Liability for aggravation of insolvency

Liability for aggravating insolvency should be the first red alert for any company in financial difficulties.

We will repeat it ad nauseam, knowing that it will be sterile. Filing for insolvency proceedings is not a right, it is an obligation. And it is so because the legal commercial traffic and the solvency of the creditors is at stake (beyond the solvency of the debtors).

Nearly 95% of Spanish company insolvencies end in liquidation. This is basically due to two causes that do not share the same burden of responsibility. The first, undoubtedly the most relevant, is attributable to the business owner. Before filing for insolvency proceedings, the entrepreneur exhausts any of the company’s resources or assets. The second cause is due to a not very agile rule, very protective, which inevitably collapses the Commercial Courts. There are undoubtedly other causes (few means …) but they are less relevant.

How should the Entrepreneur evaluate the aggravation of insolvency as a threat?

In other collaboration we have already explained the consequences of the delay in filing for insolvency proceedings. We have also stated in another contribution what should we understand by insolvency in the context of an insolvency proceeding?

Considering both concepts at the same time (delay and insolvency) we need to understand what is the aggravation of insolvency.

RDL 4/2014 and the insolvency aggravation.

(RDL = Royal Decree Law) Until 2014, the Judge qualified the insolvency proceeding by simply analyzing whether the presumptions of articles 164 and 165 LC (LC = Insolvency Act) were present. And in case of understanding that the directors’ conducts were comparable to those presumptions, they qualified the insolvency proceedings as guilty.

Once the insolvency proceedings had been declared guilty, as an automatic consequence, the CA and the Judge established a sentence to cover all or part of the insolvency deficit (172 bis LC). This insolvency deficit must be satisfied by the Administrators of the insolvent company in the manner established in the sentence.

But this changed drastically with RD 4/2014 and STS 772/2014. The rule and the Judgment – coetaneous – modified the liability system. And from the previous automaticity (guilty = coverage of the deficit), it was changed to a cause-effect relationship. The coverage of the insolvency deficit is only applicable, as long as the conduct that originates the culpability causes an aggravation of the insolvency.

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Non-compliance with the duty to file for insolvency proceedings

The debtor must file for insolvency proceedings within two months from the time he becomes aware or should have become aware of his insolvency.

The Insolvency Aggravation must be alleged and justified by the AC.

In the past, the AC (Insolvency Administrator) only had to establish an accounting irregularity (for example) in order to request guilt and coverage of the insolvency deficit. Now, in addition, the AC must make an argumentative effort to explain to what extent the conduct has aggravated the insolvency.

What happens in cases where it is not possible to explain that the conduct has aggravated the insolvency?

Indeed, taking the new doctrine to the extreme, how can the AC be required to make that effort if there is no accounting in the company? Or if the accounting is fictitious, false or completely far from the true and fair view?

RDL 4/2014, STS 772/2014, and the recent STS 279/2019 (Speaker Ignacio Sancho Gargallo) are enlightening.

In those cases the burden of proof is reversed and it is presumed that the lack of accounting or serious accounting irregularities, entails an aggravation of the insolvency.

However, NOT all accounting irregularities are presumed to aggravate the insolvency. Only those whose seriousness prevents even a slight knowledge of the true and fair view of the Company will be considered as such.

If this article has been of interest, we also suggest you to read the following article published on our website:

The 7 keys to file for insolvency proceedings.

The Sale of a Production Unit in a Bankruptcy Procedure.