Likelihood of insolvency, imminent insolvency and actual insolvency: why acting in time can change the outcome
Companies rarely move from a situation of normality to a sudden inability to meet their obligations regularly. Between those two extremes there are distinct phases that insolvency law recognises and regulates: likelihood of insolvency, imminent insolvency and actual insolvency. Each of them has different legal consequences and opens or closes alternatives for restructuring debt, negotiating with creditors or reorganising the business. The central idea is clear: the law of corporate distress does not begin only when the company stops paying, but precisely before that, and acting in those early phases can decisively change the outcome for the company, its creditors and its management bodies.
1.From likelihood of insolvency to imminent insolvency
The likelihood of insolvency is a pre-insolvency category that does not appear as such in the “texto refundido de la Ley Concursal” —Spain's consolidated Insolvency Act, the TRLC—, but that serves to describe a situation in which, without there yet being any general default or any immediate inability to pay, it is reasonable to foresee that the debtor will be unable to meet the obligations falling due within a given time horizon unless restructuring measures are adopted. It is the natural territory of early warning mechanisms and of preventive restructuring instruments. The company is still meeting its obligations, but the financial indicators, the debt structure, the development of the business or the concentration of maturities make it possible to anticipate that, if the trajectory continues, a state of insolvency will be reached.
Imminent insolvency, by contrast, is a category that is defined by law. Article 2.3 of the consolidated Insolvency Act (Royal Legislative Decree 1/2020 of 5 May) provides that insolvency may be actual or imminent, and specifies that a debtor is in a state of imminent insolvency where it foresees that within the following three months it will be unable to meet its obligations regularly and punctually. It is not required that default should already have occurred, but that there should be a well-founded forecast that it will occur within that period. The company may be up to date with its payments, but the expected lack of liquidity, the impossibility of refinancing maturities or the fall in income make it reasonable to anticipate that it will not be able to go on meeting its obligations on a regular basis. That forecast, in order to be legally relevant, must rest on objective data and not on mere conjecture, because decisions as significant as the notification of the opening of negotiations with creditors, or a petition for voluntary insolvency proceedings —the “concurso voluntario”— founded on imminent insolvency, may flow from it.
2.Actual insolvency: the inability regularly to meet obligations as they fall due
Actual insolvency is the classic precondition for insolvency proceedings. That same article 2.3 of the consolidated Insolvency Act treats as being in a state of actual insolvency the debtor that cannot regularly meet its obligations as they fall due. This is not a matter of an isolated delay or of a one-off default, but of a general inability to meet obligations on the agreed terms. The regularity of the default and its general character are the elements that make it possible to distinguish insolvency from mere temporary illiquidity.
Article 2.4 of the consolidated text also lists a series of external facts indicative of a state of insolvency that may serve as the basis for a petition for insolvency proceedings by any creditor: a prior final judicial or administrative declaration of insolvency; the existence of an instrument under which enforcement or enforcement measures have been ordered without the attachment yielding sufficient unencumbered assets for payment; the existence of attachments arising from enforcement proceedings under way that affect the debtor's assets generally; a general cessation of payment of current obligations; a general cessation of payment of tax obligations, social security contributions or employees' wages and severance payments during the three months preceding the petition; and the fraudulent removal or the hurried or ruinous disposal of assets. These facts do not exhaust the situations that amount to insolvency, but they are qualified indicia that allow it to be presumed and that carry significant evidential weight in insolvency proceedings.
The difference between imminent insolvency and actual insolvency is not merely temporal; it is qualitative. In imminent insolvency, the company can still meet its obligations but foresees that it will shortly cease to do so; in actual insolvency, it can no longer meet them regularly. This distinction has direct consequences for the debtor's duties and for the alternatives available.
3.The duty to petition for insolvency proceedings and the liability threshold
Article 5 of the consolidated Insolvency Act imposes on the debtor the duty to petition for a declaration of insolvency within the two months following the date on which it became aware, or ought to have become aware, of the state of actual insolvency. Paragraph 2 adds a significant presumption: unless there is evidence to the contrary, the debtor is presumed to have been aware that it is in a state of insolvency where any of the facts capable of serving as the basis for a petition by any other party with standing has occurred, that is to say, the external facts indicative of insolvency listed in article 2.4. This duty is therefore triggered by actual insolvency, not by likelihood or by imminence, although those earlier phases may be relevant in assessing the diligence of the management body for the purposes of the classification of the insolvency and of liability.
Failure to comply with this duty, or delay in complying with it, may have consequences for the classification of the insolvency as fortuitous or culpable and for the liability of de facto or de jure directors. Insolvency proceedings petitioned for late, when insolvency was manifest and acts have taken place that have aggravated the situation or harmed the insolvency estate, may be classified as culpable, with possible orders to meet all or part of the insolvency shortfall and to be disqualified from administering the assets of others or representing any person for a given period. From a company-law standpoint, the existence of a ground for dissolution on account of qualifying losses and the failure of the management body to react may give rise to joint and several liability for the company's debts arising after the ground came about, under the regime of the “Ley de Sociedades de Capital”, the Spanish Companies Act. Acting in time, by contrast, makes it possible to use pre-insolvency and insolvency instruments in an orderly way and reduces the risk of criticism at the classification stage.
