In the cassation appeal settled pursuant to the judgment of the Supreme Court number 214/2020 of 29thMay, two appellant directors claimed the infringement of article 172 bis of the Insolvency Act (as worded in the Law 38/2011) . The concept “deficit” was understood to be that which existed upon the date of the declaration of insolvency, determined via the inventory of assets and the list of creditors attached to the insolvency administration report. The Provincial Court, on the other hand, understood that “deficit” came about following liquidation, when the realisation of the insolvent party’s assets, would not be sufficient to satisfy all credits.

The First Chamber clarified that, given that the opening of the classification phase was subsequent to the entering into force of Royal Decree Law 4/2014 of 7th March, the wording of article 172bis of the Insolvency Act was applicable, according to said provision.

In order to interpret the contents of article 172bis of the Insolvency act, the Court summarised the evolution of the regulation of this type of insolvency liability:

  1. According to Insolvency Act 22/2003, of 9th July.
  2. According to Law 38/2011, of 10th October.
  3. According to Royal Decree Law 4/2014 of 7th March.

In this third regulation it was pointed out that the new development  of sentencing the total or partial coverage of the deficit occurred inasmuch as the conduct determining the negligent classification of the insolvency proceedings had generated or aggravated the insolvency.

Given that the latter regulation does not establish the legal concept of “deficit” in order to define it, the Court considered:

(i) that the cause of the liability was the generation or aggravation of the insolvency situation; and

(ii) that the position in which the debtor was to cause it to not be able to meet its enforceable obligations on a regular basis should be taken into account, and not the situation of insufficient assets (when assets are less than liabilities).

Since Judgment number 772/2014 of 12th January 2015, up until Judgment number 279/2019 of 22ndMay, the Chamber has declared that, in accordance with its regulation, the nature of this liability is compensatory, thus the director, liquidator or legal representative of the legal entity (and, under certain circumstances, the partners also)  may be made responsible for the total or partial cover of the insolvency deficit, insofar as the conduct which has determined the negligent classification has generated or aggravatedthe insolvency. In other words, the legal grounds for this liability lie in the contribution to the generation or aggravation of the insolvency.

The high Court has understood that the deficit is the result of the insolvency, which explains why not all of the conducts typified by the legislator as being susceptible of warranting a negligent classification in the insolvency proceedings and a sentence condemning the coverage of the deficit are prior to the declaration of insolvency proceedings, such as, for example, the non-fulfilment of the agreement through the fault of the insolvent party, the lack of collaboration or asset stripping, (which are subsequent).

In the case under consideration, the Court stated that, although at the time of the declaration of insolvency, the accounting assets were greater than the liabilities (according to the insolvency administration’s report), among these assets was the credit that the insolvent company held against its parent company, for unjustified withdrawals of money amounting to a total of Euro 13,483,578.08 which caused the situation of insolvency and the insolvency proceedings, so that the failure to repay this sum led to the existence of a liability that could not be met by realising all of the assets. It therefore considered it logical that the directors responsible for wilful or negligent misconduct (with gross negligence) that generated the insolvency, should be liable for the deficit (understood as liabilities against the insolvency estate and  insolvency liabilities) that could not be satisfied with the realisable assets.

It should be noted that we currently have a legal regulation of the concept of “deficit“. The second paragraph of article 456 (“Sentence to cover the deficit“) of Royal Legislative Decree 1/2020, of 5th May, approving the Consolidated Text of the Insolvency Act, establishes that this exists when the value of the assets and rights of the overall assets, according to the inventory of the insolvency administration, is less than the sum of the amounts of the credits recognised in the list of creditors.

Therefore, the current legal regulation of the concept follows a criterion very similar to that defended by the two company directors, who had their appeal dismissed and were sentenced to cover the insolvency deficit.

 

 

Mireia Bosch

Vilá Abogados

 

For more information, please contact:

va@vila.es

18th June 2021