Who is eligible to apply for a Bankruptcy Procedure?

Who is eligible to apply for a Bankruptcy Procedure?

1. Active legitimation
2. Voluntary Bankruptcy Procedure: The debtor

• • The management body?
    • And the CEO?
  • Or the partners?
  • And in case of conflict?
  • What documentation do they have to provide?
  • Special case: the bankruptcy´s mediator

3. Necessary Bankruptcy Procedure:

• • Creditors
    • Are there any exceptions?
  • Who are the other legitimated parties?
    • The CNMV
    • The Heirs
    • The Receivership of the parent company
  • What documentation do they have to provide?

4. Conclusions

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1. Active legitimation

Active legitimation is the ability of a party to urge the commencement of legal proceedings or processes. In a Bankruptcy Procedure there will be several persons who are entitled to apply for this procedure. These are set out in Article 3 of Spanish Bankruptcy Procedure´s Law.

The Bankruptcy Procedures are classified in two types, the voluntary and the necessary. The difference lies in who has the legal standing to ask for the commencement of such Bankruptcy Procedure. Thus, the term Voluntary Bankruptcy Procedure is used to refer to the Bankruptcy Procedure initiated by the debtor. The voluntary qualification often gives the erroneous idea that the debtor is not required to start this procedure. However, in any case the debtor must apply for Bankruptcy Procedure when it is in current or upcoming insolvency. In this regard, we recommend the reading of When it is mandatory to apply for a declaration of insolvency? When the Bankruptcy Procedure is not started by the debtor, is called Necessary Bankruptcy Procedure. Below you will see who can apply at one time or another.

2. Voluntary Bankruptcy Procedure: The debtor

Article 3.1 of the Law establishes that the debtor will be entitled to apply for the Bankruptcy Procedure. It is further specified that the competence to decide on this application will lie with the management body. However, the doubt is raised in the third section when the partners are mentioned as being entitled. This section also mentions the members with responsibility for corporate debts. This was included to take into account the case of Economic Interest Associations. However, the key point is to distinguish within the debtor company who is applying for the Bankruptcy Procedure.

• The management body?

The management body will decide on the application for the Bankruptcy Procedure in accordance with section 3.1. In order to take this decision, it will be necessary to follow the form of that body.  Therefore, the application for the Bankruptcy Procedure can be agreed in different ways.

In the case of a board of directors, complying with the appropriate majorities in the decision making process.  In the case of joint directors by the action of all of them. In the case of joint and several directors due to the actions of any of them. In fact, if it is not agreed in accordance with those rules, there won´t be an active legitimation. This is established by case-law such as Order 101/2009 of the Provincial Court of Badajoz on June 5th 2009.  The type of insolvency, current or upcoming, will not matter to the competence of this body. Since, in both cases, the management body will be competent to apply for the Bankruptcy Procedure. The above is affirmed among others in an Order of the Commercial Court nº3 of Barcelona (AC 2008/2088).

• What about the CEO?

The CEO could be competent as well if he has delegated functions in this area. This is established, among others, in the Order 272/2010 of the Provincial Court of Vizcaya.

• The partners?

First, the legitimation in this case is called exceptional or extraordinary by the doctrine. As the general rule is the application by the administrators. This exceptional character is explained in an Order of the Commercial Court nº1 of Vizcaya, (AC 2005/6). It will only applicable to partners who, according to the law, are responsible for the company’s debts with their assets.  Likewise in the Commercial Court Order nº1 of Cádiz, (JUR 2005/239883), it is specified who these partners are. Almost always, it involves partnerships, due to the responsibility of their partners. Thus, in the case of general partnerships and limited partnerships, the general partners may apply for the Bankruptcy Procedure. In the case of a limited partnership, the partners whose names are included in the company name have this competence. In the case of a limited partnership by shares, the general partners may also apply for this procedure. The partners of other types of companies will be entitled also, such as the ones of civil and irregular companies.  In the case of limited liability companies, both public and private, they generally cannot. But there will be exceptional cases such as irregularity or one-person companies. In the case of a one-person company, this feature must be notify and advertised. If the owner doesn´t advertise this condition he will respond for the company´s debt. In that case of not fulfilling the requirement the sole partner could apply for the Bankruptcy Procedure. Furthermore, the partner who is an administrator is not entitled to apply for this procedure, under Article 3.3. So, apart from these exceptional situations, it will be the management body who applies for this procedure.

• And in case of conflict?

What happens when the partners of a limited liability company do not want to apply for it but administrators do? In accordance with the Spanish Bankruptcy Law, the management body is the body responsible for submitting the application. It does not empower the partners or shareholders´ meetings as such. Therefore, even if the shareholders have not made a decision to apply for Bankruptcy Procedure, the administrator could fill the application. In other words, an agreement of the shareholders is not required to apply for and initiate the Bankruptcy Procedure.

• What documentation do they have to provide?

The documents to be provided by the debtor, usually its management body, are contained in Article 6. This establishes that the following documents must be provided in the application form:

• Special power of attorney to apply for Bankruptcy Procedure or power of attorney given by the judicial secretary.
• A report detailing the economic and legal history of the debtor. This includes information such as the activities carried out by him in the last 3 years and his establishments. In addition, which was the cause of his insolvency and which is his assessment of the viability of his assets. Finally, the relevant identification data must be indicated, such as the name of the partners, administrators and auditors.
• An inventory of assets and rights. Each one will be identified explaining its nature, place, purchase value, current value, and encumbrances.
• A list of creditors. It will identify each creditor with their address and email address of each one in alphabetical order. It will include data on their credits as the maturity and the guarantees that there were on them. It will also include the legal claims initiated by the creditors for payment by its debtors, if any.
• List of employees and identification of the representative body.
• In the event of accounting obligations, several documents must also be included. Such as the annual accounts and their management report for the last three years. The report on significant changes in equity and interim financial statements since the presentation of the last annual accounts. As well as the annual accounts in relation to other companies in its group.

