For insolvency purposes, the concept of “group” is defined in article 42 of the Spanish Commercial Code, which refers only to groups subject to control that have the legal obligation to consolidate their accounts, while excluding horizontal or co-ordinated groups.3
A private limited company (“SL”) held a credit against the insolvent company. Both were single-partner companies and were controlled through several companies by a single individual that indirectly owned 65% of the creditor’s share capital and 79% of the insolvent company’s share capital. The creditor company and the insolvent company ha d the same company as their sole director, represented by the same individual. The structure is shown schematically below:
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The credit was initially categorised as subordinate on the grounds that the creditor company was a person closely related to the insolvent company because they belonged to the same group. Under the ruling at first instance, there was unity of decision, since a single individual controlled the majority of both companies’ share capital, and this unity of decision derived from the two companies having the same directors and attorneys-in- fact.
The creditor company appealed the categorisation of the credit as subordinate. The Barcelona Provincial Court upheld the appeal, concluding that for the purposes of the Insolvency Act, the companies did not belong to one corporate group, as defined in article 42 of the Spanish Commercial Code.
The Barcelona Provincial Court reiterated the grounds for its ruling of October 4, 2012 , as regards the concept of “group,” developments in law, and the possible application of the different types in connection with insolvency, stating:
- There is a common concept in doctrine of corporate group based on the criterion of “unity of decision” or single management that may arise from a hierarchical relationship or the subordination of one company to another that, through corporate relationships, wields power of decision in the governing bodies (vertical or hierarchical groups), “or as a result of other links that do not involve control or domination, which lead to the establishment of a functional economic unit, with an underlying basis of unity of decision, giving rise to a unity of management though the governing bodies” (“horizontal or co-ordination groups, not structured as different companies subject to hierarchical dependency, but based on a re lationship of equality among the different companies being co-ordinated”).
- Before Act 16/2007, several regulations provided a concept of “group” based on the criterion of unity of decision. However, following the amendment of article 42 of the Spanish Commercial Code under Act 16/2007, “the concept of group was redefined in terms of consolidation of accounts, replacing the criterion of unity of decision with the criterion of corporate control .” Following this reform, other laws adopted the same criterion through reference to article 42 of the Spanish Commercial Code. These laws include the Insolvency Act, which, following its amendment under Act 38/2011, introduced Additional Provision Six, under which a corporate group for the purposes of the Insolvency Act is held to be as defined in article 42.1 of the Spanish Commercial Code.
- The Provincial Court noted that, before the reform carried out under Act 38/2011, it had maintained that the concept of “group” for the purposes of categorisation of credits included both vertical and horizontal groups. However, as it established in its ruling of October 4, 2012, this criterion had to be revised following the entry into force of Additional Provision Six of the Insolvency Act. Thus, the system in force excludes horizontal groups (based on unity of decision) from the concept of “group” for the purposes of insolvency, which only includes groups subject to control that are legally obliged to consolidate their accounts.
- An extensive interpretation is impracticable given the penalising nature of the regulations governing subordination of credits. Also, it is unfeasible to apply teleological or finalistic criteria for interpretation when a literal interpreta tion does not involve any doubt.
Based on the above, the Barcelona Provincial Court upheld the appeal, ordering that the appellant company’s credit be categorised as ordinary, as the relationship between the companies in the case was horizontal.
The ruling was accompanied by a dissenting vote4 by one of the court judges, who upheld an interpretation of corporate group that he considered compatible with the wording of article 42 of the Spanish Commercial Code, which centres on the concept of direct or indirect control exercised by a third party. The dissenting vote stated as follows:
- In his opinion, the concept of “group” does not need to coincide with the legal scope of the obligation to consolidate accounts as provided in article 42.1 of the Spanish Commercial Code. The reference to article 42.1 of the Commercial Code refers to the principles embodied in it (direct or indirect control), but not to the full content of the regulation, which governs issues that differ from those of insolvency.
- Taking into account the aim of the regulation, article 42.1 of the Commercial Code and the insolvency regulations concerning groups, a group exist s when there is a relationship of dominance between two or more companies that might be pertinent for the effects that the lawmakers took into account when referring to corporate groups.
- Consequently, the concept of group should only exclude coordination groups, i.e., groups where no situation of dominance is exercised by a person that controls the companies making up the group, but where action as a group is due to reasons other than the idea of control. “Group” is a factual concept that may be noted in a situation of control, not a formal concept depending on the existence or absence of consolidation of accounts.
- Article 42.1 of the Spanish Commercial Code does not require the situation of control to be in the hands of a company, since an individual may also wield control. Otherwise, compliance with the regulations governing groups would be left in the hands of the subjects.
- He concluded that the ruling handed down by the court inadmissibly reduces the concept of group and gives rise to repercussions that are not protected by Spanish law.