How to avoid insolvency proceedings in Spain | Maraz

What are insolvency proceedings and when do companies face them?

Insolvency proceedings (concurso de acreedores) are the judicial procedure under Spanish Insolvency Law for managing a company's inability to meet its payment obligations on a regular basis. They are not in themselves a death sentence for the business — proceedings can end in a creditor arrangement that preserves continuity — but they always entail loss of management control, public exposure, reputational damage and a process that in many cases permanently weakens the company.

The law distinguishes three states of insolvency, each with very different legal consequences:

• Current insolvency arises when the debtor is already unable to meet its obligations regularly — at this point the company is legally required to file for insolvency within a maximum of two months.
• Imminent insolvency occurs when it is foreseen that payments cannot be met within the next three months.
• And probable insolvency — the most significant innovation of the 2022 reform — allows companies to act when they foresee that they will be unable to meet their obligations within a two-year horizon, opening the door to preventive restructuring plans before the deterioration becomes irreversible.

The earlier action is taken, the more tools are available and the better protected the personal assets of the directors.

Types of insolvency proceedings: voluntary and involuntary

The law distinguishes two procedural routes depending on who initiates the proceedings:

• Voluntary proceedings are filed by the debtor itself, ideally within the legal two-month window from the moment it becomes aware of its current insolvency. This filing allows the debtor to retain its management powers — albeit under the supervision of the court-appointed insolvency administrator — and demonstrates a proactive approach that facilitates a finding that the insolvency was not culpable.
• Involuntary proceedings are initiated by creditors when the debtor has been in general payment default for more than three months; in this scenario the consequences are significantly more severe, including the suspension of management powers and the activation of culpability presumptions that may expose directors to personal liability for the insolvency deficit.

If insolvency proceedings are unavoidable, filing voluntarily and proactively is always preferable to waiting for creditors to act. The negotiating margin, legal protection and prospects of reaching a continuity arrangement are significantly better.

Consequences for directors and shareholders

The consequences of insolvency proceedings for directors and shareholders extend well beyond the immediate financial impact. From the moment proceedings are declared, directors are placed under the supervision of the insolvency administrator and may have their management powers suspended or intervened. But the most serious risk is the opening of the culpability section, which the judge orders when proceedings end in liquidation or when an approved arrangement is breached.

If the insolvency is classified as culpable — on the grounds that the directors acted with wilful misconduct or gross negligence in causing or aggravating the insolvency — the directors, and even shareholders who exercised decisive influence over management, may be held personally liable for the insolvency deficit with their personal assets. This means that liability is not limited to the capital invested in the company. In addition, those found culpable face disqualification from managing third-party assets and from engaging in commerce for a period of between two and fifteen years — a consequence that effectively closes professional doors for years, and one that is entirely avoidable if action is taken in time.

Early warning signs ahead of insolvency proceedings

Insolvency is not a sudden event but the culmination of a progressive deterioration that can be detected early if the right indicators are monitored. The most common warning signs, which typically appear in combination and with increasing intensity, are the following:

• Recurring cash flow pressure: a persistent need to draw on short-term credit facilities or to defer payments in order to meet ordinary obligations.
• Default or systematic deferral of payments to suppliers or financial institutions: delays that erode commercial terms and the banking relationship.
• Sustained margin deterioration: a progressive reduction in gross margin or EBITDA that cannot be attributed to a temporary or seasonal cause.
• Excessive leverage: when net financial debt exceeds 3.5 to 4 times EBITDA, the capital structure becomes unsustainable and any further deterioration in trading can precipitate insolvency.
• Debt service coverage ratio below 1: when EBITDA is insufficient to cover debt service — principal repayments plus interest — the company is consuming reserves or taking on additional debt to service existing obligations.
• Structural reliance on short-term financing to fund long-term investment or recurring operating losses: a signal that the financial model is not viable on a standalone basis.

Early detection is the single most important step in avoiding formal insolvency proceedings. A business owner who acts at the stage of probable insolvency has access to legal and financial tools that progressively disappear as the deterioration advances.

How to avoid insolvency proceedings: key preventive measures

When the warning signs above are identified with sufficient lead time, a company has several concrete levers available to turn the situation around. Knowing how to avoid insolvency proceedings in practice means activating those levers before the financial deterioration reaches the point of no return. The 2022 reform has significantly expanded the available toolkit: preventive restructuring plans now allow companies to restructure their liabilities — through haircuts, payment extensions or debt-to-equity conversions — without going through the courts, preserving confidentiality and day-to-day business operations throughout.

