During the insolvency proceeding, the judicial process for qualifying the bankruptcy may be opened. It will determine whether or not the bankruptcy is negligent, as well as the liability of the directors and the parent company if the bankruptcy is qualified as negligent.
Qualifying Evidence
As part of the bankruptcy process, it is foreseen that, in the same judicial resolution approving the agreement reached with the creditors, the liquidation plan or the order for the liquidation of the company, the Sixth Section or ‘the judicial process for qualifying the responsibilities on the company’s bankruptcy will be opened. In this Section, the Judge of the Insolvency proceeding will qualify the bankruptcy as fortuitous or negligent.
Negligent bankruptcy
As established in article 164.1 of the Insolvency Law, the bankruptcy will be considered negligent provided, that in the generation or aggravation of the state of insolvency, there has been fraud or serious negligence on part of the directors or liquidators (whether in fact or by right), general representatives and those who had these conditions within the two years prior to the date of declaration of the bankruptcy. As well as when their shareholders have refused without reasonable cause to capitalise credits or issue securities or convertible instruments.
Presumptions of the Negligent Bankruptcy
The Bankruptcy Law in Spain establishes a series of situations in which the bankruptcy is presumed negligent, highlighting, amongst others:
- Substantial non-compliance of the bookkeeping obligations
- Falsification of documents submitted with the bankruptcy application
- Asset stripping to the detriment of creditors
- Breach of duty to apply for the bankruptcy
- Breach of duty to collaborate with the Judge and/or the insolvency receiver.
Debtor’s failure to comply with their obligation to apply for the bankruptcy within two months of becoming aware of the insolvency situation, or their late filing of said application, amongst other issues, create a presumption of negligence in the generation or aggravation of insolvency. This could lead to the qualification of the bankruptcy as negligent and the financial responsibility of the directors.
Consequences of the bankruptcy declared negligent
The consequences for the directors arising from the qualification of the bankruptcy as negligent may include:
- Disqualification from managing third parties’ assets for a period of 2-15 years
- Loss of any rights they may have as creditors
- As a more serious consequence, the directors may be liable with all of their personal assets for the outstanding credits not fully paid with the liquidation of the company. That is, they would assume the so-called bankruptcy deficit.
Considering the liability regime to which the directors of Spanish companies are subject to in situations of insolvency, it is essential that they ensure the company’s interests at all times and that they act with the utmost diligence.
Liability of the parent company in negligent bankruptcy
The literal wording of Article 164 of the Insolvency Law also establishes that this liability does not only affect to by right directors or liquidators of the companies but also their de facto directors.
It is possible that, if after the bankruptcy of the subsidiary company the creditors have not been satisfied with their credits, they will turn against the parent company, claiming its responsibility as de facto director of the insolvent subsidiary, to reimburse the unsatisfied debts of the insolvency process.
The liability of the parent company (or, where applicable, of its directors) must be proved by alleging its unfair conduct and the damage caused to the subsidiary company. Furthermore, it will have to be proved that the damage has not been duly compensated by the bankruptcy process.
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