Distressed M&A and Insolvency Proceedings in Spain

What is a distressed transaction?

A distressed transaction is one in which the acquisition or restructuring of a company is negotiated under conditions of material financial stress: illiquidity, covenant breach, imminent insolvency or formal insolvency proceedings already in progress. These transactions are also referred to as special situations in financial markets.

It is important to distinguish distressed deals from standard M&A: pricing reflects a discount to normalised value, timelines are compressed, information access is constrained and the pressure on parties — especially the seller — is structurally greater.

Key point: Not every distressed transaction involves formal insolvency proceedings (concurso de acreedores). A company in crisis can be acquired pre-insolvency (bilaterally), during the insolvency process or after it. Each scenario carries materially different legal, tax and due diligence implications.

The distress spectrum: from pre-insolvency to formal proceedings

Distressed transactions span a continuum of financial severity. Spanish insolvency law calibrates the level of legal protection available at each stage, shaping both the available restructuring tools and the urgency of action.

The opening of creditor negotiations: the most underused legal shield

Before reaching formal insolvency, a company may notify the commercial court of the opening of negotiations with creditors. This procedural act activates, immediately, a triple layer of protection that most business owners do not discover until it is too late:

• Stay on enforcement actions: Individual enforcement proceedings — both judicial and extrajudicial — over assets essential to the business are suspended. Active attachments are frozen and immediate pressure from financial and trade creditors is neutralised.
• Suspension of balance-sheet dissolution duty: Where net equity has fallen below half of share capital, the notification suspends the obligation to dissolve or recapitalise the company, shielding directors from joint and several liability for subsequent corporate debts.
• Suspension of the duty to file for insolvency: The two-month legal filing deadline is suspended, providing valuable time to run a structured sale process or to negotiate a restructuring plan with the market.

Practical implication: The opening of creditor negotiations is the most valuable and most underused pre-insolvency tool in Spanish law. Filing it alone can fundamentally change the negotiating dynamic with creditors. The correct moment to activate it is at the stage of imminent insolvency — not once payments have already been missed across the board.

Characteristics and risks of distressed transactions

Core characteristics

• Discounted pricing: The buyer acquires the business or assets below normalised value. The discount can be substantial, but it incorporates risks that must be explicitly modelled before agreeing a price.
• Speed of execution: Cash scarcity at the seller level and, in formal insolvency, procedural deadlines require agile negotiation. Due diligence focuses on essentials, with an elevated risk of incomplete or asymmetric information.
• Operational restructuring plan: The buyer is not simply acquiring; it must have a concrete plan to stabilise operations, renegotiate key supplier and customer relationships and restore financial viability.
• Specialist investors: Distressed M&A attracts turnaround funds, vulture funds, distressed debt funds and special opportunities divisions. Generalist private equity funds rarely participate in these transactions.

Specific risks to manage

• Hidden liabilities: Undeclared tax debts, labour contingencies, pending litigation or guarantees with no balance-sheet footprint. Due diligence must be most thorough precisely where information is scarcest.
• Operational continuity: The loss of key employees, the termination of supply contracts or the withdrawal of credit lines can accelerate sharply during a sale process.
• Clawback actions: The insolvency administrator may challenge transactions entered into during the two-year suspect period prior to the insolvency filing, including asset disposals at below-market prices.
• Reputational risk: In mid-market SMEs, public disclosure of insolvency proceedings can damage the commercial relationships on which the future viability of the business depends. This effect carries a quantifiable cost.

Spanish insolvency proceedings: the legal framework

Insolvency proceedings (concurso de acreedores) are governed by the Consolidated Insolvency Act (TRLC), substantially reformed by Law 16/2022 to transpose the EU Restructuring and Insolvency Directive (2019/1023). The primary objective of the reformed framework is to preserve viable businesses and resort to liquidation only where no workable alternative exists.

Types of proceedings

• Voluntary proceedings (concurso voluntario): Filed by the debtor when it anticipates or is already in a state of insolvency. The debtor generally retains management of the business under the supervision of the court-appointed insolvency administrator.
• Compulsory proceedings (concurso necesario): Filed by one or more creditors where the debtor has missed payments across the board for more than three months. The insolvency administrator typically assumes direct operational control.

