Spanish restructuring law requires companies facing financial trouble to demonstrate that their recovery plan is viable before a judge will approve it. The current Bankruptcy Law (TRLC) defines a restructuring plan as a tool designed to prevent bankruptcy proceedings and ensure the continuity of economically viable businesses. This requirement aligns with the European Directive 2019/1023, which aims to help viable companies restructure early and keep operating.

Although the law does not explicitly require a separate “viability plan” document, Article 633.10 of the Bankruptcy Law mandates that the restructuring plan must include an explanation of the conditions necessary for success and the reasons why there is a reasonable prospect of guaranteeing the company’s viability in the short and medium term. This section serves as the economic and financial support to prove that the proposed restructuring will not merely delay insolvency.

What goes into the viability document

A viability plan should begin with a diagnosis of the company’s situation. This analysis must explain the causes of its difficulties, distinguishing between temporary liquidity problems and structural deficiencies related to the business model, profitability, debt, production capacity, organization, or cost structure.

Related: Six in Ten Find Starting Business Hard Spain

Based on this diagnosis, the document should describe the measures planned to restore viability. These can include identifying profitable and unprofitable business lines, reducing costs and reorganizing processes, potentially divesting from non-strategic assets, and implementing necessary commercial, productive, societarial, or labor measures. It must also cover debt restructuring tactics like write-offs, payment deferrals, capitalizations, or modifications of debt conditions, along with interim or new financing required to execute the plan.

The quantitative core should consist of integrated financial projections (income statement, balance sheet, and cash flow statement) for a period representative of the business cycle, at least covering the period of compliance with the main restructured obligations. It is not enough to project accounting results; it is essential to demonstrate cash generation capacity and its alignment with the payment calendar.

These projections should include, at a minimum, the evolution of revenues, margins, and EBITDA; essential investments to maintain activity; restructuring expenses and extraordinary costs; service of old and restructured debt; financing needs and sources; cash position and liquidity margin; and key solvency, leverage, and debt coverage indicators.

Reasonable expectations and evidence

Requiring a “reasonable perspective” does not mean guaranteeing the results of the plan. All business forecasts incorporate uncertainty. However, the law does require that the hypotheses be reasonable, coherent, traceable, and verifiable.

Related: Colombian influencers need to know their legal obligations

Each relevant hypothesis should be supported by one of the following elements depending on its nature: historical data, orders in the pipeline or expected contract renewals, sector information and market evolution, supplier budgets or negotiated commercial conditions, approved or ongoing cost reduction plans, sufficiently documented financing commitments, and comparisons with previous years and comparable companies.

The more decisive a hypothesis is for achieving viability, the greater the degree of justification required. One cannot demand the same level of support for a secondary line item as for a substantial increase in sales, a significant margin improvement, a relevant cost reduction, or the acquisition of indispensable financing.

A lack of detail can significantly weaken the defense of the plan. In competitions for the approval of restructuring plans before tribunals, projections have been questioned precisely because sufficient explanations were not provided regarding income statement items, which ultimately affected the credibility of the projected EBITDA and cash generation.

Related: Rising Home Prices Not Mortgage Count Drive Concern

Because of this, the base scenario should be complemented with a sensitivity analysis showing the effect of reasonably adverse variations in critical variables. It is particularly useful to include a base and an unfavorable scenario, identifying the point at which the company would no longer be able to meet its obligations and what corrective measures are available.

The viability plan must allow creditors, restructuring experts, and the judicial body to understand the itinerary leading from the initial state of difficulty to financial and economic recovery. Recent jurisprudence has highlighted that approval requires a reasonable perspective that the company can avoid bankruptcy and ensure viability in the short and medium term; resolutions have explicitly valued the provision of liquidity, continuity of activity, maintenance of employment, and the obtaining of essential guarantees.

While drafting these plans typically requires a multidisciplinary approach combining legal, financial, and business knowledge, the ultimate test is transparency. A good plan is not necessarily the one with the most optimistic projections, but the one that clearly explains what must happen for the restructuring to work, why it is reasonable to expect it, and what reaction capacity exists if the forecasts are not fully met. Its solidity will depend as much on the coherence of the financial model as on the quality of the evidence supporting its hypotheses.