Insolvency Agreement: Payment Arrangement with Creditors for Business Continuity

The insolvency agreement (convenio concursal) is the debt reduction and deferral arrangement that a company in insolvency proceedings proposes to its creditors for the satisfaction of their claims and the continuation of its activity, governed by arts. 317-341 of the Consolidated Text of the Insolvency Law (TRLC). The agreement may include debt reduction of up to 75% of ordinary claims and deferral of up to 10 years, and requires the favourable vote of 50% or 65% of ordinary liabilities (depending on its content) to be approved at the creditors' meeting. Once judicially approved, the agreement binds all ordinary creditors and replaces the insolvency administrator as supervisor of the company's management. Non-compliance triggers the opening of the liquidation phase. BMC, in collaboration with Herrera García Abogados, advises on the design of the agreement proposal, negotiation with key creditors, management of the voting and judicial approval process, and management of agreement compliance throughout its term.

Is your company in insolvency proceedings and do you want to avoid liquidation?

When a company enters insolvency proceedings, it faces two paths: the agreement (a payment arrangement with creditors that allows the business to continue) or liquidation (the sale of all assets to pay creditors to the extent possible). Liquidation is the default outcome if the agreement fails or if the company does not present an agreement proposal.

The insolvency agreement is, in essence, a second chance for the company: creditors accept receiving less (debt reduction) or waiting longer to receive payment (deferral) in exchange for the company being able to continue operating, generating employment, and, over time, paying its debts from trading activity. For this approach to make sense, the company must have genuine viability as a going concern: if it cannot generate sufficient cash flow to comply with the agreement’s payment plan, the agreement is destined to fail.

In 2024, the majority of insolvency proceedings in Spain ended in liquidation rather than agreement. The agreement frequently fails not because the business lacks viability, but because the proposal was not well designed, the negotiation with creditors was not sufficiently prepared, or the payment plan was unrealistic from the outset. Expert advice on agreement design is an investment that pays for itself by avoiding liquidation.

How the insolvency agreement works: proposal, vote, and approval

The insolvency agreement process has three main phases governed by arts. 317-341 TRLC:

Phase 1: Agreement proposal design

The agreement proposal must include (art. 318 TRLC): the proposed debt reduction for each type of claim (ordinary and generally privileged claims that accept the agreement), the payment deferral period, the payment plan during the deferral period, and proposed complementary measures (debt-to-equity conversion, transfer of productive units, operational restructuring measures).

Designing the proposal requires rigorous financial analysis: what level of debt reduction and deferral can the company comply with given its projected cash flow? An agreement proposal that the company cannot fulfil benefits nobody — neither the company nor the creditors, who prefer a realistic write-down to a deferral that ends in liquidation.

Phase 2: Advance proposal or creditors’ meeting

Advance proposal route (PAC): If, before the creditors’ meeting, the company has negotiated prior adhesions from creditors representing the required majority of liabilities, it may present the PAC and secure judicial approval without the need to hold a meeting, or with a purely procedural meeting. This route is the most efficient when the main creditors are willing to negotiate.

Creditors’ meeting route: The meeting is convened by the commercial court following the submission of the insolvency administrator’s report. At the meeting, creditors vote on the agreement proposal submitted by the debtor (or by creditors representing 20% of the estate’s liabilities, who may also submit a proposal). The required majorities are 50% of ordinary liabilities for agreements with debt reduction below 50% and deferral below 5 years, and 65% for agreements with debt reduction of 50-75% or deferral of 5-10 years.

Phase 3: Judicial approval and effects

If the agreement obtains the required majorities at the meeting (or if the PAC is approved), the judge approves it if there is no creditor opposition representing a significant portion of the estate or if the objections are dismissed. With judicial approval:

• The agreement is binding on all ordinary creditors, even those who did not vote or who voted against.
• The insolvency administrators cease their intervention or substitution functions.
• The company recovers its full capacity to manage and dispose of its assets.
• The agreement compliance period and the payment plan commence.

Advance agreement proposal: the strategy for shortening insolvency proceedings

The advance agreement proposal (PAC) is the most powerful strategic tool in insolvency proceedings when the company has the main creditors’ willingness to negotiate. It allows:

• Radical shortening of time frames: insolvency with a PAC can be resolved in 4-8 months compared to the 12-24 months of ordinary proceedings.
• Cost reduction: insolvency administrator fees are proportional to the duration of proceedings; shorter proceedings are significantly less expensive.
• Relative confidentiality: the PAC limits the public exposure of the insolvency, reducing reputational damage with clients and suppliers.
• Maintaining the initiative: the company that presents the PAC controls the narrative of the process, compared to a creditors’ meeting convened by the court where the initiative passes to creditors.

