Vol 3 (2006) - Issue 6

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Culpable Insolvency

1. Introduction
In this article we will focus on the consequences derived from the behaviour of persons involved in an insolvency according to Law 22/2003, dated 9 July 2003 (the ‘Insolvency Law’).
The new rules not only focus on the behaviour of the debtor but also on the conduct of those who acted on behalf of the debtor, namely registered or de facto directors or liquidators. We will refer to these persons as ‘the persons affected by the qualification’. Moreover, the Law also includes a new figure that will be analysed later: the insolvency accomplices.
In the context of insolvency proceedings, the behaviour of these persons is judged only if and when the so-called qualification stage (pieza de calificación) is reached, which happens when:
(a) the company voluntary arrangement provides for a release of more than one third of all the claims of one or more classes, or a stay of more than three years; or (b) liquidation proceedings are commenced.
The qualification stage is aimed at determining whether the insolvency should be declared accidental or culpable (the old regime used to distinguish between fraudulent, culpable and accidental insolvency). The insolvency will be declared accidental if there is no evidence
of gross negligence or wilful misconduct. On the other hand, the judge will qualify an insolvency as culpable if there is evidence of gross negligence or wilful misconduct, and where such gross negligence or wilful misconduct has caused or worsened the insolvency.
The qualification of the insolvency as culpable may lead to, inter alia, the following consequences: (a) the obligation to pay damages; (b) the obligation to pay the claims in whole or in part; (c) the disqualification from running a business or representing or administering any other company; and (d) the loss of any rights owned as insolvency creditors or estate creditors.
It appears therefore that the new Insolvency Law is tougher on directors than before and that Spain has some of the toughest insolvency laws in respect of directors’ liability of any other European country.
2. Culpable insolvency presumptions
The Insolvency Law establishes two sets of presumptions for the existence of gross negligence or wilful misconduct: (a) non-rebuttable presumptions, and (b) rebuttable presumptions. Even in the event that none of these non-rebuttable or rebuttable presumptions occur, nothing prevents the judge from qualifying the insolvency as culpable, if the requisites foreseen for such qualification are met (i.e., gross negligence or wilful misconduct having caused or worsened the insolvency). In this case, however, we can assume that in the absence of the legal presumptions, evidence of culpable insolvency will be rather difficult to find.
(a) Non-rebuttable presumptions:
(i) When the debtor substantially fails to comply with its legal obligation to draw up the company accounts or uses dual accounting or where the accounts contain irregularities which materially
affect a fair and accurate reflection of the company’s assets and financial position.
(ii) When the debtor makes a serious error in any of the documents accompanying the application
for the declaration of insolvency or in those documents presented during the insolvency proceedings, or if any of the accompanying or presented documents are false.
(iii) When the debtor infringes the company voluntary arrangement and, as a consequence, liquidation proceedings are commenced.
(iv) When all or part of the debtor’s property is unavailable to its creditors, or when the debtor has acted in any way which slows down or obstructs any type of enforcement judgment against property which has commenced or is likely to commence.
(v) When, during the two years prior to the date of declaration of insolvency, property or rights have fraudulently left the debtor’s possession.
(vi) When, prior to the date of declaration of insolvency,the debtor has done any act designed to give a false impression of the state of the company’s affairs.