Corporate Debt Restructuring: TRLC Restructuring Plans to Avoid Formal Insolvency

Corporate debt restructuring in Spain is governed primarily by Book I of the Texto Refundido de la Ley Concursal (TRLC, Legislative Royal Decree 1/2020, as reformed by Law 16/2022 transposing EU Directive 2019/1023 on preventive restructuring frameworks). A TRLC restructuring plan allows a company facing imminent or current insolvency to negotiate haircuts and maturity extensions with its creditors, organised by creditor classes, and to extend the plan's effects to dissenting creditors within each class through judicial homologation (the "cram-down" mechanism) once the required majorities are met. During negotiations, the company can activate a judicial protection shield under Article 583 TRLC — a pre-insolvency notification to the commercial court that freezes individual enforcement actions for up to six months while management retains full operational control.

Does your company have unsustainable debt but a viable business?

Corporate debt restructuring starts from a fundamental premise: some companies have debt problems, others have business problems. For the former, the solution is to adjust the financial structure, not to liquidate the business. The instrument designed for this in Spanish law is the Book I TRLC restructuring plan, introduced by Law 16/2022 transposing the European Preventive Restructuring Directive.

The typical symptoms of a company with unsustainable debt but a viable business are recognisable: EBITDA generated is insufficient to service debt (interest coverage ratio below 1x), banking covenants are in breach or at the limit, automatic credit line renewals are starting to be refused, and available cash barely covers 3-4 months of normal operations.

What many directors do not know is that the TRLC gives them a specific tool for this moment: to negotiate with creditors under judicial protection, with the ability to impose the agreement on dissenters if the required majorities are achieved.

How a Book I TRLC restructuring plan works

The restructuring plan is an agreement between the debtor company and its creditors that can include a haircut (reduction of the nominal debt amount), maturity extension (deferral of repayment schedules), debt-to-equity conversion (converting debt into shareholdings) and operational measures (workforce restructuring, asset sales, closure of loss-making business lines).

What makes the TRLC restructuring plan more powerful than a simple private renegotiation is the possibility of class voting and judicial homologation:

Creditors are grouped into classes according to the nature of their claim: secured debt (with mortgage or pledge), ordinary debt (without real security), subordinated debt and, where applicable, public debt. Each class votes separately. The plan can be approved with majorities within each class, and if there are dissenting classes but cross-class majorities are achieved (majority of classes with sufficient total liability representation), the court can homologate the plan and extend its effects to the classes that voted against it.

This mechanism — cram-down — is the most important innovation of the 2022 reform. Previously, unanimous consent from all creditor classes was required for the plan to be binding on all of them. Now, a qualified cross-class majority with judicial homologation is sufficient.

Cram-down: how to extend the plan to dissenting creditors

Cram-down (forced extension of the plan to dissenting creditors through judicial homologation) solves the holdout problem: the minority creditor who blocks agreement knowing that if restructuring fails the outcome is formal insolvency, which allows them to negotiate more favourable terms than those agreed by the majority.

For the court to homologate the plan with cram-down effect on dissenting classes, two main conditions must be met:

Cross-class majorities. The plan must have obtained approval from a majority of creditor classes, with a minimum representation of the total liability included in the plan. The Law establishes the specific majorities depending on whether or not lower-ranking classes approve the plan.

Best-interest test. Dissenting creditors cannot be left in a worse position than if the debtor entered liquidation insolvency proceedings. The plan must demonstrate, with an independent expert report, that what it offers to dissenting creditors is at least equivalent to what they would receive in the liquidation scenario. If the test is passed, the court has no discretion: it homologates the plan.

What our corporate debt restructuring advisory includes

Corporate debt restructuring is a multidisciplinary process combining financial analysis, negotiation strategy and legal precision. Our team integrates both dimensions: Raúl Herrera García leads the insolvency law component, coordinating with BMC’s corporate restructuring team when the transaction requires new investor financing components, asset valuation or capital structuring.

We have experience in restructurings involving syndicated bank debt, distressed debt funds, bonds and significant trade debt. We know the internal protocols of the major financial institutions and the negotiating patterns of the distressed funds operating in the Spanish market, which allows us to design realistic negotiation strategies from day one.

Restructuring plan versus formal insolvency proceedings

The most common question is: when is the restructuring plan the better option and when is formal insolvency better?

The restructuring plan is preferable when: (i) the company has a viable business with restructured debt, (ii) there is a critical mass of creditors with whom private negotiation is possible, (iii) the company wants to retain management control and avoid the stigma of formal insolvency, and (iv) the debt structure is primarily financial (banks, funds) rather than an atomised liability of many small trade creditors.

Formal insolvency proceedings are the right route when: (i) insolvency is already current and there is no prospect of a pre-insolvency agreement, (ii) atomised trade creditors make private negotiation impractical, (iii) orderly liquidation is the best outcome for creditors and the business has no real viability, or (iv) a creditor has already petitioned for involuntary insolvency.

In many cases the optimal route is to combine both: start pre-insolvency negotiations under Art. 583 TRLC protection, and if sufficient agreement is not reached, transition in an orderly fashion to formal insolvency proceedings with an anticipatory arrangement proposal.