Restructuring Plans in Spanish Legislation: a Comprehensive Framework

A strategic tool for corporate recovery

Economic instability can cause significant disruptions for businesses, leading to financial distress, job losses and market instability. To mitigate these risks, the European Union (EU) introduced a framework designed to allow businesses to recover from financial distress without necessarily entering insolvency. This framework is encapsulated in Directive (EU) 2019/1023, which aims to harmonise and facilitate preventive restructuring across EU member states.

Restructuring plans (RPs) in Spain directly stem from this Directive, reflecting its principles and goals. The Directive encourages the use of preventive restructuring tools to help businesses address financial difficulties early, enabling them to restructure their operations and liabilities in a way that maximises chances of survival and that reduces the adverse effects of insolvency. It mandates that all EU countries (including Spain) provide businesses with an opportunity to implement an RP before insolvency procedures are necessary, ensuring that businesses can reorganise while preserving jobs and economic value.

Spain’s Insolvency Law, amended in 2022, incorporates the provisions of Directive (EU) 2019/1023 by introducing the RP as a formal, judicially supervised mechanism. Under this new legal framework, companies facing financial distress can develop an RP in collaboration with their creditors and stakeholders, with the aim of reorganising debt obligations, adjusting operational structures and ensuring continued business viability. The plan must be approved by a majority of creditors and by the court to become legally binding.

This development reflects a broader shift in European insolvency law towards preventive restructuring, where the focus is on avoiding insolvency through early intervention and negotiated solutions rather than allowing businesses to collapse under the weight of their debts. The introduction of RPs in Spain aligns with international best practices, providing businesses with a valuable tool for financial recovery, job preservation and market stability.

The adoption of RPs under Spain’s amended Insolvency Law mirrors the objectives of the EU Directive, aiming to preserve the value of distressed businesses, safeguard jobs and reduce the economic costs of insolvency. The focus is not just on reorganising debt but on ensuring that businesses remain operational, contributing to long-term economic resilience.

What Are RPs?

RPs are judicial mechanisms designed to help businesses in financial distress by restructuring their debts and operations. These plans provide an alternative to traditional insolvency proceedings, allowing companies to address their financial difficulties before reaching the point of insolvency. The process involves negotiations with creditors to restructure obligations, adjust business operations and, ultimately, ensure that the company remains operational.

RPs serve as a preventive tool, offering businesses the chance to avoid liquidation and instead focus on long-term recovery. Unlike insolvency proceedings, which often result in business closure, RPs allow companies to preserve their operations, safeguard jobs and protect the value of the business for all stakeholders involved.

Typically, these plans include proposals to modify debt repayment terms, reduce the principal amount or even convert debt into equity. In more complex cases, restructuring may also involve reorganising business processes, renegotiating contracts with suppliers and securing new financing to support the recovery effort.

Core Features of Restructuring Plans

Debt restructuring

This involves renegotiating repayment schedules, reducing the principal amount of debt or modifying interest rates to offer financial relief to distressed companies.

Equity conversion

In some cases, RPs may allow creditors to convert their debt into equity, which strengthens the company’s capital base and fosters new investor confidence.

Operational adjustments

These adjustments can include renegotiating contracts with suppliers, streamlining operations or implementing cost-saving measures to improve cash flow and enhance operational efficiency.

Stakeholder collaboration

Engaging creditors, shareholders and employees is critical to the success of the restructuring plan, ensuring that all parties are aligned and committed to achieving the business’ long-term recovery. However, in some instances achieving full collaboration may not be possible; in those cases, non-consensual RPs provide a judicial solution to implement necessary changes despite dissent.

Homologation of RPs

The process of homologation plays a crucial role in ensuring that RPs are legally enforceable and fair. Judicial approval is required in specific circumstances to ensure that the plan respects the rights of all stakeholders – particularly creditors.

Homologation is necessary in the following cases.

Extending the effects of the plan

If the plan aims to extend its effects to creditors or creditor classes who have not approved it, or to shareholders of the debtor company, judicial approval ensures that these parties are bound by the plan despite their opposition.

Terminating contracts

When the plan involves the termination or modification of contracts in the interest of the restructuring, judicial approval is required to protect the parties involved and to ensure that such actions are legally valid.

Protecting interim and new financing

The plan may include provisions to protect interim financing and new financial support essential for the restructuring process. Judicial homologation ensures that these financial arrangements are protected from potential claw-back actions, and secures their preferential treatment in accordance with the law.

The court’s role in homologation guarantees that all affected creditors are treated equitably and that the RP complies with the legal framework, ensuring its effective implementation and preventing legal challenges from dissenting parties.

Key Components of the Homologation

Judicial oversight

The court’s approval is critical to ensuring that the RP complies with legal requirements and treats all parties fairly. When judicial homologation is necessary, it guarantees that the plan can be enforced, even if some creditors or shareholders oppose it. This judicial review protects the interests of all stakeholders, ensuring that the restructuring process adheres to legal standards and the principles of fairness.

Creditor classification

Creditors are grouped into classes based on the nature of their claims. This classification allows for more tailored negotiations and helps ensure that the plan is equitable. Secured creditors, for example, are likely to have different terms compared to unsecured creditors, reflecting their priority in the case of liquidation. This classification is essential in making sure that each class of creditor is treated fairly, and that the RP is acceptable to as many stakeholders as possible.

Transparency and financial disclosure

Transparency is a core element of the RP process. Companies must provide detailed financial disclosures, including information on their assets, liabilities and the specific measures included in the restructuring plan. This transparency allows creditors and the court to make informed decisions, and ensures that all parties involved understand the plan’s implications.

Benefits of Homologation

Uniform enforcement

Homologated RPs are binding on all creditors, including those who dissent.

Legal certainty

Homologation guarantees that the RP will be protected from legal challenges in subsequent insolvency proceedings.

Creditor confidence

The court’s approval reassures creditors that the plan is fair and legally sound, which promotes trust in the restructuring process.

Consensual Restructuring Plans

Definition and characteristics

Consensual RPs rely on unanimous approval from all affected creditor classes, making them a collaborative solution for restructuring. They are best suited for situations where creditors and debtors share aligned interests and can negotiate mutually beneficial terms.

Unanimous approval

All affected creditor classes must approve the plan.

Collaborative approach

Stakeholders work together to develop the terms of the plan, which are mutually beneficial.

No judicial imposition in consensual RPs

The court’s role is limited to homologation, making the process faster and less costly.

Advantages

Speed

Since there is no need for judicial imposition, consensual plans can be implemented faster, allowing the business to return to normal operations sooner.

Cost efficiency

Fewer legal procedures mean lower costs for both the business and its creditors.

Stronger relationships

The collaborative nature of consensual plans helps foster trust and goodwill between creditors and the debtor.

Challenges

Achieving consensus

Unanimous approval can be difficult, especially with diverse creditor groups.

Risk of deadlock

If a single creditor class dissents, it can block the entire plan, leading to delays and further financial instability.

Non-Consensual Restructuring Plans

Definition and characteristics

Non-consensual RPs are implemented when unanimity among creditors cannot be achieved. These plans rely on judicial intervention to ensure fairness and enforceability.

Judicial oversight

Courts validate and impose the plan on dissenting creditor classes.

Cross-class cram-down

The plan binds all creditor classes if certain legal criteria are met.

Fairness assurance

Judicial enforcement ensures equitable treatment for all stakeholders.

Advantages

Conflict resolution

Judicial oversight resolves disputes, enabling the plan’s implementation.

Applicability in complex cases

Non-consensual RPs are effective for businesses with multiple creditor classes whose interests conflict.

Protection against obstruction

Minority creditors cannot block the restructuring process.

Challenges

Judicial dependency

The process depends on court approval, which can be time-consuming.

Higher costs

Legal proceedings increase administrative and judicial costs.

Potential resistance

Dissenting creditors may challenge the plan, causing delays.

Comparing Consensual and Non-Consensual Plans

When deciding between a consensual or non-consensual RP, businesses and stakeholders must carefully weigh the advantages and disadvantages of each option. While both aim to achieve financial recovery and avoid insolvency, they differ significantly in terms of process, feasibility and the level of judicial involvement. The following is a more detailed comparison of the two types of plans, highlighting when each approach is most appropriate and the specific factors that could influence the decision.

Approval Process

Consensual plans

In consensual RPs, unanimous approval from all affected creditor classes is required. This means that all creditors, including secured, unsecured and equity holders, must agree to the terms of the plan for it to proceed. This process is collaborative and typically involves negotiations between the debtor and its creditors to reach mutually beneficial terms.

Advantage

When consensus is reached, the plan is implemented quickly, with minimal court intervention, allowing businesses to resume operations with fewer legal hurdles.

Challenge

Achieving unanimous approval can be difficult, especially in cases where there are large, diverse creditor groups with conflicting interests. A single dissenting creditor can delay or even block the plan.

Non-consensual plans

Non-consensual plans are used when unanimous approval cannot be achieved. In this case, the plan can be imposed on dissenting creditors by judicial intervention. Courts are tasked with validating the plan and ensuring that it meets the fairness criteria outlined by law, even if not all creditors agree.

Advantage

This process ensures that the plan can proceed despite objections from minority creditors, reducing the likelihood of a deadlock.

Challenge

The judicial oversight required in non-consensual plans can result in a more prolonged and costly process. The court must evaluate whether the plan treats creditors equitably and complies with legal standards, which can lead to delays.

Efficiency and Speed

Consensual plans

Because consensual plans rely on creditor co-operation and involve less judicial intervention, they are often faster and more cost-effective. Once consensus is achieved, the plan can proceed with minimal court involvement, allowing businesses to move forward quickly.