Early financial restructuring

Restructuring debt before default occurs is significantly more effective — and less costly — than attempting to negotiate from a position of arrears. As long as the company maintains its payment track record, financial institutions have a genuine incentive to renegotiate: a customer who is struggling is a problem to be managed; a customer in default is a loss to be provisioned.

The available tools include the negotiation of principal grace periods — during which only interest is serviced — to relieve pressure on operating cash flow; extension of amortisation schedules calibrated to the company's actual cash generation capacity; sale-and-leaseback transactions on owned property or fixed assets to inject immediate liquidity without interrupting operations; and the overall alignment of the capital structure with the real cash generation capacity of the business. The restructuring and refinancing practice at Maraz Corporate Finance operates precisely at this critical juncture: before default, when there is still room to act.

Treasury management and working capital optimisation

A significant proportion of financial crises do not originate in insurmountable structural problems, but in poor day-to-day financial management. Reducing the average collection period — through early payment discounts, non-recourse factoring or stricter customer credit policies — can release material cash without requiring external financing. Working capital optimisation also involves reviewing stock levels and liquidating slow-moving inventory, using reverse factoring (confirming) to extend supplier payment terms without damaging critical commercial relationships, and eliminating non-productive assets. In many cases, significant liquidity is simply trapped in underutilised current assets — and releasing it can transform the company's cash position within weeks.

Out-of-court arrangements with creditors

The out-of-court payment agreement (acuerdo extrajudicial de pagos), provided for under the Spanish Insolvency Law, allows the debtor to negotiate a debt haircut, a payment extension or a combination of both with its creditors without the need for full court proceedings. Its fundamental advantage over formal insolvency is discretion: it is processed before a notary or commercial registrar, does not generate the public exposure of court proceedings and preserves the company's commercial reputation and its relationships with customers and suppliers. Direct bilateral negotiation with suppliers and financial creditors, when conducted in an orderly manner with the support of an experienced adviser, can resolve tension situations without the market becoming aware of them.

The role of the financial adviser in preventing insolvency proceedings

One of the most common mistakes in situations of financial difficulty is attempting to manage them without specialist external support. A business owner negotiating directly with their bank from a position of weakness rarely obtains the same terms that a specialist financial restructuring adviser — one who understands the internal credit criteria of financial institutions and can construct a credible negotiation file — would achieve. Knowing how to avoid insolvency proceedings in practice has much to do with knowing when to seek professional assistance — and doing so before it is too late.

Financial diagnosis: the starting point for timely action

Before any negotiation, it is essential to have a precise understanding of the company's actual situation: the composition and maturity profile of its debt, its realistic cash generation capacity over the next twelve months, and the underlying causes of the financial deterioration. A rigorous diagnostic — conducted with the methodology of a specialist fractional CFO — makes it possible to determine whether the problem is one of temporary liquidity or structural solvency, which entirely determines the appropriate course of action. Without that prior diagnostic, any negotiation with creditors or financial institutions starts from a position of informational weakness that experienced banking counterparties will identify immediately.

Negotiating with banks and creditors: the key to avoiding formal proceedings

The preparation of the negotiation file — with a credible viability plan, realistic cash flow projections and a concrete restructuring proposal — is what distinguishes a negotiation with genuine prospects of success from a conversation without resolution. Banks receive dozens of refinancing requests; those that succeed are the ones accompanied by rigorous analysis, concrete proposals and a professional interlocutor who demonstrates that management understands the problem and has a plan to resolve it. The improvement in negotiating position compared with direct negotiation by the business owner is not merely a presentational advantage — it is a quantifiable difference in the terms ultimately achieved.

When insolvency proceedings can no longer be avoided: options and alternatives

In some cases, prevention comes too late — whether because the deterioration was too rapid, because negotiations failed to reach a conclusion, or because the situation only came to light when the room for manoeuvre had already disappeared. In those circumstances, it is important to understand that formal insolvency proceedings are not necessarily the end of the business. The law provides mechanisms that can protect the business owner and maximise the prospects of continuity.

