categorical: sales carried out within insolvency proceedings suffer an average liquidation discount of 45% compared with equivalent transactions carried out under normal conditions. This cost — the so-called "insolvency stigma" — reflects the loss of confidence among customers, suppliers and employees that occurs as soon as the situation becomes public.

For this reason, the strategic rule is clear: act in pre-insolvency whenever possible. However, there are situations in which insolvency proceedings are the only route, or are simply the most efficient one:

• When haircuts are a necessary condition of viability: If indebtedness is so high that no reasonable buyer can absorb it, the insolvency process offers the legal framework to reduce it compulsorily with qualified majorities.
• When there are blocking creditors: A creditor with a dominant position can block an out-of-court restructuring. Insolvency proceedings and restructuring plans make it possible to overcome that block through cross-class cram-down.
• When legal certainty is sought for the buyer: Court approval of the VUP materially reduces the risk of a subsequent challenge, which can be decisive for institutional investors.
• When creditors are dispersed: If there are many small creditors with heterogeneous criteria, the insolvency process organises and simplifies negotiations.

If the underlying problem is debt and the underlying business is viable, before considering a distressed sale it is advisable to exhaust the route of debt refinancing and restructuring. It helps to understand what banks expect in order to refinance debt and to prepare the negotiation with a solid viability plan.

The insolvency pre-pack and Directive (EU) 2026/799

The pre-pack is a hybrid procedure in which the sale of the productive unit is prepared and negotiated confidentially during the pre-court phase under the supervision of an independent expert appointed by the court. Once insolvency is declared, the transfer is executed almost immediately, minimising the impact on the business.

This mechanism has been strengthened and harmonised at European level by Directive (EU) 2026/799 (the second Insolvency Directive), which declares acquisitions by persons closely related to the debtor (founders, directors, shareholders) fully admissible, but subjects them to strict safeguards:

• Mandatory independent valuation: A full valuation of the productive unit as a going concern is required, without exception, to verify that the price offered by the related party reflects market value.
• Open competitive process: Sufficient time must be allowed for unrelated third parties to submit competing offers, limiting the related party's information advantage.
• Simplified procedure for SMEs: The TRLC provides a simplified restructuring procedure for SMEs that reduces formalities, lowers the number of expert reports required and speeds up court approval.

Formal rigour: the mistakes that lead to refusal of court approval

The track record of the practical application of restructuring plans in Spain shows a marked tightening of ex officio control by the commercial courts. The main reasons for refusal of court approval are:

• Missing majorities certificate: Failure to provide the certificate issued by the restructuring expert attesting that the legally required majorities have been reached.
• Defects in the notification to creditors: Errors or gaps in the individual notification to affected creditors, especially where a cram-down of a class is sought.
• Late or insufficient valuation reports: Submitting the expert and viability reports out of time or without the minimum content required by the TRLC.
• Inconsistent viability plan: Financial projections that do not withstand comparison with the real situation or that do not demonstrate the viability of the business beyond the plan horizon.

Practical recommendation: Court approval of a restructuring plan is not an administrative formality: it is a procedural step with high formal requirements. Coordination between the financial adviser, the insolvency lawyer and the restructuring expert must begin weeks before filing, not days. A minor formal defect can cost months of delay and a descent into formal insolvency.

Conclusion on Distressed M&A

Distressed M&A is a double-edged tool: it offers real acquisition opportunities at attractive prices, but it demands experience, resources and execution capacity that most buyers do not have on their own. The most important rule is foresight: the likelihood-of-insolvency stage offers the greatest room for manoeuvre and the lowest restructuring cost. Every week of delay in acting has a measurable cost in value destroyed.

For the buyer, success depends on rigorous due diligence focused on the real risks — especially the Social Security liabilities in VUP acquisitions — on a well-chosen structure (hive-down, VUP or share deal as the case may be) and on a realistic operational restructuring plan for the day after closing.

For the seller in crisis, the sooner a structured process for the sale of the company in a distressed situation is started — before the insolvency becomes public and key customers and employees begin to flee — the greater the recoverable value. The 45% discount associated with the insolvency stigma is the cost of inaction.

If you are considering the sale of your company in a crisis situation or the acquisition of a company in financial difficulty, at Maraz Corporate Finance we have the experience to advise you throughout the process: from the initial valuation and the choice of the optimal structure to the closing of the transaction, coordinating in parallel the debt restructuring.

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance

Frequently asked questions about Distressed M&A and insolvency proceedings

Are insolvency proceedings always necessary to sell a company in crisis?

No. Many distressed deals are closed out of court, before insolvency proceedings, which usually preserves more value (the "insolvency stigma" implies an average discount of 45%). If the problem is essentially one of debt and the business is viable, the preferred route is restructuring and refinancing. Insolvency proceedings are only the best option in specific cases (unavoidable haircuts, blocking creditors, need for legal certainty).

What is a sale of a productive unit (VUP) and why is it used so much?

It is the transfer, within insolvency proceedings, of a set of assets, contracts and employees that form an autonomous economic activity, without the need to sell the entire company or assume the insolvency liabilities. It is used so much because it allows the buyer to ring-fence liabilities, maintain operational continuity and execute the purchase in very short timeframes once approved by the judge.

Can the Social Security claim old debts from me if I buy a productive unit?

Yes, and it is the most underestimated risk in these transactions. Even if the judge delimits the succession, the TGSS can pass joint and several liability for the prior debt on to the acquirer that takes over the employees. That is why a specific employment and tax due diligence is essential, as is obtaining up-to-date debt certificates and modelling that liability in the offer before closing.

In distressed deals, is it better to buy shares (share deal) or assets (asset deal)?

In most distressed deals in the Spanish mid-market the buyer prefers the asset deal or the VUP, because it allows liabilities to be delimited precisely and hidden and historical debts to be left out. The share deal only makes sense when the value lies in intangibles, licences or non-transferable contracts that would be lost in an asset deal.

What is the best time to act if my company gets into difficulties?

The sooner the better. The likelihood-of-insolvency stage (up to a 24-month horizon) offers the greatest room for manoeuvre and the lowest cost. The notice of opening of negotiations activates a very powerful legal shield. Every week of delay destroys value. It is advisable to seek financial restructuring advice as soon as the first symptoms are detected, not once payments have already been missed.