Delay in the Bankruptcy Procedure´s Application

How to construe the delay in the application for the Bankruptcy procedure?

How does the Supreme Court construe the iuris tantum presumption of Article 165.1 of the Spanish Bankruptcy Law?

The most relevant interpretation from a legal point of view of the Supreme Court is that Article 165 is a complementary rule to Article 164.1 of the Spanish Bankruptcy Law (that is, the general clause of culpability)

Article 165 covers malice, gross negligence and the relationship of causality.

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But let’s start at the beginning: When should the application for Bankruptcy Procedure be filled?

Two months after the company´s directors has known or should have known of the insolvency situation.

What does insolvency mean for the Supreme Court?

The court clarifies it very graphically:

“(…) insolvency is not identified with imbalance or aggravated losses. It is possible that the book equity is less than half of the share capital. Even that the assets are less than the liabilities, and yet the debtor can regularly meet its obligations, since it obtains financing. Conversely, the assets may be greater than the liabilities and the debtor may lack liquidity. For example, because the asset can be liquidated in the very long term and no financing can be obtained. This would make it impossible to meet obligations regularly at any given time and, consequently, would set current insolvency”.

How do you undermine a presumption of guilt?

With proof to the contrary, this proof is the responsibility of the company’s director. However, in order to distort the presumption, the Receivership firstly had to prove the delay. And to prove the delay, it is necessary to set the date on which the company was de facto in bankruptcy procedure. According to the Supreme Court (STS 3 July 2014), it is not necessary to set an exact date, but at least a range. A temporary framework in which, in the opinion of the Receivership, it was already in bankruptcy situation.

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Who is eligible to apply for a Bankruptcy Procedure?

In the bankruptcy there will be several people with standing to present a bankruptcy. These are included in article 3 of the Bankruptcy Law

Attenuating and exonerating factors for the late or untimely application for the bankruptcy procedure

The board of directors may defend against the accusation of the Receivership: (1) that there was no delay, (2) that even if there was a delay there was no malice or gross negligence; and (3) that even if there was a delay and even if there was malice or gross negligence, the insolvency was not aggravated.

Can you mitigate liability for a delay in the application for the bankruptcy procedure? Due to a significant business expectation, a possible sale of a production unit, a merger in progress, a capital increase, a possible Participatory Loan, a firm commitment from a potential acquirer?

The most paradigmatic case is the Spanair bankruptcy procedure. The Commercial Court declared the bankruptcy to be guilty. And it did so taking as its only reason, the late application for the Bankruptcy procedure. The Provincial Court of BCN declared that there was no malice or gross negligence. It also declared that the insolvency was not aggravated by the constant capital contributions.

Supreme Court Ruling 490/2016 of July 14^th 2016 (Speaker: Pedro José Vela Torres)

In the judgments No. 492/2015 of September 17^th and 269/2016 of April 22^nd, this court established the following. The non-compliance with the legal duty to apply for a declaration of insolvency in time shifts the burden of proof. The manager or director shall then prove that the delay did not aggravate the insolvency. And in the decision of the Plenary of this Chamber, number 772/2014, of January 12^th 2015, they said

“Taking into account that the regulatory criterion that determines the delay in the application for bankruptcy procedure as a cause for guilty classification is the aggravation of the insolvency and the increase in the equity deficit that this delay may represent, as the company continues to act in the commercial traffic contracting new obligations when it could no longer comply with them regularly, the elements consisting of the duration of the delay in applying for the bankruptcy procedure and the importance of the increase in the equity deficit, which are those taken into account by the judgment under appeal, are relevant objective elements in relation to the relevant regulatory criterion for classifying the procedure as guilty’.

If this article has been of interest to you, we recommend the following reading:

When it is mandatory to apply for a declaration of insolvency?