Introduction
Classification of the credits in agreement compliance phase
Direct applicability of Directive by Spanish courts
Comment
On 11 January 2022, the bill to reform the consolidated text of the Insolvency Law (TRLC) by transposing the EU directive on restructuring and insolvency (the Directive)(1) received approval through Royal Legislative Decree 1/2020 of 5 May 2022.
Once the Directive has received full approval and has been transposed, it is expected that the new TRLC will become effective from Summer 2023 with significant amendments that will modify its current regulatory structure.
This article provides an overview of some of the substantial changes that have occurred as a result of the Directive's implementation.
Classification of the credits in agreement compliance phase
The legislator has opted to modify the classification of credits accrued in the compliance phase for the relevant agreement – that is, outside the judicial procedure and when the agreement is subsequently breached. This entails the reopening of the insolvency proceedings and is particularly relevant when starting liquidation.
Currently, it has been understood that under article 242.8 of the consolidated text of the TRLC, the classification of this type of credit must be ordered as credits against the mass.
This establishes credits against the mass as those that are generated by the bankrupt party's professional or business activities after declaring insolvency proceedings, so that both credits broadly fit in a possible liquidation phase and in agreement compliance; the latter is also caused by declaring insolvency proceedings, even if it is outside the judicial phase.
This classification has led to several modifications motivated by the latest legal amendment. Under the umbrella of the original Insolvency Law 22/2003 of 9 July 2003, these credits would be considered as bankruptcy.
However, after the TRLC reform on 10 October 2011,(2) the amended wording of article 84.2. 5 changed the criteria for these credits and classified them as credits against the mass.
The Supreme Court has since made several rulings in connection with these modified regulations:
- In one case, the insolvent company failed to comply with the agreement reached with the creditors and started a liquidation. The insolvency administration classified the credits in favour of the General Treasury of Social Security as bankruptcy credits.
However, the High Court determined that the credit generated during the period of compliance with the agreement did not arise in a strict bankruptcy context but in a negotiation context. Therefore, the credits had to be considered as against the mass, according to the new wording provided by Law 38/2011, in which the time limit of the approval of the agreement must be removed in order to consider the credits.(3)
- In a similar case, the High Court reiterated that, as there was no conflict between the parties, it would be a bankruptcy credit if the previous wording of article 84.2.5 of the TRLC were applicable or a credit against the mass if the amended wording were applicable.(4)
The new bill again intends to revert to the old position that was maintained prior to the TRLC reform, meaning that the legal text will classify these credits as bankruptcy credits.
Consequently, the current wording provided for the new article 414 bis of the new bill establishes certain specialties in the event of breach of the agreement, establishing bankruptcy credits as those incurred by the debtor during the agreement compliance phase.
Direct applicability of Directive by Spanish courts
Another change in legal practice in connection with the Directive's transposition is that some Spanish courts are now able to directly apply the new regulations, despite the fact that they are still pending legislative approval. For example, on 6 April 2022 the Second Section of the Commercial Court of Seville issued a decision that granted an application for the benefit of exoneration of unsatisfied credits.
The Court argued that the applicant was exonerated from the payment of the public credit, which is not permitted by article 491.1 of the TRLC, as recital 1 of the Directive aims at the full and complete exoneration of the credits from all debtors in good faith.
Therefore, the Court granted full exoneration of the entire pending credit, including the public credit.
However, the applicability of the full exoneration of unsatisfied credits, including public credit, is a controversial and disputed issue, as it seems that the new bill does not follow the same guidelines and purposes of the Directive.
The eventual implementation of the Directive will significantly change the Spanish insolvency landscape, as evidenced by its transposition, which has highlighted numerous issues and contradictions in the current TRLC.
For further information on this topic please contact Sara Arcediano at Augusta Abogados by telephone (+34 933 621 620) or email ([email protected]). The Augusta Abogados website can be accessed at www.augustaabogados.com.
Endnotes
(1) Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019.
(3) Ruling No. 720/2012 of 4 December 2012, the First Civil Chamber of the Supreme Court, Appeal No. 1041/2010.
(4) Ruling No. 324/2014 of 24 June 2014, the First Civil Chamber of the Supreme Court, Appeal No. 1728/2013.