What does the pars condictio creditorum mean?

Introduction

The institution of insolvency proceedings in Spain has two main functions. On the one hand, the satisfaction of creditors. On the other hand, the maintenance of the company. A third function, however, could be added, the sanctioning function. A function that in recent years has acquired greater significance in insolvency proceedings. This last function pursues the condemnation of those persons who have generated or aggravated the insolvency.

In previous collaborations we have dealt with the different tools that the insolvency law establishes to preserve the business activity. That is to say, the different mechanisms through which an insolvent company can successfully overcome the insolvency process. We have commented on the fundamental aspects of the Creditors’ Agreement. Similarly, we have analyzed the sale of the productive unit of the insolvent company.

In the same way, we have dealt with the qualification of the insolvency. The so-called sanctioning function. How the legislation condemns those who have generated the insolvency situation, under very specific precepts. So, we have analyzed the delay in the request for insolvency proceedings. Or the liability for aggravation of insolvency and its consequences have also been examined.

On this occasion, the objective is to approach that function of the process consisting of the satisfaction of creditors. We will do so by means of one of the basic principles of the insolvency process. The pars condictio creditorum, or in other words, the parity of treatment of creditors in the bankruptcy process.

Satisfaction of creditors and the pars condictio creditorum

As we said at the beginning, the satisfaction of creditors is one of the main functions of the bankruptcy process. The cake has to be distributed, and the aim of this collaboration is to understand how it is distributed. To do so, we turn to what we have called the principle par excellence of the bankruptcy process: the pars condictio creditorum.

Pars condictio creditorum is a Latin locution whose meaning is “equal credit condition”. It implies, in the insolvency field, that all creditors will have the same treatment for the recovery of their credit.  However, it is necessary to qualify.

To this end, we bring up the questions that appear in our heading: does a creditor that has brought legal action to request its claim have an advantage in the collection? And a creditor that has liens recorded? Or a creditor that prior to the declaration of insolvency has guaranteed its claim?

The above questions may give rise to problems of interpretation, even disparity between creditors. However, these problems disappear when parity of treatment is applied to creditors of the same class.

For this purpose, it is mandatory to classify the debtor’s claims. To classify them as required by the insolvency law. And once they have been classified, the principle of parity of treatment is understandable and applicable. Because this will be applied to the credits, and therefore creditors, with equal status.

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

To present the Contest we have to fulfill an essential prerequisite: to be insolvent. This insolvency, whether current or imminent, is characterized by the impossibility of satisfying creditors' credits.

Brief reference to the classification of claims

We will not go into detail in explaining how the Bankruptcy Law classifies credits. However, we consider it necessary to make a brief reference to this issue.

A preliminary clarification. Bankruptcy credits are considered to be those credits that have arisen prior to the declaration of the bankruptcy. They are classified as follows:

1. Special Privilege Credits. In general, these are all credits that have a security interest.
2. Credits with General Privilege. These are those credits which, because of the creditor’s status, have a preferential treatment. For example, certain labor or public law receivables have this classification.
3. Ordinary credits.  These are all receivables that cannot be classified in any of the above categories and are not classified as subordinated.
4. Subordinated receivables. These are the credits of certain persons related to the insolvent party. Also, interests and penalties are subordinated receivables.

Therefore, once the qualification of the credits has been determined, parity of treatment will be applied to each category. The recoverable amount of the credits with the same qualification will be proportional.

Conclusion

All bankruptcy proceedings must pursue the maximum satisfaction of creditors, complying with the principle of equal treatment. The pars condictio creditorum implies that creditors with equal status, with the same nature of credit, receive the same treatment in the recovery of their credit. Thus, a creditor who has initiated a judicial proceeding will not have an advantage over a creditor who has not initiated a judicial proceeding. It will only depend on the qualification and nature of his claim. If both creditors have the same status, it is irrelevant whether or not one of them has sued.

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.

Delay in the Bankruptcy Procedure´s Application.