Key effects for M&A purposes

• Stay on enforcement: The opening of proceedings suspends individual enforcement actions, including mortgage enforcement and attachments, providing space to negotiate an orderly solution.
• Haircuts and moratoria (quitas y esperas): A creditor arrangement (convenio) may include reductions of principal amounts (haircuts) and extensions of payment timelines (moratoria). Significant debt haircuts can make a distressed M&A transaction viable that would otherwise be economically impossible for the buyer.
• Restructuring plans (Law 16/2022): Before reaching formal insolvency, the company may negotiate a restructuring plan which, if it obtains the requisite majorities, can be judicially sanctioned and become binding even on dissenting creditors (cross-class cram-down). Plans can also bind trade creditors — not only financial ones — and restructure corporate groups through a single sanction application.
• Legal certainty for the buyer: Court supervision materially reduces the risk of subsequent challenge to the transaction.

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

The sale of a productive business unit (venta de unidad productiva, VUP) is the most widely used legal instrument in Spanish distressed M&A within formal insolvency proceedings. It allows the transfer of an integrated set of assets, contracts and employees linked to an autonomous economic activity, without requiring the sale of the entire company and without the buyer assuming the insolvency estate's liabilities.

Advantages for the buyer

• Contained liabilities: As a general rule, the buyer does not assume the pre-insolvency debts included in the insolvency estate.
• Contractual continuity: Contracts with customers, suppliers or public authorities may be assigned to the buyer, unless they contain change-of-control provisions.
• Employees: Employees assigned to the business unit transfer to the buyer with their accrued rights, although the court may authorise modifications to employment conditions within the authorisation order itself.
• Speed: Once the court approves the VUP, the transfer can be executed within very short timeframes — critical for businesses where operational continuity is paramount.

The TGSS conflict: the primary risk not written into the court order

The most underestimated risk in a VUP acquisition is the conflict between the court's delimitation of the business transfer and the administrative practice of the Spanish Social Security Treasury (Tesorería General de la Seguridad Social, TGSS).

The TRLC grants the insolvency court jurisdiction to define the scope of the business succession. However, the TGSS, relying on Article 142.1 of the General Social Security Act and Article 44 of the Workers' Statute, routinely exercises its administrative powers to hold the acquirer of a business unit jointly and severally liable for all prior Social Security debts of the insolvent company — regardless of what the court authorisation order states.

This conflict has been addressed by the Supreme Court (Administrative Chamber, judgment no. 6037/2025), which confirmed that the insolvency court's delimitation of the transfer does not bind the TGSS's self-enforcement powers. As a result, any buyer who assumes employees from the insolvent company faces a material risk of joint and several liability for prior Social Security debt.

How to manage this risk

Prior to closing:

• Obtain updated debt certificates from the TGSS for all employees to be transferred.
• Model the worst-case scenario assuming full joint and several liability for prior labour and Social Security debt as a condition of the offer.
• Where possible, negotiate a payment arrangement or a zero-debt certificate with the TGSS before closing.

Other specific risks

• Tax liability: The Spanish Tax Agency (AEAT) may pursue the buyer for the seller's tax debts if it identifies a business succession. Specific tax due diligence is essential.
• Intuitu personae contracts: Administrative licences, public contracts or exclusivity agreements may not be transferable without prior consent from the relevant public authority or third party.

Share deal vs. asset deal in distressed transactions

The choice of acquisition structure has materially different legal, tax and operational implications in distress situations. In the majority of Spanish mid-market cases, the asset deal or VUP in formal insolvency is the buyer's preferred structure, as it provides greater precision in containing liabilities.

The hive-down as an alternative to the VUP

Where the distressed company operates multiple business lines with different viability profiles, an efficient alternative is the hive-down (filialización): the segregation and non-cash contribution of the viable business branch into a newly incorporated entity (NewCo), pursuant to Royal Decree-Law 5/2023.

This mechanism isolates the operating business from the insolvent parent prior to the transfer, enabling a cleaner acquisition for the buyer. The NewCo is established free of historical liabilities, eliminating the most severe form of the business succession risk. It is particularly effective in corporate groups with mixed activities where only part of the business is operationally viable.

Due diligence in a distressed environment

Due diligence in a distressed transaction is qualitatively different from a standard M&A process. Available information is incomplete, time is limited and post-closing surprises can be materially significant.

Priority areas

• Financial: Verification of actual financial debt (including default interest and early repayment fees), analysis of minimum operational cash requirements, and EBITDA normalisation to remove distress effects.
• Tax: Outstanding liabilities with the AEAT and TGSS, ongoing tax audits, and assessment of the business succession risk where an asset deal or VUP structure is used.
• Labour: Outstanding wage arrears, active labour litigation, current ERTE (temporary layoff) arrangements, and the state of the labour creditor mass as reported by the insolvency administrator.
• Legal: Key contracts with change-of-control or insolvency termination clauses, status of administrative licences and authorisations, and the register of attachments and charges over essential assets.
• Operational: Dependency on critical suppliers, risk of customer attrition during the sale process, and the actual condition of plant, IT systems and facilities.

