Restructuring of the company as an alternative to bankruptcy

The economic downturn caused by the COVID-19 crisis has placed many companies in insolvency situations that require swift action to achieve company viability. Spanish regulations offer alternatives to ensure the survival of the business, being in any case necessary a good previous study of the situation to adopt the corresponding measures and reverse a situation of insolvency. We discuss two of these measures below.

What are refinancing agreements

Refinancing agreements are agreements reached with creditors (for example, suppliers, public administration, workers, banks, etc.) whose purpose is to deal with the non-payment situation through new commitments and economic conditions such as the extension of credit, the partial cancellation of debts or the postponement of expiration terms through a payment schedule according to the financial situation of the company.

The main purpose of the refinancing agreement is the continuity of the company through the collaboration of all creditors, as can be seen from article 598.1 of the Consolidated Text of the Bankruptcy Law, which literally says:

“That the agreement responds to a feasibility plan that allows the continuity of the professional or business activity of the debtor in the short and medium term.”

The tools used to force a negotiation of these characteristics with the creditor party, are part of the work to be carried out by the corresponding adviser. Undoubtedly, the fear of a potential bankruptcy is the main threat to achieve this goal. Sometimes these negotiations make it possible to restore a situation of pressing lack due to a drop in business activity which, although it does not impede the viability of the company in the medium and long term, may place it in a scenario of treasury stress.

Likewise, in the negotiation process of the refinancing agreement, we can offer advice for obtaining liquidity from financial institutions or public entities, which allow injecting additional cash lung when the company needs working capital due to a temporary need.

In the current context, many companies have resorted to this mechanism through the ICO COVID-19 Guarantee Lines, which are a source of liquidity that can save the continuity of the company. It is always advisable, before increasing the debt, to face the due financial analysis and not assume an excessive volume of debt, and comply with the legal requirements so as not to compromise the assets of the company’s administrators.

There is also the possibility of resorting to traditional financing methods such as the search for capitalist partners who directly inject capital into the company through a capital increase.

There are different legal formulas to carry out the operation, either through a capital increase through a monetary contribution, a non-monetary contribution, credit compensation, etc. Additionally, it will be advisable to regulate the rights and obligations of each of the partners (new and old) by adopting the appropriate shareholder agreements.

It may interest you: “Separation of partners in companies declared bankrupt”

Restructuring or corporate modifications

The second great alternative to bankruptcy >, which we address in this article, are the corporate changes that are included in the Law 3/2009, of April 3, on Structural Modifications of Companies (hereinafter, “LME”) in which different ways are developed to change the structural elements of a society in order to make it more economically efficient and achieve its continuity.

These measures are viable when companies have more than one line of business, for example a car dealership with a sales and an after-sales service, and one of those two activities is not profitable. In these cases, the LME makes it possible through the spin-off (which may be total or partial) to isolate the productive business from the deficit, allowing the company to continue operating. This is how the Law itself explains it in its article 69, which literally says:

“A total spin-off is understood as the extinction of a company, with the division of all its assets into two or more parts, each of which is transmitted en bloc by universal succession to a newly created company or is absorbed by an already existing company, receiving the partners a number of shares, participations or quotas of the beneficiary companies proportional to their respective participation in the company that is split off.”

Another frequent situation is the excessive dimension of structural expenses, specifically when it comes to companies from the same group. In these circumstances, the merger of companies can become a useful tool. The merger, also regulated in the LME, can allow a considerable reduction in rental, personnel or production costs, among others. This is how the LME defines the merger in its article 22, with the following literal wording:

“By virtue of the merger, two or more registered commercial companies are integrated into a single company by means of the block transfer of their assets and the attribution to the partners of the companies that are extinguished of shares, participations or shares of the resulting company, which can be newly created or one of the merging companies.”

On other occasions it is the corporate structure itself that becomes the biggest obstacle for the company to get out of a situation of insolvency or lack of liquidity. Let us take as an example the limited company that is prevented from increasing the share capital due to the restrictions imposed by article 107 of the Capital Companies Law, on the inter vivos transfer of shares. Let’s see what this article says:

“(…) the voluntary transfer of shares by inter vivos acts between partners will be free, as well as that carried out in favor of the spouse, ascendant or descendant of the partner or in favor of companies belonging to the same group as the transferor . In all other cases, the transmission is subject to the rules and limitations established by the statutes and, failing that, those established in this law”.

Depending on the case, it may even be advisable to transform the limited company into a public limited company, or vice versa, as allowed by the LME.

Multiple alternatives to bankruptcy

From our experience, refinancing or restructuring are useful alternatives when it comes to alleviating an insolvency situation and circumstances allow it, since they involve less interference in the life of the company than bankruptcy.

Without prejudice to the solution that is ultimately considered optimal, it is worth emphasizing the importance of adopting measures to avoid compromising the liability of administrators for company debts. Allowing the company to worsen its economic situation, and specifically when the net worth is reduced to half of the share capital, could lead to the administrators ending up responding with their assets to creditors for the company’s debts.