A credit institution that is the indirect owner of an insolvent company’s share capital is not a person closely related to the insolvent company, unless it uses an intermediary to avoid that status.

The matter at issue was whether a credit entity that was a creditor in the insolvency could be classed as a person closely related to the insolvent company. The credit entity was the indirect owner of a stake in the insolvent company (the creditor owned 99.8% of the share capital of a public limited company that in turn owned 19% of the insolvent company’s share capital). The structure was as follows:

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The Commercial Court considered that the credit was not subordinate because the credit entity could not be classed as a closely related person, and it categorised the credit as specially privileged in part, ordinary in part, and contingent in  part , based on  the following arguments:

  • It could not be classed as a closely related person under article 93.2.15 of the Insolvency Act, as that provision requires the stake to be direct as a condition for that status. In this case, the stake was indirect.
  • To class the credit entity as a closely related person, “there would have to be a specific intent to elude the consequence of subordination under article 92.5 of the Insolvency Act by interposing a front company for the formal purpose of avoiding the status of director shareholder. This would require specific proof of the factual elements indicating the existence of fraudulent circumvention of the law, to allow piercing the veil of that interposed ownership and discern the true status of the creditor’s partner.” In this case, there is no indication of fraudulent circumvention of the law.
  • Regarding article 93.2.3 of the Insolvency Act,6 the definition of “group” given in article 42 of the Spanish Commercial Code must be considered. The credit institution was not a member of the insolvent company’s corporate group. As it did not own a majority stake or control the insolvent company, they did not belong to the same group