This article is framed in the unusual health crisis generated by COVID-19 and the present and future impact of the pandemic containment measures agreed and implemented by the Spanish government in almost all economic sectors. In this context it seems that many companies are already or will be shortly in an extreme situation when the market recovery and return to normal is still an open question.

Bankruptcy proceedings: a stigma.

We are aware of the stigma attached to bankruptcy in our country for cultural reasons, which makes us see it as a form of liquidation of companies, rather than a useful tool to help them survive, with the consequences that this has on the market - difficulties with suppliers, inability to access bank financing, etc. -. Therefore, we think that it may be interesting to explore the alternatives to bankruptcy proceedings that a company has when it has already detected that it is in an economic situation of insolvency, question that has already been addressed in another article (Should I File for Bankruptcy After COVID-19?).

This article is intended to shed some light on those alternative legal tools and instruments to bankruptcy proceedings without overlooking the liabilities that the company management body may incur in case of a late filing of bankruptcy, aspect already discussed in another article (May I Incur Liability If I Do Not File for Bankruptcy After COVID-19?). In order to do so, we must bear in mind the fact that any alternative necessarily involves overcoming the situation of insolvency within the legally established deadline so as to prevent the company management body from incurring liability and its viability will depend on the specific circumstances of the company itself.

The different alternatives available range from the simplest ones such as a cash injection into the company to meet outstanding payments, to those that are more complex and require a more elaborate legal technique and whose achievement will require a greater effort at every level.

Self-financing.

A plausible and easy first alternative would be for the company to obtain its own financing, that is, to recur to the shareholders for them to inject cash into the company through the different existing options:

• By granting a loan to the company, under the conditions and with the repayment terms and interest rate freely agreed between the company and the shareholder, which can be done through a private agreement between the parties.
• By granting a profit participating loan (PPL) to the company pursuant to Article 20 of Royal Decree-Law 7/1996, of June 7, on urgent tax measures and measures for the promotion and liberalization of economic activity which main requirements are as follows:
• The need to agree on a variable interest rate that will be determined based on the evolution of the activity of the borrower (the company) is compulsory. The criterion for determining such evolution may refer to net profit, turnover, total assets or any other element to be freely agreed by the parties;
• Agreeing upon a fixed interest rate is optional, and;
• Early repayment by the borrower of a PPL is only possible if said repayment is balanced out by an increase in equity for the exact same amount and provided that it does not come from a capital appreciation (rise in the value of assets). In short, early repayment requires a capital increase.

It should be noted that as for the order of priority of claims, Profit Participating Loans come after common creditors and, as far as Corporate Law is concerned, PPL are considered part of the equity. In the same way as an ordinary loan, PPL can be formalized through a private agreement between the parties as long as the above requirements are met.

• By increasing the company's share capital which is the traditional way to provide liquidity to the company by partners and shareholders. In this case, for the capital increase to be fully effective a resolution of the General Meeting is needed; then the bylaws must be modified before a Notary Public and such modification must be next registered in the Companies Registry

Third-party financing.

If “self-financing” is not feasible, a second alternative is to resort to third-party to inject liquidity into the company.

As for bank financing, the best solution would be the financing scheme approved by the government for SMEs through Royal Decree-Law 8/2020, of March 17, on extraordinary urgent measures to face the economic and social impact of COVID-19. This scheme offers the possibility of obtaining financing under very favorable conditions that we have already addressed in another article [How to obtain financing if my company has been affected by COVID-19?] – LINK TO ENGLISH VERSION to which we must necessarily refer at this point.

If bank financing is not possible, either through the state aid mentioned above, or through traditional channels, an alternative would be to look for financing through third party investors. The success of this option would lie in the interest that the company is capable to spark in the market, prospection that will need to be performed in order to access this type of financing. If there are indeed third-parties interested in investing in the company, the ways to do it go from those already mentioned above (ordinary loan, profit participating loan and capital increase) to  others such the purchase of shares, the possibility of drawing up special shareholders’ agreements that regulate internal relations with new shareholders beyond the provisions of the bylaws which may also be subject to modification in order to be adapted to the new situation. The documentation and formalities to observe in these cases will depend on the system finally chosen and agreed between the parties.

