Creditors beware! Debtors, be careful!

Following the application for the declaration of insolvency without assets, the Commercial Court, if it appreciates the possible insufficiency of assets alleged by the insolvent company, issues an Order declaring the insolvency proceedings with an expression of the liabilities and orders its publication in the Official State Gazette, as well as in the Public Insolvency Register.

With this publication, a period of 15 days begins in which creditors, representing 5% of the liabilities, may request the appointment of an insolvency administrator if they consider that there are indications 1) that the debtor has carried out acts detrimental to the assets to be reintegrated; 2) for the exercise of the social action for liability, or 3) that the insolvency proceedings could be classified as culpable.

If the aforementioned request is made, the judge must appoint an insolvency administrator to present a report analysing the possible existence of the aforementioned indications. If it is considered that these may be present, the Judge will issue a complementary Order, agreeing to the ordinary processing of the insolvency proceedings.

On the other hand, if the aforementioned request is not made, the judge will issue another order, without further formalities, agreeing to the conclusion of the insolvency proceedings and the extinction of the company's legal personality.

Well, a little over a year after the entry into force of the new regulation, practice is revealing the fraudulent use of this legal mechanism for the termination of companies in insolvency, as it avoids the ordinary processing of the procedure with the supervision of an Insolvency Administrator, as well as the opening of the qualification section where the liability of the administrators in the generation and/or aggravation of the insolvency must be elucidated.

Specifically, we find that many companies decide to derecognise their assets from the accounts or proceed to a ruinous liquidation of the same, in order to achieve the processing of the insolvency without assets, with the confidence that i) the creditors will not consult either the BOE or the Public Insolvency Register and therefore will not be able to request the appointment of the insolvency administrator in time, or, ii) that if they are aware, they will not do so either due to the obligation of having to assume the cost of the report to be prepared by the insolvency administrator.

However, several warnings should be made in this respect:

• The debtor must be careful as creditors are increasingly aware of the fraudulent use of express insolvency proceedings, and are more alert to the publications in order to request the appointment of the insolvency administrator in due time and form.
• If it is proven that there has been an accounting alteration to derecognise the assets, or a ruinous liquidation of the assets, the insolvency proceedings could be classified as guilty, and the company's administrators could be held liable as a result.
• The sale of assets below market value within the two years prior to the application for the declaration of insolvency proceedings could also give rise to reinstatement actions.
• The processing of the express insolvency proceedings does not imply that the assets do not have to be liquidated, but that they must be liquidated once the insolvency proceedings have been concluded, with the proceeds from the sale of the assets being distributed among the creditors.
• If these operations are not carried out correctly, the company's administrators could be declared liable under art. 367 of the Consolidated Text of the Spanish Companies Act (Texto Refundido de la Ley de Sociedades de Capital).

Likewise, more and more Commercial Courts, faced with the abuse of the express insolvency mechanism, are requiring the debtor to inform its creditors of the filing of the application for insolvency without assets.
The possible liability of the administrators of the insolvent company for the fraudulent use of this legal mechanism, and the possible exercise of reintegration actions for the ruinous sale of assets, may be an incentive for creditors to be vigilant and request the appointment of the insolvency administrator, as this is the only way to increase their expectations of collecting their claims.

In this respect, although it is the creditor who must pay the fees of the insolvency administrator for the drafting of the aforementioned report, and not for the processing of the insolvency proceedings, some judges are beginning to consider that the fees that the creditor has had to pay to the insolvency administrator should be recognised as a credit against the estate, if the insolvency proceedings are finally processed.

We are therefore faced with a new trend that seeks to protect creditors in the face of the patent fraudulent use of insolvency without assets that is taking place, promoting the participation of creditors, and alerting the debtor to the responsibilities that its administrators may assume if they resort to insolvency without assets in an artificial manner.