Non-compliance with accounting duties

Non-compliance with accounting duties in Bankruptcy Procedure matters. The ruling.

The general clause of guilt (Article 164 LC) is accompanied by a certain number of censurable conducts. The objective of defining these conducts is to facilitate the elements that prove the guilt of the Bankruptcy Procedure.

Among these conducts, the legislator wanted to differentiate between two types of conduct.

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Non-compliance with accounting duties: Censurable conduct in any case vs. Censurable conduct that admits evidence to the contrary.

On the one hand, those which, if they occur, lead to the ruling of guilty in any case. And, on the other hand, those that admit evidence to the contrary. This is what is known in law as iuris et de iure or iuris tantum presumptions, respectively.

Non-compliance with accounting requirements is present in both types of conduct or behaviour, as explained below. However, we have previously set out the instructions to which all entepreneurs are obliged to comply in accounting matters.

Non-compliance with accounting duties: The accounting made by entrepeneurs is, above all, informative

Every entrepeneur has the duty to keep their accounting in an orderly manner. This accounting involves the preparation of a day book and an inventory book and annual accounts. This obligation is set out in Article 25 of the Commercial Code.

However, the main function of the accounts is providing information. Therefore, it is not enough to comply with the obligation to prepare the legal books. Employers are required to keep accounts on the basis of generally applicable rules and principles. This, according to a certain regulatory framework, so that the information shows the true image of the company. The objective is to encourage market operators to make decisions based on predictably truthful information.

Actually, this information function will be judged in the ruling section. That is, if the accounting has been prepared in compliance with the law, so that it shows a true image.

Non-compliance with accounting duties in any case. No evidence to the contrary is admitted. Presumptions iure et de iure.

Article 164.2 LC establishes what is considered the most serious conduct in terms of accounting non-compliance.

In this sense, it establishes the regulatory precept that the Bankruptcy Procedure will be guilty due to non-compliance with accounting duties, when the debtor:

• Does not comply with the legal obligation to keep accounts.
• Maintains double accounting.
• Has committed any irregularity relevant to the understanding of his or her financial or asset situation.

If any of the factual assumptions that constitute this presumption are made, the Bankruptcy Procedure will be ruled as guilty. There is no evidence to the contrary. It will not be necessary to prove whether or not there was intent or gross fault on the part of the debtor.

This does not exclude, however, the need to prove whether or not the conduct has actually occurred.

In other words, iuris et de iure presumptions excuse the Receivership from proving the debtor’s intent or gross fault, but not the fact on which the presumption is based.

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Legal Due Diligence

Legal Due Diligence is the analysis of the business through the revision of documents and interviews of the employees. Normally, it is done when one wants to purchase a business or a business unit.

Among these breaches, we must highlight, due to the impact they have, relevant accounting irregularities.

Non-compliance of the mentioned accounting duties. Iuris tantum presumptions.

Article 165.1 (third section) establishes a list of the non-compliance with accounting duties that may lead to a guilty ruling. As we have seen, in these cases the presumption admits evidence to the contrary.

Regulation states that the debtor’s guilt will be assumed and thus, the Bankruptcy Procedure will be guilty when the debtor:

• Has not formulated the annual accounts.
• Has not been audited when he is obliged to be audited.
• Once the accounts have been approved, he has not proceeded to deposit them in the Commercial Register.

These conducts are limited to the three financial years prior to the ruling of Bankruptcy Procedure.

We can say that this type of non-compliance is considered less serious than those we have mentioned above.

Even at the beginning, the Supreme Court considered Article 165 as a complementary rule to the ruling. That is, the Supreme Court considers that it is a complementary rule to the conduct defined in Article 164.2. And therefore the Court did not suppose that the conduct defined in that precept, constituted, by itself, a guilty ruling. Although it is true that this interpretation was later abandoned.

Now the Supreme Court considers that the only difference between the conducts defined in both articles (164 and 165) is the admission of evidence to the contrary.

The regulatory change in Bankruptcy Procedure matters in 2015 solved any doubts in this respect. It was precisely this regulatory change that incorporated the expressions “in any case” and “unless there is evidence to the contrary”.

Consequently, it is sufficient to state that we are facing any of the three breaches or defaults listed, to determine a guilty ruling. However, the person affected by the rating may prove that the breach did not generate or aggravate the insolvency situation.

Conclusions

The accounting non-compliance is the most analysed behaviour in the pieces of the bankruptcy ruling. The law distinguishes which behaviours will allow evidence to the contrary and which will not. Thus, the law distinguishes between non-compliance that can be classified as more serious and those that can be classified as less serious.

Once the Receivership proves that the event constituting an accounting breach has occurred, the affected party, in the cases specifically provided for, may prove that no fraudulent or burdensome conduct has taken place. In which case, the debtor may be exempted from guilt.