Law 25/2015, of 28 July, on the second-chance mechanism, financial burden reduction and other social support measures, ratifies and confirms the content of Royal Decree-Law 1/2015, of 27 February, amending the Insolvency Act (Ley Concursal –“LC”), among other laws.

However, the Law includes certain changes to the text of the abovementioned Royal Decree-Law that should be highlighted. In particular, individual debtors are able to obtain the debt relief benefit, and reforms have been made to Insolvency Administration regulations, limiting but at the same time guaranteeing the remuneration of insolvency practitioners.

Unpaid debt relief benefit

The applicability of the second-chance mechanism or debt relief system for individual debtors has been extended to include cases classified as negligent insolvency. Upon conclusion of insolvency proceedings due to liquidation or insufficient assets, the judge in the proceedings is empowered to grant unpaid debt relief, pardoning any outstanding debts, even when the insolvency has been declared negligent if that negligence was due to delay or default in the application for insolvency, in view of the circumstances and only in the absence of a finding of gross negligence on the part of the debtor (Article 178 bis.3.1 LC).

Furthermore, the new legislation clarifies the legal status of guarantors, collateral providers or joint debtors that have covered the debt of the insolvent. They cannot claim the unpaid debt relief benefit obtained by the insolvent, or be subrogated for the payment after liquidation to the rights that the creditor had against the insolvent, unless the relief granted is revoked (Article 178 bis.5 LC).

Legal regulations for Insolvency Administration

In relation to the legal regulations for Insolvency Administration, although there is a draft bill for a Royal Decree that will set them forth in detail, the Law introduces some new elements.

First of all, it sets a limit on remuneration for Insolvency Administration. The maximum total amount that can be received for administration in insolvency proceedings shall be the lower of the following: The amount resulting from multiplying the debtor’s assets by 4%, or 1,500,000 euros. However, the judge, with due cause and having heard the parties, may approve remuneration higher than the above limit when, due to the complexity of the insolvency, the costs assumed by the insolvency practitioner justify it, although in no case may this exceed 50% of the aforementioned limit [Article 34.2.b) LC].

Secondly, a guarantee is established for the payment of remuneration for Insolvency Administration, though a fee guarantee account (cuenta de garantía arancelaria). In insolvency proceedings concluded due to insufficient assets to pay the claims against the estate, payment of a minimum remuneration will be guaranteed through an account that will hold mandatory contributions by insolvency practitioners [Article 34.2.c) LC].

To this end, a single account will be established, under the responsibility of the Ministry of Justice (Article 34bis LC). Clerks of courts with competence in insolvency matters will be the only persons authorised to dispose of the funds held in the account, as well as being the ones responsible for administering it and controlling deposits and expenses through a proprietary computer application of the Ministry of Justice as determined thereby (Article 34 ter LC).

Contributions by insolvency practitioners must be made within five business days of effective receipt of any form of remuneration. The amounts to be deposited shall be calculated by applying different percentages based on the remuneration received. However, insolvency practitioners whose remuneration for the entire insolvency process is less than 2,565 euros will be exempt from the obligation to contribute to the account, as will any who are entitled to compensation from the aforementioned account (Article 34 quater LC).

In any case, the operation of the account and the distribution system will be subject to the regulatory provisions (Articles 34 bis.2 and 34 quater.5 LC). In this respect, the draft bill of the Royal Decree implementing the Insolvency Administration Regulations will provide more detail on the system, operation and contributions for the fee guarantee account, as well as all rights and obligations arising therefrom.