Nowadays it is also possible to resort to not so traditional or financing channels which we recommend exploring since they may be a viable option to overcome the business crisis. Among these alternatives we find the following: Crowdfunding (contribution of small amounts by individuals in exchange for some kind of reward); Crowdinvesting (investment of small or large amounts of money in a private company, mainly start-ups, in exchange for shares); Crowdlending (loans granted from private investors in exchange for an interest rate that will depend on the type and risk of the operation) and Crowdfactoring (the company benefits from factoring thanks to the contributions of private investors who lend their money). In any case, we recommend using only collective investment platforms authorized by the National Securities Market Commission, regulated by Law 5/2015, of April 27, to promote business financing.

If the company managed to obtain enough cash to meet all current obligations either through internal financing channels, or by means of external financing or even both in combination, which is perfectly possible, the insolvency situation would have been overcome and therefore it will not be  necessary to file for bankruptcy.

Corporate restructuring measures.

We will not explain here other corporate restructuring measures such as the capital reduction to try to balance the company's equity and prevent it from incurring a cause for dissolution (article 363.1 e) of the Spanish Corporations Act) or legally permitted accounting corrections since such measures will no longer help the company overcome a current or imminent insolvency situation.

Arrangements with creditors.

If the company is unable to obtain liquidity either through external channels or self-financing, there are other ways, of different complexity and effects, to overcome the insolvency situation. These alternative routes must necessarily go through an arrangement with the creditors.

First, we must mention private debt renegotiations between debtor and creditors by means of out-of-court debt relief arrangements. The purpose of these arrangements is to restructure the debt or settle it in an orderly manner with each of the creditors or even with groups of creditors of the same type in a coordinated manner, and always including the whole debt, since the only way to overcome the situation of insolvency is by reaching an agreement comprising all the company’s liabilities. Besides, we must not forget the Tax Agency and National Social Security, since both of them are creditors to whom deferrals must be requested and those shall be granted, where appropriate, according to their own internal regulations.

Although these arrangements are private and therefore, they do not generate bad press, they have some disadvantages:

• It is difficult to get them executed since it is hard to reach an agreement with all creditors;
• It is a race against time since the company is already insolvent, and
• There is also the risk of early termination because one or several creditors consider that said arrangements are detrimental to them and therefore offer little legal certainty.

These are the reasons why this option is not advisable a priori unless the debtor is a company with few creditors, and which has simple capital structure.

Out-of-court payment agreement.

However, bankruptcy law also offers instruments that improve individual negotiation with creditors and can be extremely useful to reach an agreement that allows the debtor overcome the situation of insolvency and provides greater legal certainty regarding the results of the negotiation. In these cases, negotiation deadlines are also longer.

The out-of-court payment agreement (Articles 231 to 242 of the Spanish Bankruptcy Act).

Although this tool has been fundamentally used for individuals, it can also be useful for companies provided that they are not particularly complex (that is, as long as they have less than 50 creditors, less than 5 million liabilities, and the valuation of their assets does not reach 5 million) and as long as they can cover the expenses resulting from the agreement.

The procedure is initiated by submitting a request for the appointment of a mediator to the Companies Registry and to the Official Chambers of Commerce. Once initiated the procedure and notified to the Commercial Court:

• all the executions against the company will be suspended, except for those collateralized and as long as the collaterals are not assets necessary for the continuity of the professional or business activity;
• interest accrual is also suspended;
• there is no obligation to file for bankruptcy until the procedure initiated ends and we know whether an agreement has been reached or not.