4.Acting at the likelihood-of-insolvency stage: preventive restructuring
The likelihood-of-insolvency phase is the natural territory of the preventive restructuring instruments introduced and strengthened in the consolidated Insolvency Act following the transposition of Directive (EU) 2019/1023. At this stage, the company may notify the opening of negotiations with its creditors with a view to reaching a restructuring plan enabling it to alter the composition, the maturity or the terms of its debt, to restructure its capital or its business, or to sell business units. The notification of negotiations, governed by Book Two of the consolidated text, has significant effects on individual enforcement proceedings and on protection against petitions for creditor-initiated insolvency proceedings —the “concurso necesario”—, and it opens a window of time in which to negotiate solutions that avoid insolvency or make it more manageable.
Acting at this stage has several practical advantages. The company retains credibility with creditors and suppliers, because it is still meeting its obligations and can put forward a plan from a stronger negotiating position. The range of available measures is wider: refinancings, conversions of debt into equity, sales of non-essential assets, the entry of new investors, and operational and organisational restructuring. The scope for preserving value is greater: hurried sales can be avoided, onerous contracts terminated, the cost structure adjusted and the business reorganised without the immediate pressure of actual insolvency. From the directors' point of view, the early use of these instruments may be a significant argument for establishing diligence in the management of the crisis.
5.Imminent insolvency: bringing insolvency proceedings forward and ordering the transition
In imminent insolvency, the company is no longer in a state of mere likelihood; it foresees that in the next three months it will be unable to meet its obligations regularly and punctually. This is a critical moment. Article 2.2 of the consolidated text expressly allows a petition for a declaration of insolvency filed by the debtor to be founded on its being in a state of insolvency, without distinguishing between actual and imminent insolvency, so that the debtor may petition for voluntary insolvency proceedings founded on imminent insolvency. That possibility has a strategic dimension: it makes it possible to order the transition into insolvency proceedings and to avoid disorderly enforcement or a race between creditors.
A petition at this stage may facilitate the approval of a “convenio” —a composition with creditors—, the orderly sale of business units or the use of restructuring mechanisms within the insolvency proceedings themselves. The company can prepare the insolvency documentation in advance, negotiate preliminary agreements with financial or trade creditors, design an early composition proposal or an orderly liquidation plan, and avoid acts capable of being set aside as detrimental to the insolvency estate during the suspect period. The management body can demonstrate diligence by anticipating the situation and by using the legal tools available, which may be relevant to the classification of the insolvency and to any claim for liability.
6.Actual insolvency: managing the proceedings and preserving what can be preserved
Where insolvency is already actual, the room for manoeuvre narrows, but it does not disappear. Insolvency proceedings remain an instrument for ordering the satisfaction of claims, preserving viable business units and, where appropriate, allowing the discharge of unsatisfied liabilities for debtors who are natural persons. The difference is that the company reaches the proceedings in a more deteriorated situation, with enforcement proceedings possibly under way, a loss of confidence on the part of creditors and suppliers, and earlier acts that may be the subject of claw-back actions.
Acting in time where insolvency is actual means, first of all, complying with the duty to petition for insolvency proceedings within the two-month period running from the moment insolvency is known or ought to be known, in accordance with article 5 of the consolidated text. It also means avoiding acts that aggravate the situation or that unduly favour particular creditors or related parties, which could be classified as acts detrimental to the insolvency estate and give rise to avoidance actions. The preparation of the petition, the quality of the report, of the inventory and of the list of creditors, and transparency in the information supplied to the court and to the insolvency administrator are elements capable of influencing the conduct of the proceedings and the assessment of the debtor's conduct.
7.Dispelling the perception that insolvency law begins when payments stop
The perception that insolvency law begins only once the company has already stopped paying is mistaken and dangerous. The preamble to Royal Legislative Decree 1/2020 itself stresses that insolvency law is conceived as a fundamental tool for preserving the business fabric and employment, and that the legislature has incorporated a “derecho de la crisis” (a law of corporate distress) that is alternative and, on occasion, prior to the traditional law of insolvency, through the regulation of the notification of negotiations, refinancing agreements, out-of-court payment agreements and consecutive insolvency proceedings. The acceptance of imminent insolvency as an alternative precondition for voluntary insolvency proceedings and the design of preventive restructuring instruments show that the system is intended to allow action before a general cessation of payments.
Acting at the likelihood-of-insolvency and imminent-insolvency stages can change the outcome. A company that detects a likelihood of insolvency and uses the restructuring mechanisms may avoid insolvency proceedings or reach them in better condition, with a plan already negotiated and with greater preservation of value. A company that recognises imminent insolvency and petitions for voluntary insolvency proceedings can order the transition, preserve business units, minimise the destruction of value and reduce liability risks for its directors. A company that waits for actual insolvency, that delays its petition beyond the period laid down in article 5 and that carries out acts aggravating the situation exposes itself to more complex proceedings, to greater losses of value and to criticism in the classification of the insolvency as culpable.
8.Conclusion: time as a legal variable in corporate distress
Likelihood of insolvency, imminent insolvency and actual insolvency are not merely economic labels; they are categories of legal significance that mark out thresholds for action and for liability. The consolidated Insolvency Act offers different tools at each stage, from the notification of negotiations and restructuring plans through to voluntary insolvency proceedings founded on imminent or actual insolvency. The decision to use them in time can decisively change the outcome of the crisis. The legal management of a crisis is, above all, a question of anticipation: the sooner the difficulties are identified and the appropriate instruments deployed, the greater the chances of preserving the company, of ordering the satisfaction of creditors and of reducing the risks for those who manage it. In this sense, time becomes a genuine legal variable in insolvency law.