Insolvency proceedings with a continuity plan

A creditor arrangement (convenio de acreedores) is the preferred outcome within insolvency proceedings: it allows the debtor to propose a haircut on outstanding debt and/or extended payment terms, in exchange for a viability plan that justifies the continuation of the business.

When the trading activity is viable but the legal entity is weighed down by an unsustainable debt burden, the law also permits the sale of the productive unit to a third party — the acquirer takes on the assets, contracts and workforce required for the activity, generally free of the historical debts of the insolvent entity, allowing the business to be saved even if the original company enters liquidation. The difference between a set of proceedings that ends in a going-concern outcome and one that ends in asset liquidation typically lies in the quality of the plan presented and the credibility of the team defending it.

A fresh start for the entrepreneur: what the law provides

The debt discharge mechanism (Beneficio de Exoneración del Pasivo Insatisfecho — BEPI), regulated under the Spanish Insolvency Law, allows an individual entrepreneur who has acted in good faith to be released from debts that could not be repaid during insolvency proceedings, including tax and social security liabilities up to certain limits. The requirements include the absence of criminal convictions for economic offences, a prior attempt at an out-of-court agreement and no prior discharge in the preceding ten years. This is a genuine mechanism that works and allows the entrepreneur to start again without the burden of unserviceable debt. Even in the worst-case scenario, acting with professional advice makes the difference between emerging with options and emerging without them.

How Maraz Corporate Finance supports companies in preventing and managing insolvency

At Maraz Corporate Finance we work alongside companies and business owners in financial difficulty from the initial diagnostic through to resolution, regardless of the stage at which they come to us. Our experience in restructuring and refinancing allows us to act with speed — diagnosis and initial action plan within two weeks — and with the discretion these situations require.

• Rigorous financial diagnosis and identification of the causes of deterioration.
• Design of the restructuring plan and preparation of the negotiation file.
• Professional representation in dealings with financial institutions and creditors.
• Support through out-of-court arrangements and insolvency proceedings with continuity plans.
• An approach focused on the business owner, not just the process — with full confidentiality throughout.

If your company is experiencing cash flow pressure or difficulty meeting its financial commitments and is considering a restructuring, contact us for a confidential, no-obligation initial consultation. Acting early makes all the difference.

Javier de Rojas Roca de Togores

Partner — Maraz Corporate Finance

FAQs on how to avoid insolvency proceedings

What are insolvency proceedings and when should a company consider filing?

Insolvency proceedings are the judicial procedure for managing a company's inability to meet its payment obligations regularly. A company should consider filing when it foresees that situation is imminent or is already occurring — and it is always preferable to file voluntarily before creditors take action. Spanish law requires a company to file within two months of becoming aware of its current insolvency; failing to do so activates culpability presumptions that may result in personal liability for directors.

What are the early warning signs ahead of insolvency proceedings?

The most common warning signs are recurring cash flow pressure, systematic deferral of payments to suppliers or financial institutions, sustained margin erosion and excessive leverage relative to EBITDA. From a technical financial perspective, a net financial debt-to-EBITDA ratio above 3.5 to 4 times, or a debt service coverage ratio below 1, are objective indicators that the capital structure has ceased to be sustainable and require immediate review.

How can a company avoid insolvency proceedings if it is beginning to experience liquidity problems?

The main levers are early debt restructuring before default occurs, working capital improvement — reducing the average collection period, using non-recourse factoring and optimising supplier payment terms — and out-of-court negotiations with creditors. The 2022 reform has also opened the route of preventive restructuring plans, which allow a company to restructure its liabilities confidentially without court proceedings. In all cases, acting promptly and with the support of a specialist financial adviser significantly increases the probability of a successful outcome.

Can debt be renegotiated before entering formal insolvency proceedings?

Yes — and it is the preferable option whenever possible. As long as the company maintains its payment track record, financial institutions have a genuine incentive to renegotiate terms — maturities, interest rates, security, principal grace periods — rather than absorb the cost of a default. The key is to initiate that negotiation proactively, with a credible viability plan and the support of a financial adviser with restructuring experience.

When is it no longer possible to avoid insolvency proceedings?

When the company is in a state of current insolvency and it has not been possible to reach out-of-court agreements with creditors. At that point, filing voluntarily remains the best option compared with waiting for creditors to act, as it provides greater legal protection and better prospects of reaching a creditor arrangement or executing an orderly sale of the productive unit that preserves the business and the workforce.