In accordance with article 44.3 of the Workers’ Statute (Estatuto de los Trabajadores – ET) the transfer of a production unit is considered to be a business succession, and consequently the assignor, as well as the assignee shall be jointly and severally liable, during a period of three years, for unfulfilled employment obligations arising before said transfer (they shall also be jointly and severally liable for the obligations arising after the transfer, if said transfer was declared to be a fraud).
Likewise, within the framework of insolvency proceedings, as set forth in article 149.4 (formerly 2) of the Insolvency Act (Ley Concursal – LC), the transfer of a production unit is also considered to be a business succession for employment and Social Security purposes. This has been confirmed by the Labour Chamber of the Supreme Court in, among others, its judgment dated 29th October 2014, in which it concluded that business succession had taken place following the collective termination of employment contracts authorised within the framework of insolvency proceedings, upon the complete disposal of the company’s assets in the liquidation phase of the proceedings.
The above implies that if an offer to purchase the production unit was made in the liquidation phase, which is conditioned to the exemption of any responsibilities which may arise from the continuity of the company, such as, for example, those involving Social Security, the exoneration which may have been authorised by the Commercial Courts dealing with the insolvency proceedings may be rendered ineffective, if under labour jurisdiction a business succession is deemed to have occurred and therefore such burdens should be borne by the purchaser/assignee of the production unit.
In this way, it should also be borne in mind that the competent body for determining the scope of article 44 of the Workers’ Statute and the existence or not of business succession when a third party acquires a functioning production unit in the liquidation phase of insolvency proceedings is not the court dealing with the insolvency proceedings (Commercial Courts) but instead the labour jurisdiction, as concluded by the Labour Chamber of the Supreme Court, in, among others, its recent judgment number 442/2017 dated 18th May 2017.
The same would apply in the case of the acquisition of a production unit in ordinary commercial traffic (within the scope of an M&A operation where there are no insolvency proceedings), even if in this case the purchaser may demand a first call bank guarantee or similar from the vendor for an amount covering the employment obligations arising before the transfer of the production unit. This is to ensure – in the contractual domain- that the purchaser shall not have to be jointly and severally liable for said obligations, instead they shall be assumed by the vendor/assignor.
Carla Villavicencio
Vilá Abogados
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7th of July 2017