The PAC is particularly recommended when: (1) the 2-3 main financial creditors represent the majority of the estate’s liabilities and are willing to negotiate; (2) the company has a credible business plan that it can present to creditors; and (3) the management team is aligned with the restructuring and there are no internal conflicts that could complicate approval.

After the agreement: managing compliance

The agreement compliance period — which may last up to 10 years — is the longest and, in many cases, the most complicated phase. Companies that have emerged from insolvency with an approved agreement have periodic payment obligations that must be met exactly in accordance with the agreement’s schedule. Deviations, even if isolated, may give rise to applications for a declaration of non-compliance by creditors.

The most frequent causes of agreement non-compliance we observe are: (1) overly optimistic cash flow projections at the design stage; (2) deterioration of the economic environment during the agreement period; (3) loss of key contracts or clients; and (4) emergence of unforeseen tax or employment contingencies.

Active management of compliance — with periodic monitoring of actual versus projected cash flow, early identification of deviation risks, and proactive communication with creditors when problems arise — is what distinguishes agreements that are complied with from those that end in liquidation.

For companies that can still act before entering insolvency, the pre-insolvency restructuring plan with judicial approval is the instrument equivalent to the agreement but with the advantage of not having to declare insolvency. For companies in insolvency where liquidation is inevitable, management of the insolvency qualification and insolvency rescission are the most critical aspects.

Sources and Regulatory Framework

• BOE - Consolidated Text of the Insolvency Law (TRLC), arts. 317-341
• BOE - Law 16/2022 Reforming the TRLC
• CGPJ - Commercial Courts
• Public Insolvency Registry

Regulatory framework: TRLC arts. 317-341 and majorities for the agreement

The insolvency agreement is the classic instrument for resolving insolvency proceedings without liquidation: an arrangement between the debtor and its creditors on payment terms that, once approved by the court, binds all ordinary creditors.

TRLC arts. 317-341 (On the insolvency agreement): Art. 317 TRLC defines the agreement as the arrangement between the debtor and its creditors that concludes the insolvency through compliance with the agreed terms. The minimum content of the agreement includes the debtor’s proposal with the offered debt reductions and deferrals. Art. 318 TRLC sets out the limits: the debt reduction may not exceed 75% of ordinary claims (beyond 75%, the proposal is unacceptable), and the deferral may not exceed 10 years. To exceed these limits, the company must provide a viability plan justifying the exception.

Majorities for agreement approval (art. 375 TRLC): The agreement is approved if it secures the favourable vote of ordinary creditors representing at least 50% of ordinary liabilities for proposals with debt reduction below 50% and deferral below 5 years. For more onerous proposals: 65% of ordinary liabilities for debt reductions of 50-75% or deferrals of 5-10 years. Privileged creditors (mortgage, pledge, employees) vote separately and may remain outside the agreement if agreed.

Advance agreement proposal (PAPC, arts. 327-333 TRLC): A debtor with sufficient prior adhesions before the agreement phase may present a PAPC with those adhesions already signed. The advantage: it significantly reduces the duration of the insolvency proceedings and uncertainty about the voting outcome. Adhesions from creditors representing at least 50% of ordinary liabilities (or the percentage required for the specific proposal) are needed.

Effect of the approved agreement: The judgment approving the agreement extends its effects to all ordinary creditors, including dissidents who voted against. Privileged creditors who have not voted in favour remain outside the agreement (their claims are maintained in full). The approved agreement produces the cessation of the effects of the insolvency declaration (art. 399 TRLC): the directors recover their management and disposal powers.

Agreement non-compliance (arts. 400-415 TRLC): If the debtor fails to comply with the agreement, any creditor may apply to the commercial court for a declaration of non-compliance. A declaration of non-compliance leads to the opening of the liquidation phase (art. 407 TRLC) and the commencement of the qualification section for non-compliance (presumption of culpability, art. 445 TRLC).

