Written by Maria Teresa Garasa
Commercial lawyer
An out-of-court payment agreement may be requested while a refinancing agreement is being negotiated with creditors. It is an application for the appointment of an insolvency mediator, which may be filed by a debtor — whether an individual or a legal entity — who is currently or imminently insolvent and has not yet been declared bankrupt, with the aim of reaching an out-of-court payment agreement with their creditors.
What happens when no agreement is reached in mediation or pre-insolvency proceedings? 
Content of the proposed agreement:
The proposal may include any of the following measures (Article 667 of the Consolidated Insolvency Act — TRLC):
- Payment deferrals for a period not exceeding ten years — that is, requiring creditors to wait before receiving payment.
- Debt write-downs — that is, reducing the outstanding debt by a percentage.
- The transfer of assets or rights to creditors in satisfaction of all or part of their claims, where applicable.
Where the debtor is a legal entity — a company, association, or similar — the proposal may also include, where applicable:
- a proposal for the conversion of claims into shares or equity interests in the debtor entity or in another company; the conversion of claims into participating loans for a period not exceeding ten years; their conversion into convertible bonds, subordinated debt, loans with capitalisable interest, or any other financial instrument with characteristics, ranking, or maturity terms different from those of the original claims.
EFFECTS OF THE OUT-OF-COURT PAYMENT AGREEMENT:
Once the appointment of an insolvency mediator has been requested, the debtor may continue their professional, business or employment activities, but must refrain from carrying out any acts of administration or disposal that go beyond the ordinary course of their business operations.
REFINANCING AGREEMENT APPLICATION FORM:
This standard form must be accompanied by the following standard forms:
- the inventory of assets and rights, detailing:
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- their nature
- their characteristics
- their location
- registry identification details
- acquisition value, any applicable valuation adjustments, and an estimate of current value
- encumbrances, attachments and charges affecting these assets and rights:
- specifying their nature
- registry identification details
- In an Annex, the following must be set out:
- cash and liquid assets available
- a list of anticipated regular income
- the list of creditors:
- in alphabetical order
- including public law creditors
- stating each creditor's identity, address and email address, where available
- indicating the amount owed
- specifying the due date
- detailing credits and any personal or real guarantees provided (with the value of the guarantee as set out in the Insolvency Act for claims with special privilege).
- enforcement proceedings against the debtor's assets:
- including the identity of the enforcing party.
- the court and case number in which the proceedings are being conducted
- specifying which enforcement proceedings relate to assets or rights necessary for the continuity of the professional or business activity.
- As an Annex, the following shall be included:
- a list of current contracts
- a list of projected monthly expenses.
- If the debtor has employees, the following must be provided:
- a list of employees, including their identities
- the address of their representatives.
- Accounting documents, if the debtor is required to keep accounts:
- annual accounts for the last three financial years
- an up-to-date balance sheet.
SPECIFIC REQUIREMENTS FOR LEGAL ENTITIES AND NATURAL PERSONS:
For legal entities:
- The decision to file the application shall be taken by the management or liquidation body in the case of a legal entity.
- The estimated initial assets and liabilities must be less than €5M, or there must be fewer than 50 creditors. In both cases, the debtor must have sufficient assets to cover the costs of the procedure.
For natural persons:
- If the debtor is a natural person, the procedure is not available where estimated liabilities exceed €5M.
- If the debtor is married under a joint property regime (gananciales) or any other community of property arrangement, this must be stated and the spouse's details provided. If the shared family home may be affected, both spouses must sign the application or the other spouse's consent must be submitted.
DEFERRAL OF PUBLIC DEBTS
Once the insolvency mediator has been appointed, the debtor with outstanding tax debts or Social Security contributions must apply for a deferral or instalment payment arrangement from the competent public authority in respect of any amounts that were outstanding at the date of the mediator's appointment.
- The application must be accompanied by a list of any other public-law debts that, at the date of submission, were included in requests pending resolution.
- Applications relating to tax debts shall be governed by the provisions of Law 58/2003, of 17 December.
- Applications relating to Social Security debt shall be governed by the General Social Security Act.
- A decision granting a deferral or instalment arrangement for these debts may only be issued once the out-of-court payment agreement has been formalised, or if three months have elapsed since it was submitted without publication of the out-of-court payment agreement in the public insolvency register, or if the debtor has been declared insolvent.
How long can public debt be deferred?
Unless considerations of amount, assessed at the discretion of the public authority, determine otherwise, the decision granting the deferral or instalment arrangement will have as its maximum time frame that set out in the out-of-court payment agreement, although the frequency of instalments may differ.
What happens to previously granted deferrals or instalment arrangements?
Deferrals and instalment arrangements for tax debts or Social Security debts previously granted and still in force at the date of submission of the application will continue to have full effect.
However, if a modification of the conditions of an existing arrangement is requested, that application will be processed jointly with the new one.
We hope you find this information useful. You can find all the information on insolvency proceedings at:
