Insolvency and directors' duties in Spain: overview
Q&A guide to insolvency and directors' duties in Spain.
The Q&A global guide provides an overview of insolvency from the perspective of companies that are operating within a domestic and/or international group of companies, and considers the various complexities that this can introduce into insolvency procedures. It also has a significant concentration on duties, liabilities, insurance, litigation, and subsequent restrictions imposed on directors of an insolvent company.
To compare answers across multiple jurisdictions, visit the Insolvency and Directors’ Duties Country Q&A tool.
This Q&A is part of the Insolvency and Directors’ Duties Global Guide. For a full list of contents, please visit www.practicallaw.com/internationalinsolvency-guide.
Corporate insolvency proceedings
The only proceedings that exist under the Spanish Insolvency Act for the liquidation of assets of an insolvent debtor are insolvency proceedings opened by the competent Commercial Court with the appointment of an insolvency administrator. This occurs in the case of voluntary or compulsory insolvency proceedings (see Question 3).
The Spanish Insolvency Act establishes the following statutory proceedings that allow for the restructuring of the debtor company's operations and debts:
The communication of negotiations (Article 5 bis, Insolvency Act).
The refinancing agreements (Article 71 bis and Disposición Adicional Cuarta, Insolvency Act).
The ordinary proposal of agreement (Articles 99 to 141, Insolvency Act) and the anticipated proposal of agreement (Articles 104 to 110, Insolvency Act).
The out-of-court payment agreement (Articles 231 to 242 bis, Insolvency Act).
The communication of negotiations (Article 5 bis, Insolvency Act). This Article permits negotiations with the debtor's creditors to reach a refinancing agreement or an out-of-court payment agreement, or to obtain the necessary assurances to achieve an anticipated proposal of agreement (negotiations to occur within a three-month period). The debtor must inform the court at the beginning of the negotiations with his creditors. During this period, the debtor is protected from new judicial or extrajudicial enforcements. The enforcements in process remain suspended during the negotiations.
At the end of the three-month period, whether or not the negotiations are successful, the debtor must request the opening of the insolvency proceedings by the following working month, except if the insolvency has disappeared. When negotiations are successful, the request is necessary to obtain legalisation (in the form of refinancing agreements) or the approval (in the form of the anticipated proposal of agreement) by the court. When negotiations are unsuccessful, the request is necessary to liquidate the debtor's assets or to reach an ordinary arrangement with creditors with the appointment of an insolvency administrator. In the case of refinancing agreements, the enforcements by creditors with financial liabilities will also remain suspended when negotiations are entered into with creditors that represent at least 51% of the financial liabilities.
Refinancing agreements, anticipated proposal of agreements and out-of-court payment agreements are proceedings that can be initiated independently of the communication of negotiations proceedings.
Refinancing agreements (Article 71 bis and Disposición Adicional Cuarta, Insolvency Act). Under these provisions, the court can approve refinancing agreements signed by creditors that represent at least 51% of the financial liabilities. However, these agreements must involve the increase of available credit or the modification or termination of obligations, according to a viability plan that allows for the continuation of the professional or entrepreneurial activity. The necessary majority to adopt the agreement must be certified by an auditor and the refinancing agreement must be formalised in a public deed.
The ordinary proposal of agreement (Articles 99 to 141, Insolvency Act) and the anticipated proposal of agreement (Articles 104 to 110, Insolvency Act). These Articles permit the debtor, in voluntary or compulsory insolvency proceedings opened by the court and with the appointment of an insolvency administrator, to file a proposal of agreement with the debtor's creditors. To approve the proposal and to obtain 50% of debt relief of the unsecured claims and an extension of the payment term by five years, the support of creditors representing at least 50% of the ordinary liabilities (unsecured claims) is required. Other majorities are necessary to gain more than 50% of debt relief and an extension of the payment term by ten years. In some cases it is possible to extend the effects of the proposal of agreement to privileged creditors (secured claims) if they have support from at least 60% of these creditors.
The main difference between the ordinary proposal of agreement and the anticipated proposal of agreement is the period to file with the court and the period for processingthe applications.
The out-of-court payment agreement (Articles 231 to 242 bis, Insolvency Act). The following can commence proceedings to obtain an out-of-court payment agreement:
Insolvent natural persons (regardless of whether the natural person is an entrepreneur or not), if the liability does not exceed EUR5 million.
Insolvent legal entities (regardless of whether or not the legal entities are capital companies), if all of the following apply:
number of creditors is less than 50;
liability does not exceed EUR5 million;
value of the assets does not exceed EUR5 million; and
legal entity can pay the expenses of the agreement.
Out-of-court payment agreements require the appointment of an insolvency mediator by a notary if the mediator is a natural person, or by the Commercial Registry if it is a legal entity. The debtor and the mediator have approximately three months to reach an agreement with the creditors, which will only be accepted if it has the support of creditors that represent at least 60% of the liabilities. In this case, it is possible to get 25% of debt relief of unsecured claims only and an extension of five years of the payment term. A higher majority is required to obtain more than 25% of debt relief and an extension of ten years of the payment term.
If the agreement is unsuccessful the mediator must immediately make an application to the court for the commencement of insolvency proceedings.
In general, insolvency proceedings can commence on one of the following grounds (Article 2(4), Insolvency Act):
The company failed in its obligation to pay debts when they became due.
The company's assets have been seized and the creditor cannot exercise its security rights.
The company has liquidated its assets to put them beyond the reach of creditors.
The company has defaulted on one of the following in the three-month period before the insolvency petition is filed:
social security contributions; or
salaries and indemnities related to employees.
The requirements are the same if the request for insolvency is filed by the debtor (that is, voluntary insolvency proceedings) or by the creditor (that is, compulsory insolvency proceedings). If the request is filed by the debtor, it must be requested within two months following the date on which the insolvency was known or should have been known (Article 5(1), Insolvency Act).
Insolvency of corporate groups
Spanish insolvency law, according to the first version of the Spanish Insolvency Act (Ley 22/2003, de 9 de junio, Concursal) (Insolvency Act), did not provide for the opening of insolvency proceedings by a group of companies as a whole.
Until the reform of the Insolvency Act by Law 38/2011 on 10 October 2011 (Law 38/2011), which entered into force on 1 January 2012, there was no definition for the term of a group of companies (although the Insolvency Act made various references to groups of companies). For example, Article 6(2) of the Insolvency Act provides that, when the application for the opening of the proceedings is filed by the debtor, and the debtor is a legal person, the application must indicate whether it belongs to a group of companies (grupo de empresas) and must list the companies included in the group.
Law 38/2011 introduced a new provision stating that for the purposes of the Insolvency Act, the concept of a group of companies will be as defined in Article 42(1) of the Spanish Code of Commerce, which provides that companies that must consolidate their accounts because they belong to a group of companies are defined as a "group of companies".
A group of companies also exists when a company has or may have (directly or indirectly) the control of another company or companies, and it is presumed that control exists when a dominant company is related to another subsidiary in any of the following manners:
It holds the majority of voting rights.
It holds the power to appoint or dismiss the majority of the members of the board of directors.
It may hold, by virtue of agreement with other shareholders, the majority vote.
It has appointed the majority of the directors with its votes exclusively.
In addition, the reform of the Insolvency Act by Law 38/2011 introduced some important changes by applying Articles 25, 25 bis and 25 ter of the Insolvency Act, to groups of companies. Article 25 provides that various debtors can apply for the opening of insolvency proceedings as a whole when groups of companies exist (as defined in Article 42 of the Code of Commerce). This is also extended to creditors that want to request the opening of insolvency proceedings for various debtors as a whole. In this case, the law permits the creditor to do the same, even if the assets are between various debtors, which are not a group of companies.
Article 25 bis of the Insolvency Act allows for the accumulation of various insolvency proceedings after their opening, particularly in the case of groups of companies. The accumulation can be applicable for the debtors or the insolvency administrators. Article 25 ter of the Insolvency Act allows for the co-ordinated processing of insolvency proceedings and the consolidation of inventories and lists of creditors of various debtors in the report of the insolvency administration, when there is a confusion of assets and it is not possible to separate the ownership of the assets and the liabilities without accruing unjustified expenses or delays.
In these circumstances, the Insolvency Act provides for the following procedural consequences:
The joint opening of proceedings. A creditor can request the opening of insolvency proceedings for several debtors when there is a confusion of assets or when they belong to the same group of companies. Therefore, it is possible to file an application for the opening of insolvency proceedings, either by the debtors or the creditors, concerning all the affiliates in a group of companies. The joint opening of proceedings does not mean that the assets and liabilities of the companies concerned will be consolidated but that different proceedings will be co-ordinated (other than the exception provided in Article 25 ter (see above).
The consolidation of proceedings already opened. Article 25 bis provides that any of the debtors or the insolvency administration can request from the judge (on reasonable grounds) the accumulation of the insolvency proceedings already declared in the case of a group of companies or a confusion of assets.
The jurisdiction to open insolvency proceedings is granted to the judge in the place where the debtor has its centre of main interests (COMI). If the debtor has its registered office in Spain and the registered office does not coincide with the COMI, the creditor can choose between the place of the registered office and the place of the COMI.
A company from a distant location can only commence its insolvency proceedings where an affiliate is located, if the affiliate has already commenced its insolvency proceedings and it can prove that the COMI is located in that place. Otherwise, the company must file the application with the judge of the place where its COMI is situated, but can subsequently request from the judge that the insolvency proceedings are consolidated with the proceedings of the other affiliate (Article 25 bis, Insolvency Act).
The judge can appoint the same insolvency administration to administer the assets and the liabilities of the companies where either:
A judge has jurisdiction over companies belonging to the same group.
The insolvency proceedings affecting companies belonging to the same group are consolidated before the same judge.
On the request for opening proceedings for companies belonging to the same group, or after the accumulation of insolvency proceedings for companies of the same group, it is possible to request that the insolvency administration carry out the administration. Only the judge is responsible for making this decision.
The judge's decision to appoint insolvency administration can be appealed before the same judge by any party to the proceedings.
During the two-year period prior to the opening of insolvency proceedings, any actions by the debtor that may be detrimental for the assets of the company can be rescinded (Article 71, Insolvency Act).
Any actions taken by the debtor in favour of a related party (such as between companies of a company group) are considered to be detrimental to the assets of the debtor (unless proved otherwise).
The claims of one member of a corporate family against other members of the corporate family are considered to be subordinated claims (Article 92.1(5), Insolvency Act).
Subordinated claims are not invalid or unenforceable but are subordinate to all other claims. Subordinated claims will not be effected until all ordinary claims have been paid (Article 158, Insolvency Act).
The joint opening of proceedings does not mean that the assets and liabilities of the companies will be consolidated, but that different proceedings will be co-ordinated. Therefore, a creditor of one member of the corporate family will not become a creditor of all the members. There is no pooling of assets and liabilities (with the exception provided in Article 25 of the Insolvency Act (see Question 4)).
However, in practice the co-ordination of the different proceedings aims to facilitate the information relating to intra-group relationships, the financial situation of the insolvent companies in the group and the sustainability of the group as a whole. The Insolvency Act provides that the opening of the insolvency proceedings must not interrupt the activity that the debtor is carrying out. In the case of a group of companies, the continuation of the activity involves considering the interests of the group and the continuation of the intra-group relationships. The insolvency administrators will then need to reconcile the interests of the creditors of each of the insolvent companies of the group with the interests of the group as a whole.
Insolvency proceedings for international corporate groups
Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) is applicable in Spain, and will apply to all insolvency proceedings where a court of a member state has jurisdiction in accordance with Article 3 of the Insolvency Regulation.
The Insolvency Regulation does not address the issues raised by international groups of companies. A number of cases have been heard by the courts of member states and the European Court of Justice (ECJ) has had the opportunity to rule on this. The ECJ determined that where a debtor is a subsidiary company, whose registered office and that of its parent company are situated in two different member states, the presumption in Article 3(1) of the Insolvency Regulation is that if the centre of main interests (COMI) of that subsidiary is situated in the member state where its registered office is situated, it can only be rebutted if factors that are both objective and ascertainable by third parties are established. This could be the case for companies that do not carry out any business in the territory of the member state in which its registered office is situated. However, where a company carries out its business in the territory of the member state where its registered office is situated, the fact that its management can be controlled by a parent company in another member state is not enough to rebut the presumption laid down by the Insolvency Regulation (Eurofood IFSC Ltd case C-341/04).
The Spanish Insolvency Act contains rules of private international law that follow (with necessary adaptations) the model of the Insolvency Regulation. Therefore, Spanish courts interpret the concept of COMI in the same manner.
The Insolvency Regulation was repealed by Article 91 of Regulation (UE) 2015/848, of 20 May 2015. However, it will continue to be applicable until 26 June 2017 with some exceptions (Article 92, Regulation (UE) 2015/848).
Regulation (EC) 1346/2000 on insolvency proceedings only applies to insolvency/restructuring proceedings started for corporate group members in member states.
However, there are no international treaties or EU legislation for insolvency/restructuring proceedings commenced for corporate group members in different countries (member and non-member states) other than the model law on Cross-Border Insolvency of the United Nations Commission on International Trade Law.
Under the Insolvency Act, jurisdiction is granted to the Spanish courts where the company has its centre of main interests (COMI) in Spain. The rule also applies to international insolvencies.
Spanish insolvency proceedings have universal scope and include all of the debtor's assets (wherever they are located). However, this does not apply to territorial insolvency proceedings where jurisdiction is limited to the assets located in Spain.
Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) is applicable in Spain. Therefore, all judgments rendered by courts of member states will be recognised in Spain in accordance with the Insolvency Regulation.
In addition, the Spanish Insolvency Act applies the provisions of the Insolvency Regulation to judgments delivered by courts of non-member states. Therefore, Spanish courts will enforce a court order from a foreign country on terms similar to those laid down in the Insolvency Regulation.
Spanish courts will apply the provisions of Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) for the co-ordination of proceedings when the foreign jurisdiction is a member state.
Article 31 of the Insolvency Regulation refers to the duty to co-operate and communicate information. The liquidator in the main proceedings and the liquidators in the secondary proceedings must communicate information with each other. They must immediately communicate any information which may be relevant to the other proceedings, in particular all progress made in lodging and verifying claims and all measures aimed at terminating the proceedings.
The liquidator in the main proceedings and the liquidators in the secondary proceedings must also co-operate with each other. The liquidator in secondary proceedings must give the liquidator in the main proceedings an early opportunity to submit proposals on the liquidation or use of the assets in the secondary proceedings.
If the foreign jurisdiction is a non-member state, the private international law rules of the Insolvency Act provide for co-ordination between parallel insolvency proceedings.
The insolvency administration of the bankruptcy declared in Spain and the insolvency administration or representative of the foreign insolvency proceedings related to the same debtor will be subject to a duty of reciprocal co-operation in the exercise of their powers, under the supervision of their respective courts, tribunals or competent authorities. However, the refusal by the foreign insolvency administrator or representative, or tribunal or authority to co-operate will absolve the Spanish courts of this duty.
All parties must co-operate by:
Exchanging information that may be useful in the other proceedings (without prejudice to the compulsory fulfilment of the rules protecting the confidentiality of the data contained in the information). This obligation to provide information includes material changes to the respective proceedings, for example, the appointment of the administrator or representative, and the opening of insolvency proceedings in another state with respect to the same debtor.
Co-ordinating the management and the control or supervision of the assets and activities of the debtor.
Approving and implementing agreements related to the co-ordination of the proceedings.
The insolvency administration of the territorial bankruptcy declared in Spain must allow the insolvency administration or representative of the main foreign proceedings to file proposals for an agreement, liquidation of the assets and rights of the estate or the payment of the claims. The insolvency administration of the main bankruptcy declared in Spain must request the same measures in any other proceedings opened abroad.
As far as permitted under the law applicable to the foreign insolvency proceedings, its insolvency administration or representative can lodge to the bankruptcy declared in Spain claims recognised in such proceedings. Under the same conditions, the insolvency administration or representative can participate in the bankruptcy on behalf of the creditors of the claims of which it has communicated.
The insolvency administration of a bankruptcy declared in Spain can lodge with foreign, main or territorial insolvency proceedings, the claims recognised in the definitive list of creditors, provided always that it is permitted under the law applicable to these proceedings. Under the same conditions, the insolvency administration or the person appointed by it can participate in these proceedings on behalf of the creditors of the claims which it has communicated.
The Insolvency Act provides for a rule of payment. A creditor who obtains a partial payment for its claim in foreign insolvency proceedings cannot try to claim any additional payment in the bankruptcy declared in Spain until the remaining creditors of the same class and rank have obtained equivalent proportional payments from the bankruptcy.
Under the principle of reciprocity, the assets remaining on the conclusion of a bankruptcy or territorial proceedings must be put at the disposal of the insolvency administration or representative of the main foreign proceedings recognised in Spain. The insolvency administration of the main bankruptcy declared in Spain must request the same measure in any other proceedings opened abroad.
Spain has not adopted, or informally used, the Guidelines Applicable to Court-To-Court Communications in Cross-Border Cases as adopted and promulgated by the American Law Institute and the International Insolvency Institute.
Spanish law does not expressly encourage or discourage overlapping boards or management teams for separate members of a corporate family. However, the overlapping of boards of directors or management teams can lead to the conclusion that the company's centre of main interests (COMI) is situated in a place where the members of the boards or management teams have their domicile or residence.
Under the Insolvency Act, if the directors of a parent company are not directors of the subsidiary but they directly or indirectly manage the affairs of the subsidiary, they are considered to be "de facto" or "shadow" directors of the subsidiary.
Specific references to de facto directors are found in:
Article 164 of the Insolvency Act (regarding the qualification of insolvency proceedings as negligent).
Article 166 of the Insolvency Act (regarding the accomplices to negligent insolvency).
Article 48 ter of the Insolvency Act (that provides for the seizure of the directors' assets if the insolvency is likely to be qualified as negligent (see Question 22).
Article 172 bis of the Insolvency Act, which provides that the directors can be liable to pay the deficit if the insolvency is eventually qualified as negligent.
Directors of the parent company can be considered "de facto" directors if they give instructions to the affiliate that caused or aggravated its insolvency.
The Spanish Companies Act (Real Decreto Legislativo 1/2010, de 2 de Julio, por el que se aprueba el texto refundido de la Ley de Sociedades de Capital) contains the following directors' duties (Articles 225 to 232):
Duty of diligent management: the directors must perform their office with the diligence of a prudent entrepreneur. Each of the directors must diligently obtain information on the company's performance.
Duty of loyalty: the directors must perform their office as loyal representatives in the defence of the company's interests and must comply with the obligations imposed in the law and the bye-laws.
Prohibition on using the name of the company and to invoke the capacity as a director: the directors must not use the name of the company or invoke their capacity as directors to carry out transactions for their own account or on behalf of persons related to them.
Prohibition on taking advantage of business opportunities: the directors must not carry out, for their own benefit or for the benefit of persons related to them, investments or whatever transactions related to the assets of the company, of which they have been aware in the performance of their office, when the investment or the transaction has been offered to the company or the company has an interest in it, as long as the company has not declined the investment or transaction without the influence of the directors.
Situations of conflicts of interest: the directors must communicate any direct or indirect conflict situation which they may have with the interests of the company. The directors affected must refrain from intervening in the resolutions related to the transaction, which is the object of the conflict and must disclose any direct or indirect participation which they or the persons related to them may have in the capital of a company with a similar corporate object, as well as any offices or functions that they may have in the same.
Prohibition of competition: the directors must not engage, on their own or on behalf of other persons, in the same or similar activity of the company, unless the general meeting has expressly authorised them to do so, otherwise they may be removed.
Duty of confidentiality: the directors, even after having ceased in their office, must keep confidential the information which they know as a consequence of the performance of their office, and must not communicate this information to third parties when this may have adverse consequences for the company, except if the law allows its communication to third parties, or if they are requested by the relevant supervisory authorities.
The following persons are deemed to be related to the directors:
The spouse or persons with a similar relationship.
The parents, descendants, siblings of the director or his/her spouse.
The spouses of the parents, descendants or siblings of the director.
The companies in which the director is related to under Article 42(1) of the Commercial Code.
The above duties do not change when the company becomes insolvent.
In addition, when the company becomes insolvent, the directors have more duties, both to the insolvency administration and the judge. Article 165(1) of the Companies Act provides that it will be presumed that the debtor or its legal representatives, administrators or liquidators have acted in bad faith or with gross negligence (unless proved to the contrary) when they have breached their duty to co-operate with the insolvency judge and the insolvency administration, they have not provided the necessary or appropriate information for the proceedings.
The Insolvency Act does not address competing fiduciary duties where officers and directors of company family members overlap and conflicts of interest may exist. However, the Spanish Companies Act (Real Decreto Legislativo 1/2010, de 2 de Julio, por el que se aprueba el texto refundido de la Ley de Sociedades de Capital) provides for general duties of loyalty and conflicts of interest (see Question 22).
Failure to take reasonable steps to minimise losses to creditors
The failure to take reasonable steps to minimise losses to creditors may violate the duties and responsibilities of directors. Article 164(1) of the Insolvency Act provides that the insolvency will be found to be negligent when the insolvency has been originated or aggravated with bad faith or gross negligence on the part of the company's directors or liquidators (or any person holding such a position in the two-year period before the filing of the insolvency petition).
If the insolvency is found to be negligent, the directors can be held liable for "bankruptcy liability", that is the liability to cover the deficit between the assets and the liabilities.
Misappropriation of corporate assets
If directors violate their duties by misappropriating corporate assets, the insolvency will be declared negligent and the directors would be subject to bankruptcy liability.
Article 164(2.4) of the Insolvency Act provides that the insolvency will be found to be negligent when the debtor has taken all or part of his assets to the detriment of his creditors, or had carried out any act that delays, makes difficult or impedes the efficiency of a seizure of assets in any kind of enforcement action.
In addition, Article 164(2.5) of the Insolvency Act provides that the insolvency will be found to be negligent when the assets or rights of the debtor have been fraudulently removed from the pool of assets during the two-year period before the opening of the proceedings.
Undervaluation of corporate assets in a preference or other transaction to the detriment of creditors
Article 164(2-6) of the Insolvency Act provides that the insolvency will also be found to be negligent when the debtor (a director or officer of the debtor) has carried out any action aimed at imitating a fictitious financial condition before the opening of the insolvency proceedings.
Failure to inform creditors of insolvency
Article 165(1) of the Insolvency Act provides that it will be presumed that the debtor (a director of officer of the debtor) or its legal representatives, administrators or liquidators have acted in bad faith or with gross negligence when they breach the duty to request the opening of the insolvency proceedings (unless proved otherwise). Article 5 of the Insolvency Act provides that the debtor (a director of officer of the debtor) must request the opening of the insolvency proceedings within two months following the date on which it has known, or should have known, about the insolvency.
Preferential payments to a creditor
There is no liability for directors who make a preferential payment to one creditor as opposed to another creditor when there are insufficient monies available to pay both.
Continuing to trade when there is little prospect of being able to pay when due
If the directors allow the company to continue to trade when there is little prospect of being able to pay when due, they may breach their obligation to file the application for the opening of insolvency proceedings under Article 5 of the Insolvency Act (see above).
Article 164(2.1) of the Insolvency Act provides that the insolvency will be found to be negligent when the debtor (a director of officer of the debtor) is legally bound to keep accounts and has substantially breached the obligation, has kept double accountancy, or has committed irregularities in the accounts that are relevant for the understanding of the company's financial situation. However, Article 165(1.3) provides that it will be presumed that the debtor (a director of officer of the debtor) or its legal representatives, administrators or liquidators have acted in bad faith or with gross negligence, when the debtor (a director of officer of the debtor) who is legally bound to keep accounts:
Has not drawn up the annual accounts.
Has not audited the annual accounts when required.
Has not filed the accounts with the Commercial Registry in any of the three years before the opening of the proceedings.
Under Article 236 of the Companies Act, the directors will be liable to the company, the shareholders and the creditors for the damage caused by any acts or omissions of the law or bye-laws or those carried out in breach of their duties.
The Criminal Code provides for the liability of directors for the following corporate crimes (delitos societarios):
Directors who have forged the annual accounts or other documents that reflect the legal or economic status of the company, in a way that causes economic harm to the company or to one of its shareholders or a third party, will be punishable with imprisonment of one to three years and will receive a fine.
Directors who, without legal cause, deny or refuse the exercise of rights to information, participation in the management or control of the corporate activity, or pre-emption rights to one shareholder, will receive a fine.
Directors who refuse or obstruct the actions of supervisory individuals or agencies will be punishable with imprisonment from a period of six months to three years or receive a fine.
In addition, the Criminal Code provides for the following criminal liability in the case of insolvency:
Those that conceal their goods to the detriment of creditors, or for the same purpose, make any disposition of assets or create liabilities to delay or impede the effectiveness of a seizure or an enforcement proceeding, will be punishable with imprisonment from a period of one to four years and will receive a fine. The penalty will apply whatever the nature or origin of the obligation or debt.
If the debtor (a director of officer of the debtor) makes any disposition of assets or creates liabilities aimed at paying one or more creditors (privileged or not) and postpones payment to other creditors, without being authorised to do so (either by the court or by the insolvency administration), the debtor will be punishable with a period of one to four years imprisonment and a fine.
A person that is declared bankrupt will be punishable with imprisonment from a period of two to six years and a fine, when the insolvency is intentionally caused or aggravated. Consideration will be given to the amount of damage inflicted on the creditors, the number of creditors and their economic status in order to establish the appropriate penalty.
Those that submit false information in relation to the financial situation in the insolvency proceedings in order to achieve the opening of the insolvency proceedings will be punishable with imprisonment from a period of one to two years and a fine.
There can be serious personal civil and criminal liability for the officers and directors. The main reason that officers and directors apply for the opening of insolvency proceedings of the company in a timely manner is to avoid bankruptcy liability (that is, risking being liable for the company's debts).
Litigation against officers and directors for violation of their duties after the commencement of insolvency proceedings are not common. There are potential civil and criminal consequences for officers and directors that remain after the opening of insolvency proceedings. However, officers and directors will ensure that they are avoided.
However, litigation against officers and directors is normally successful. The insolvency judges have a tendency to accept the claims filed by the insolvency administration to enforce their liability.
The main defence available to directors under the Companies Act is established in Article 237 of the Insolvency Act. All members of the management body that decided on the resolution or carried out the damaging act will be jointly and severally liable. This is with the exception of those that can prove that they did not intervene in the taking or execution of the resolution and did not know of its existence, or if they did know of its existence, did everything necessary to avoid the damage, or expressly opposed the resolution.
Other options available to directors and officers are listed below.
Good faith is a general principle of Spanish law, and all actions are considered to be in good faith unless proven to the contrary.
The first duty of directors is the duty of due diligence. Therefore, as part of their defence, the directors can argue that they have complied with the obligation, if they obtain a valuation of assets or carry out any due diligence verification.
