The Supreme Court judgment of March 15, 2017 has clarified that the concept defined as a group of companies (article 42.1 of the Commercial Code) does not only exist in cases when a legal entity has control over a company in insolvency proceedings and its creditor, but also when such control is held by a natural person.
The process corresponding to said judgment involved insolvency proceedings in which company B had a credit against company A. This said credit was qualified as subordinate by the insolvency administrator, due to the fact that the two companies were controlled by the same natural person. Thereby and in accordance with art. 92. 5 of the Insolvency Law, this credit was classified as subordinate since the creditor is a “natural person who is specially related to the debtor“.
Company B challenged the creditors’ list, and specifically, the qualification of its credit as subordinate. The Commercial Court dismissed this challenge on the grounds that it considered that both the insolvent company and the creditor were sole shareholder companies, which belonged to the same group, at the top of which was a natural person, who owned 65% and 79% of other companies, which in turn held 100% of shares of the creditor’s and debtor’s companies.
Company B filed an appeal with the Provincial Court of Barcelona, that was upheld and consequently the credit qualified as ordinary for the following reasons:
1) After the reform of article 42 of the Commercial Code introduced by Law 16/2007 of July 4, in order to determine whether a group of companies exists, the criterion of the management unit has been replaced by that of corporate control. That is, a company may hold, directly or indirectly the control of another or more companies.
2) The current wording of art. 42.1 of the Commercial Code excludes horizontal groups from it’s scope of application, which consolidates the idea of unity of decision. In the case at hand, the Provincial Court of Barcelona considered that the relationship between the companies in question was horizontal, because there was no hierarchical relationship, nor a dominant company upon which the dominated company depended.
3) Furthermore, the Provincial Court of Barcelona concluded that the aforementioned art. 42.1 states that any parent company must present consolidated company accounts. Based on this argument, the Provincial Court explained that, given a situation of control by a natural person, it was not clear that any of the individuals, or companies, that were part of the group had consolidated the annual accounts.
The Supreme Court stated that the most controversial issue in this appeal, which had not previously been dealt with by the court, was that the person who was controlling the insolvent company and the creditor was not a commercial company, but instead a natural person. The Court clarified that the controlling situation was clear, although the control exercised over the debtor and the creditor by the natural person at the head of the company was indirect, even if said person exercised control through other companies, which on the other hand were the sole shareholders of the debtor and creditor companies, which were also participated by this same natural person. Therefore, if there is control it cannot be said that we are faced with a horizontal group, which is excluded from art. 42.1 of the Commercial Code and, in addition, it is this controlling situation that is important to the interpretation of the article, regardless of whether the control is held by a commercial company or a natural person.
Finally, the court points out that in order for a group of companies to exist, it is not necessary for the control to be held by a commercial company that has the obligation to consolidate annual accounts, considering that the article also contains elements that are only relevant for accounting purposes, and are therefore irrelevant to other effects. In conclusion, indeed the accounting obligations which affect commercial companies are different from those which affect natural persons, and this fact is irrelevant for the purposes of the insolvency proceedings.
Hugo Ester
Vilá Abogados
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12th May 2017