Managing information asymmetry

In distressed environments, the accounts may not faithfully reflect the actual financial position: assets are frequently overstated (obsolete inventory, uncollectible receivables not provisioned) and liabilities understated (unpursued supplier debts, unrecognised contingencies). A rigorous adjusted balance sheet, built independently before agreeing a price, is indispensable.

When are formal insolvency proceedings the right route?

Market evidence is unambiguous: sales completed within formal insolvency proceedings carry an average "insolvency stigma" discount of approximately 45% compared with equivalent transactions completed under normal conditions. This cost reflects the erosion of customer, supplier and employee confidence that occurs once insolvency is made public.

The strategic rule is therefore clear: act at the pre-insolvency stage whenever possible. That said, there are situations where formal proceedings are either the only viable option or are directly the most efficient route:

• When debt haircuts are a necessary condition of viability: Where indebtedness is so high that no rational buyer can absorb it, formal proceedings provide the legal framework to compel haircuts by qualified majority.
• When there is a blocking creditor: A creditor with a dominant position can veto an out-of-court restructuring. Insolvency proceedings and restructuring plans allow that block to be overcome through cross-class cram-down.
• When legal certainty is required by the buyer: Court approval of the VUP materially reduces the risk of subsequent challenge — a key consideration for institutional investors.
• When the creditor base is fragmented: A large number of small creditors with heterogeneous positions makes court-supervised proceedings far more effective than bilateral negotiations.

The pre-pack and EU Directive 2026/799

The pre-pack is a hybrid procedure in which the sale of the business unit is prepared and negotiated confidentially during the pre-insolvency phase under the supervision of a court-appointed independent expert. Once formal proceedings are opened, the transfer is executed almost immediately, minimising disruption to the business.

This mechanism has been reinforced and harmonised across Europe by EU Directive 2026/799 (the Second Insolvency Directive), which formally permits acquisitions by persons closely associated with the debtor (PCAs: founders, directors, shareholders) but subjects them to strict safeguards:

• Mandatory independent valuation: A full going-concern valuation of the business unit is required in every case, without exception, to verify that the price offered by the PCA reflects market value.
• Open competitive process: Sufficient time must be provided for independent third parties to submit competing offers, limiting the information and relationship advantage held by the connected party.
• Simplified SME procedure: The TRLC provides a simplified restructuring procedure for SMEs that reduces formalities, lowers the number of required expert reports and accelerates the path to a sanctioned plan.

Formal rigour: the errors that lead to rejection of the sanction application

The track record of restructuring plan applications in Spain shows a marked tightening of ex officio judicial scrutiny by the commercial courts. The principal grounds for rejection of sanction applications are:

• Missing majority certificate: Failure to submit the certificate issued by the restructuring expert confirming that the legally required majorities have been reached.
• Defective creditor notification: Errors or gaps in the individual notification of affected creditors, particularly where cram-down over a class is being sought.
• Late or insufficient valuation reports: Submitting the independent valuation and viability reports outside the statutory deadline or without the minimum content required by the TRLC.
• Incoherent business plan: Financial projections that do not withstand comparison with the actual position, or that fail to demonstrate the viability of the business beyond the plan horizon.

Practical recommendation : Obtaining judicial sanction for a restructuring plan is not an administrative formality: it is a high-stakes procedural step. Coordination between the financial adviser, the insolvency counsel and the restructuring expert must begin weeks before submission — not days. A minor formal defect can cost months of delay and a downward migration to full insolvency proceedings.

Conclusion

Distressed M&A is a double-edged tool: it offers genuine opportunities to acquire businesses at attractive prices, but demands experience, resources and execution capability that most buyers do not have in-house. The most important rule is anticipation: the likelihood-of-insolvency stage offers the greatest room for manoeuvre and the lowest restructuring cost. Every week of delay in acting carries a measurable and compounding cost in destroyed value.

For the buyer, success depends on rigorous due diligence focused on actual risks — particularly Social Security liabilities in VUP acquisitions —, a correctly chosen structure (hive-down, VUP or share deal depending on the circumstances), and a realistic operational restructuring plan for the day after closing.

For the distressed seller, the earlier a structured sale process is initiated — before the financial situation becomes public and key employees and customers begin to leave — the greater the value recoverable for creditors and shareholders. The 45% insolvency stigma discount is the quantified cost of inaction.

If you are considering the sale of a distressed business or the acquisition of a company in financial difficulty, Maraz Corporate Finance provides specialist advisory across the full transaction lifecycle: from initial valuation and structure selection through to closing.

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance