Refinancing Agreements

Refinancing has been recently introduced in Spain, as an alternative to Bankruptcy Proceedings. They are legal instruments designed for companies that have specific financial difficulties or weaknesses in their line of business but are still solvent. They help business continuity, permitting companies to be restructured.

We have had famous restructuring case, with big Spanish companies, Eroski and Abengoa. But the procedure is useful for SMEs too.

The measures to guarantee the viability of the company and its continuity include debt restructuring, where debtor agrees with creditors on certain debts write-offs; or freezing of payments. The agreement must be accepted by the majority of the company’s creditors. They also may include labor restructuring with renegotiation of contracts or a cost saving plan.

These agreements, once approved according to the Law, will extend their effects to creditors who have not signed them or even have stated their disagreement with them. The approval may be challenged in Court, based on only 2 reasons:

(i) The agreement was approved without the majority of creditors agreeing to it and

(ii) Assessment of the disproportionate nature of the sacrifice of dissenting creditors.


Out-of-Court Payment Agreement

Out-of-Court agreements are a solution to avoid Bankruptcy Proceedings. Both companies and private persons, including professionals and self-employed who are in insolvency can apply.

Said agreements may include waiting for payments, up to 10 years or debt reductions / withdrawals. They frequently include the assignment of debtors’ assets or rights to creditors in payment of credits or the conversion of debt into a different financial instrument.

This agreement cannot affect public law credits (Social Security and Taxes).

The agreement may bind creditors with real collateral, even if they have not voted in favor of the agreement. The measures adopted may apply to them, when the agreement has been approved by the qualified majorities of creditos established by law.

If an out-of-court payment agreement becomes impossible, or debtor cannot comply with the agreement, he can initiate a “consequent Bankruptcy Proceedings”.

If the bankrupt is a private person, the proceedings will only be to liquidate his assets. This also applies for companies, businessmen or professionals who do not submit an payment agreement proposal. The relevant point for private persons is that, the debtor will be released from his / her existing debts, once the bankruptcy proceedings have ended, as long as it is declared fortuitous. His / her debts will be “forgotten”.

In any case, as a consequence of Directive (EU) 2019/1023 on Restructuring and Insolvency, both pre-bankruptcy instruments must be reformed in order to:

(i) Give more flexibility to the negotiation and content of the agreements between debtor and creditors

(ii) Guarantee that access to the restructuring is prior to entering the insolvency phase

(iii) Provide greater legal certainty to the parties involved.

For example, clearly define the concept of financial liabilities or the deadlines for suspension of executions during the negotiation period of the agreements.

Pilar Pallares