Have you been affected by an express insolvency proceeding? Not all is lost

Since the reform introduced by Law 38/2011, Spanish insolvency legislation has included a modality allowing for the immediate conclusion of insolvency proceedings where the insolvent company does not possess sufficient assets to cover post-petition debts incurred during the procedure. In other words, it applies to companies without any realisable assets.

The process begins with the submission of a petition for the declaration of an express insolvency proceeding. If the Commercial Court deems the company’s claim of asset insufficiency to be well-founded, it issues an Order declaring the insolvency and mandates its publication in the Official State Gazette and the Public Insolvency Register. From the date of publication, creditors have 15 days to request the appointment of an insolvency administrator if they believe there is evidence of detrimental acts, liability of the directors, or grounds to classify the insolvency as culpable. If no such request is made, the court issues a further Order concluding the insolvency and dissolving the company’s legal personality.

Over time, this mechanism has been increasingly used fraudulently to dissolve insolvent companies. Many businesses write off their assets in the accounts or proceed with a ruinous liquidation in order to qualify for the express proceeding, relying on the assumption that creditors will neither check the BOE nor the Public Insolvency Register, nor be willing to bear the cost of the insolvency administrator’s report.

Many creditors become aware of the situation too late—once the 15-day period to request the appointment of the administrator has passed. However, all is not lost. There are two legal avenues for recovering claims: the individual action for liability (Article 241 of the Spanish Insolvency Act - TRLC) and the action for liability for company debts (Article 367 of the Companies Act - LSC).

The individual action for liability enables a creditor to hold a director personally liable for non-payment of a corporate debt as damage suffered by the creditor, provided three requirements are met: a negligent act attributable to the director, actual damage suffered by the creditor, and a causal link between the unlawful act and the damage. For example, if a company files for an express insolvency proceeding while it still has employees under active contracts, the liquidator must terminate those contracts in accordance with Article 51 of the Workers’ Statute. Failure to do so increases labour debts, and the liquidator may be held liable through the individual action.

In Barcelona, the Commercial Courts confirmed in December 2023 that failure or omission by the directors to terminate employment contracts may give rise to liability under Article 241 LSC.

On the other hand, the action for liability for company debts (Article 367 LSC) enables a creditor to claim against a director for a debt if, at the time the debt was incurred, the company was already in a situation requiring dissolution and no action was taken pursuant to Article 363 LSC.

In summary, even if a creditor has been affected by an express insolvency proceeding and believes their claim to be irrecoverable, they should be aware that they may still pursue the directors of the company, provided the requirements for an individual action or an action for company debts are met. Not all is lost.