Insolvency agreement procedure step by step

Phase 1 — Agreement proposal design (months 1-2 of insolvency proceedings)

The design of the proposal is the most critical element: it must be attractive to creditors (sufficient debt reduction/deferral for them to prefer the agreement over liquidation) and sustainable for the debtor (the payment plan must be achievable with the business’s projected cash flow). The viability plan underpinning the proposal is prepared, demonstrating that the company can comply with the proposed agreement.

Phase 2 — Prior negotiation with key creditors

Before presenting the formal proposal, terms are negotiated with major creditors (banks, bondholders, main suppliers). The objective is to arrive at the creditors’ meeting with adhesions from creditors representing the required majority, converting the process into a PAPC or facilitating approval at the meeting.

Phase 3 — Presentation of the agreement proposal

The formal proposal is presented to the court within the legal time limit. The insolvency administrator issues its report on the proposal (art. 361 TRLC). If there are alternative proposals from creditors, these are also processed in parallel.

Phase 4 — Creditors’ meeting and vote

The creditors’ meeting is convened by the judge. At the meeting, creditors vote on the proposal. If the majorities under art. 375 TRLC are achieved, the agreement is considered approved. The judge may approve the meeting-approved agreement if there are no grounds for opposition (art. 390 TRLC).

Phase 5 — Agreement compliance

Once approved, the debtor manages the company normally under the agreement plan. The insolvency administrator may remain in a supervisory capacity if the agreement so provides. Full compliance with the agreement extinguishes claims in accordance with the agreed terms.

Competent court

The Commercial Court handling the main insolvency proceedings is competent for the entire agreement phase: approval of the proposal, convening and holding of the creditors’ meeting, judgment approving the agreement, and resolution of objections. The judgment approving the agreement is subject to appeal before the Provincial Court of Appeal.

Case study: distribution company with 3.2M euros of ordinary liabilities and a 35% debt reduction proposal

Situation: A distribution company declares insolvency with ordinary liabilities of 3.2M euros (12 creditors, the largest being a bank with 1.1M euros and the second a main supplier with 0.8M euros) and assets of 1.4M euros. The company has positive EBITDA (320,000 euros/year) and a viable continuation plan if its liabilities are reduced. Debtor’s proposal: 35% debt reduction on ordinary claims + 4-year deferral.

BMC strategy: Negotiations are conducted with the 2 largest creditors (bank and main supplier, 1.9M euros = 59% of ordinary liabilities) before the meeting. The bank accepts the proposal if the viability plan demonstrates the sustainability of the restructured debt. The main supplier accepts if continued post-agreement commercial terms are guaranteed. With those two adhesions, the 50% of ordinary liabilities required for the standard proposal is exceeded. The creditors’ meeting approves the agreement with 67% of liabilities.

Result: The approved agreement reduces ordinary liabilities from 3.2M euros to 2.08M euros (35% debt reduction) with a 4-year deferral. The company exits insolvency in 8 months and complies with the payment plan over the following 4 years.

Common errors in the insolvency agreement

1. Proposing an agreement without a solid viability plan. An agreement that proposes unsustainable terms for the debtor is destined for subsequent non-compliance. Non-compliance with the agreement triggers liquidation and generates a presumption of culpability. The viability plan is the most important document in the proposal.

2. Not negotiating with the majority creditors before the meeting. Arriving at the meeting without knowing the position of the creditors who represent the majority of the estate’s liabilities is a serious strategic error. The meeting may reject the agreement, triggering the liquidation phase. Prior negotiation is what converts the meeting into a ratification of an already negotiated arrangement, rather than an uncertain vote.

3. Proposing debt reductions that exceed the legal limits without justification. Art. 318 TRLC sets out limits on debt reduction (75%) and deferral (10 years). Proposals exceeding these limits are inadmissible without the special documentation justifying them (exceptional viability plan). Commercial judges are strict on this point.

4. Failing to account for privileged creditors in the strategy. Creditors with special privilege (mortgages, pledges) and general privilege (Tax Authority, Social Security, employees) remain outside the agreement if they do not vote in favour. An agreement that ignores mortgage debt or tax debt may be formally approved but leaves the debtor with an unsustainable burden outside the agreement.

5. Not anticipating the contingencies that may prevent agreement compliance. The agreement’s payment plan must include a sufficient liquidity cushion to address unforeseen events (sales decline, new debts, litigation). An agreement calibrated to the limit of payment capacity has a high probability of non-compliance when any disruption occurs.