• Special case: The bankruptcy´s mediator?

This figure is established in the event of an out-of-court settlement. When, prior to a Bankruptcy Procedure, the debtor and the creditors try to resolve the matter out of court. The bankruptcy´s mediator will be the mediator of this out-of-court procedure. According to Article 241, the bankruptcy´s mediator can apply for the Bankruptcy Procedure when the debtor fails to comply with the agreement. In this case, this Bankruptcy Procedure is called Consecutive Bankruptcy Procedure. Despite this name, it is still a Voluntary Bankruptcy Procedure and therefore the documentation will be the one commented on.

3. Necessary Bankruptcy Procedure

The Necessary Bankruptcy Procedure is the one presented by the debtor’s creditors or other legitimate parties. Thus, in this section we detail who those are. If both types of Bankruptcy Procedure are filled, voluntary and necessary, the one filled first will prevail.

• The creditors

Mainly when the procedure is not started by the debtor, it will be the creditor who applies for the Procedure. Article 3.1 mentions any of its creditors, so there will be no other requirements than that of being a creditor. Article 3.4 also entitles the creditors of the deceased debtor. Thus, the regulation protects those affected by the debtor’s insolvency with the power to apply for the Bankruptcy Procedure. There will be active legitimation even when the creditor initiating the Bankruptcy Procedure is claiming his credit in court. This is established in the Order 39/2012 of the Provincial Court of Alicante. Including, therefore, those contingent credits, meaning, those that can be confirmed or not depending on judicial or extrajudicial resolution. If this credit is not confirmed, the procedure will later change its type to the voluntary one. In addition, the creditor who applies for the Bankruptcy Procedure will obtain a benefit. Said benefit will be that 50% of its credit will become privileged, as claimed by Article 91. The aim of it is to accomplish that the debtor will be the one who asks for the Bankruptcy Procedure. This incentive is explained, for example, by the Sentence of the Supreme Court with number 708/2015. It states that applying for this procedure is a risk for the creditor and that is why that benefit is granted. The risk derives from the fact that, if the creditor’s application is rejected, the debtor can claim damages from him. An assumption of the declaration of bankruptcy is that there is a plurality of creditors. This is stated in an Order of the Commercial Court No. 1 Bilbao of 3 December 2004. Then, the creditor must know that in the application he must prove that he is not the only creditor.

• Are there any exceptions?

In the case of creditors, Article 3.2 establishes an exception. The creditor will not initiate the Bankruptcy Procedure if he has acquired a credit by inter vivos and individual acts. Provided that said acquisition was within the six months prior to the application for the Bankruptcy Procedure and its credit had expired.

Nor will creditors who present a lapsed or extinguished credit have this right. This nuance is reflected in case-law such as the Order 82/2009 of the Provincial Court of Barcelona.

However, those who subrogate themselves in their credits will be included as creditors. Like, for instance, former administrators of the company, all in accordance with Article 1145 of the Spanish Civil Code.

• Who are the other legitimated parties?

Article 7, when it refers to the documents that the creditor must present, mentions the other legitimated parties. But who are these?

• The CNMV

According to the 18th Final Disposition, the National Securities Market Commission will also have active legitimation in certain circumstances. This organism, CNMV by its Spanish acronym, may apply for the Bankruptcy Procedure of Investment Firms. Because it can detects the insolvency of their accounting statements. This is because the CNMV, being the market’s regulatory body, must supervise the actions of the Investment Firms.

• The Heirs

According to Article 3.4, the debtor’s heirs will be entitled to apply for the inheritance´s Bankruptcy Procedure. However, a condition is established, only they could do it when the inheritance is not accepted pure and simple. The administrator of the inheritance may also apply for the Bankruptcy Procedure.

• The Receivership of the parent company

Judges may occasionally admit the active legitimacy of the Receivership in the case of a corporate group. In general, case-law establishes that no rule grants this legal standing to the Receivership of a parent company. However, there are cases in which a parent company is the administrator of a subsidiary or dominated company. There is only a case that allows the Receivership of the dominant company to apply for the procedure of a dominated company. This case is when the court has empowered him to replace the directors of his subsidiaries. This is stated in the Order 133/2013 of the Provincial Court of Barcelona.

• What documentation do they have to provide?

Article 7 establishes that the documentation must be provided by the creditor and the rest of the legitimated parties. Thus, the creditor must include the documents that justify the existence and conditions of its credit. They must therefore prove the origin, nature, amount, date of acquisition and maturity, and the current situation of the credit. It is reiterated by case-law that it is not necessary for the credit to be overdue or to have been claimed. In fact, as established by Order 73/2012 of the Provincial Court of Madrid, the claim of contingent credit is allowed.  The case-law states that it is not necessary to provide full proof of the credit. This will be done at a later stage once the Bankruptcy Procedure has begun. However, the recommendation is to express this in detail as it may lead to the application being rejected. In addition in the application form there will be include the means of proof to support the facts. These facts basically refer to prove the debtor’s state of insolvency. The second paragraph of this article states that witnesses alone will not be enough as proof.

The second subparagraph of Article 7.1 mentions the other legitimated parties entitled. These others must accompany the application with documents proving the reason for their entitlement or proposing evidence to support it.

4. Conclusions

When a company is in a situation of insolvency, it is important to know which position someone holds in the legal relationship. So you are able to know who can apply for the Bankruptcy Procedure in that particular case. Beyond knowing which persons can apply for such a Bankruptcy Procedure, it is necessary to know how to apply for it. Therefore, what documentation must be sent as it may be relevant for the approval of such application by the judge.