Once the mediator has been appointed all creditors are called to a meeting where they will be proposed an agreement that may contain the following measures:

• Debt reliefs – deferral of debt repayments for a period not exceeding ten years.
• Debt reliefs – cancellation of part of the debt.
• Transfer of assets or rights to creditors to repay all or part of their claims.
• Conversion of debt into equity (debt-equity swaps).
• Conversion of debt into profit participating loans (PPL) or the like for a period not exceeding ten years. Creditors will have a period to formulate alternative proposals or proposals for modification.

If an agreement is reached at the meeting, all creditors will adhere to it. The agreement will vary depending on the degree of consensus reached: if 60% of the creditors vote for, they all will be subject to deferrals not exceeding 5 years and claims reductions of 25% or debt conversion to profit participating loans; if 75% of the creditors vote for, they will be subject to deferrals of 5 years or more and claim  reductions over 25% and to the other proposed measures. The agreement will be then signed before a Notary Public which is the last step for the company to overcome the insolvency situation without the need to file for bankruptcy.

It must be noted that the above agreement will neither concern secured creditors up to the amount backed by collateral nor the Tax Agency and National Social Security, whose claims are governed by public law.

Pre-bankruptcy proceedings.

Article 5. bis of the Spanish Bankruptcy Act provides another possible alternative: Pre-bankruptcy proceedings.

Pre-bankruptcy proceedings basically consist of a communication by the company to the Court informing of the insolvency situation. From this moment on, a new phase starts where the debtor is granted: (i) further time to negotiate with creditors –3 additional months-; (ii) protection against executions, provided that the assets or rights concerned are necessary for the continuity of the professional or business activity; (iii) the possibility to access the following negotiation instruments:

• Refinancing agreements provided for in Art. 71 bis of the Spanish Bankruptcy Act (text updated through the Royal-Decree-Law 4/2014, of March 7, under which urgent measures are adopted on refinancing and restructuring of corporate debt): These are bank refinancing agreements which do not need the unanimity of all the creditor banks, instead the approval of 75% is sufficient in order to bind the rest of the entities involved. The advantage of bank refinancing agreements is that those are legally approved (that is, enforced by a court), with no need to be subject to bankruptcy proceedings and therefore they cannot be nullified in the event of subsequent bankruptcy proceedings, provided that: (i) they have been approved by an independent expert appointed by the Companies Registry; (ii) they involve a significant increase of the credit available or the modification of the debtor liabilities either by extending their maturity or by establishing other obligations to replace the first and; (iii) provided that they comply with a feasibility plan that allows the debtor to pursue its professional or business activity in the short and medium term. Said agreements must be signed before a Notary Public (public deed). Finally, an advantage for banks is that 50% of the loans that represent new cash inflows and have been granted within the framework of a refinancing agreement will be considered as claims against the bankruptcy estate which means that they will be priority as for the order of repayment of claims if finally the company files for bankruptcy.
• Refinancing agreements enforced by a court regulated under the Additional Provision 4 of the Spanish Bankruptcy Act: It concerns financial creditors, which is a broader concept than the bank creditors. According to said provision, refinancing agreements can be enforced by the Commercial Court so that they also apply to creditors who have not adhered to or who have objected to said agreements. The extent of the agreement that can be applied varies depending on the majorities reached (60% or 75%) and ranges from debt deferral of less than 5 years, to deferrals of up to 10 years; debt reliefs (total or partial cancellation), loan capitalization; or transfer of assets or rights to creditors in payment of all or part of the debt.

Conclusion.

If through the aforementioned measures the insolvency situation is overcome, it will not be necessary file for bankruptcy; otherwise and within the bankruptcy proceedings, there will be other alternatives to save the company by reaching agreements with the creditors or through the sale of the productive unit, but all these issues will be covered in a future article. In any case, in order to properly apply either or even several of the above solutions, it is essential to count on the help of a multidisciplinary specialist team that provides us with adequate legal and economic advise and response to the questions and issues that concerns us and that are habitual in this type of situations.