Advantage

For straightforward cases with aligned interests among creditors, consensual plans can offer a swift resolution, enabling the business to resume normal operations without unnecessary delays.

Challenge

The need for unanimous approval can slow down the process if some creditors are unwilling to co-operate.

Non-consensual plans

Non-consensual plans may be slower due to the need for judicial approval and the possibility of litigation from dissenting creditors. The process often involves higher legal and administrative costs because of the judicial oversight and potential challenges from creditors.

Advantage

While the process may be lengthier, it allows for a resolution even when there are conflicting interests among creditors.

Challenge

The delay in implementing the RP can put additional strain on the company, especially if there is ongoing financial distress.

Stakeholder Relationships

Consensual plans

The collaborative nature of consensual RPs fosters positive relationships between creditors and the debtor. Since all stakeholders work together to reach an agreement, there is often greater goodwill and a sense of co-operation. This can also lead to more flexible terms and a stronger foundation for long-term success.

Advantage

The collaborative approach helps to maintain trust among creditors and the debtor, which can be vital for the business’ future operations and for maintaining investor confidence.

Challenge

The challenge lies in achieving consensus, as it can be difficult to align the interests of different creditors, especially when there are diverse priorities.

Non-consensual plans

Non-consensual plans can sometimes lead to strained relationships between creditors and the debtor, particularly when creditors feel that their interests have been ignored or unfairly treated. Imposition of the plan by the court can lead to resentment, particularly when creditors are forced into unfavourable terms.

Advantage

The court’s involvement ensures that the plan is enforced, even when some parties resist. However, this may not result in long-term trust and co-operation.

Challenge

The adversarial nature of non-consensual plans can lead to long-term friction between the debtor and its creditors, potentially making future negotiations more difficult.

Complexity and Suitability

Consensual plans

Consensual plans are typically best suited for cases where there is alignment among creditors and the debtor regarding the terms of the restructuring. They are ideal for companies that have a relatively straightforward financial structure and whose creditors are willing to co-operate in finding a solution.

Advantage

For companies in moderate financial distress, consensual RPs are an excellent way to resolve issues without significant judicial intervention.

Challenge

If creditor groups are divided or have conflicting interests, achieving consensus may not be possible, and this could delay or block the restructuring process.

Non-consensual plans

Non-consensual plans are often necessary for more complex restructuring scenarios, where multiple creditor classes have competing interests or when a significant number of creditors are unlikely to agree to the terms. These plans allow the debtor to proceed with a restructuring even when all stakeholders cannot reach an agreement.

Advantage

Non-consensual RPs are effective in diverse and complex cases where there is disagreement between creditors or when one or more creditor classes might otherwise obstruct the process.

Challenge

The complexity of these plans often requires extensive judicial intervention, which can lead to longer timelines and increased costs.

Provisions for SMEs

Small and medium-sized enterprises (SMEs) often face unique challenges during restructuring, such as limited resources and negotiating power. Spain’s Insolvency Law includes provisions specifically tailored to SMEs.

Key features

Streamlined procedures

The law streamlines the restructuring process for SMEs, reducing administrative burdens and making it more cost-effective.

Cost efficiency

Lower fees and fewer legal requirements ensure that SMEs can access restructuring options without prohibitive costs.

Flexible homologation standards

SMEs can homologate RPs without unanimous creditor approval, provided fairness criteria are met.

Impact on local economies

By helping SMEs restructure successfully, these provisions contribute to local job preservation, economic resilience and long-term sustainability.

Conclusion: Restructuring Plans as Catalysts for Economic Stability

In conclusion, RPs represent a critical tool in Spain’s insolvency landscape, providing a proactive solution for businesses facing financial difficulties. By facilitating the renegotiation of debt, operational adjustments and creditor agreements, RPs offer a means of avoiding insolvency and liquidation, ultimately preserving businesses and jobs.

The flexibility embedded in the design of RPs allows businesses to address financial distress early, preventing further economic damage and fostering long-term recovery. While consensual restructuring promotes collaboration and trust among creditors and debtors, the non-consensual plans provide a judicial avenue when agreement cannot be reached, ensuring that restructuring can still proceed despite dissenting parties.

As Spain continues to adapt its legal framework to align with EU Directives, the implementation of RPs will play a central role in maintaining business continuity, stabilising local economies and safeguarding employment. The involvement of the Spanish Supreme Court in shaping and enforcing these plans will also ensure that their application remains fair, transparent and in line with legal principles.

Moving forward, RPs will not only be essential for individual business recovery but also for the broader economic health of Spain, contributing to resilience in times of financial turbulence and reinforcing the country’s commitment to effective economic recovery mechanisms.

In this context, the RP stands as a modern solution to the challenges of financial distress, offering a pathway to recovery that minimises the social and economic impact of insolvency.