Reliance on outside consultants or professionals
Directors can rely on outside consultants or professionals at their own risk, including accountants, lawyers and financial advisors. Although this reliance will not absolve them of liability towards the shareholders and the creditors, they may have a third party action against the consultants or professionals if they relied on their advice and the advice proved to be wrong.
Exercise of reasonable judgment with intent to preserve the ‘on going value’ of the enterprise
As part of their defence, directors/officers can argue that they exercised reasonable judgment with intent to preserve the "ongoing value" of the company.
If it appears that "going concern values" will result in a higher return to creditors than a liquidation of the assets, the officers and directors will be protected if they decide to continue operations to protect the values for the benefit of all creditors. In fact, the Insolvency Act aims to preserve the company rather than liquidate its assets.
All acts of the directors are subject to the authorisation of the insolvency administration after the opening of insolvency proceedings. Therefore, the directors cannot increase the debt owed to creditors without first obtaining the approval of the insolvency administration.
Before the opening of insolvency proceedings, the increase of debt owed to creditors will be a matter of diligence rather than good faith. If the directors increase the debt without due care and diligence, it will be understood that they have negligently aggravated the insolvency and therefore could be subject to the bankruptcy liability and be liable to cover the deficit.
The fact that a company becomes insolvent does not automatically disqualify an officer or director of that company from acting as an officer or director in another company or from obtaining credit as a promoter of another company.
However, if the insolvency has been found to be negligent, the officers and directors (including de facto directors (see Question 21)) that are held liable for the negligence will be restricted from managing the assets of third parties for a period of between two to 15 years, and must not represent any person during this period.
The negligent officers or directors will lose all their rights as creditors and must return any assets or rights that they have received from the debtor or its assets. They must also indemnify the company for the damage caused.
In addition, if the officers or directors have committed malfeasance, the insolvency will be found to be negligent (see Question 24), and the officers or directors can be held liable for negligence and be disqualified.
If an officer or director becomes personally insolvent, he will be restricted from acting as an officer or director of any company if the insolvency has been found to be negligent.
See Question 32.
Ministry of Justice (Ministerio de Justicia)
Description. The official website of the Ministry of Justice (Ministerio de Justicia) of the Spanish Government. The website provides sections of the Spanish Insolvency Act in English. The website is available in various languages (including English).
Official State Gazette (Boletín Oficial del Estado)
Description. The official website of the Official State Gazette (Boletín Oficial del Estado) belonging to the Ministry of Presidency (Ministerio de la Presidencia) of the Spanish Government. The website provides legislation, announcements and publications. The website is available in various languages (including English).
Insolvency publicity (Publicidad concursal)
Description. The official website belonging to the Ministry of Justice (Ministerio de Justicia) of the Spanish Government relating to insolvency publications. The website is only available in Spanish.
Baker Tilly Abogados
Professional qualifications. Illustrious Bar Association of Barcelona (Ilustre Colegio de Abogados de Barcelona (ICAB)), Lawyer; Associate Professor of Private International Law, University of Barcelona
Areas of practice. Insolvency law; international law and corporate law.
Professional memberships and associations
President of the Foreign Investments Commission of the International Association of Lawyers (Union Internationale des Avocats (UIA)).
Member of the International Insolvency Institute (III).
Member of the Insolvency Law Commission of the ICAB.
Baker Tilly Abogados
Professional qualifications. Illustrious Bar Association of Barcelona (Ilustre Colegio de Abogados de Barcelona (ICAB)), Lawyer; Mediator in civil, commercial and insolvency law, as certified by the European Arbitration Association (Asociación Europea de Arbitraje (AEADE)) and the General Council of Economists (Consejo General de Economistas (CGE)); Associate Professor of Private International Law, University of Barcelona
Areas of practice. Insolvency law; international law and corporate law.
Non-professional qualifications. Law, University of Barcelona; Masters in Economic Management, University Abad Oliba CEU; Postgraduate CECRI in Corporate and Finance Restructuring and Insolvency, University Pompeu Fabra (iDec)
Professional associations and memberships. Member of the Insolvency Law Commission of the ICAB.