Insolvency Liability of Company Directors Under Spanish Law

Spanish bankruptcy law provides for the possibility of examining the conduct of the company directors prior to the declaration of bankruptcy of the debtor company in order to verify whether it had an impact on the generation or aggravation of the company’s insolvency. The following lines are intended to describe very briefly the current state of this matter.

The individuals whose conduct is subject to analysis are the directors (de jure or de facto) of the company, or its general directors, at the time of the declaration of bankruptcy and those who have occupied any of these offices in the previous two years.

The Bankruptcy Law (“Texto refundido de la Ley Concursal”) wishes creditors to take a proactive approach. Thus, at the time when they make their statement of claims to the insolvency receiver (which takes place at the beginning of the insolvency proceedings) they may inform said body of any facts that could lead to consider the bankruptcy as fraudulent (“allegations”).

Likewise, those same creditors could make the insolvency receiver aware that it is advisable to request the court to adopt the preventive attachment of the assets of the directors, when it can be assumed that the bankruptcy could prima facie be qualified as fraudulent. All this in order to avoid the temptation that directors might have to dispose of their assets.

In the present wording of the Law the insolvency receiver, within fifteen days since his or her rendering in court the so-called “provisional report” (which includes the complete list of creditors and assets of the insolvent debtor) must submit the qualification report.

This significantly speeds up the bankruptcy proceedings compared to the situation existing until 2022, as the moment of submitting the aforementioned report has considerably been pushed forward. In this document the receiver will have to scrutinize the conduct of the company directors prior to the declaration of bankruptcy, to end up proposing the insolvency to be qualified as fortuitous or fraudulent (this decision to be taken by the court after hearing the affected parties).

Aditionally creditors (provided that they hold more than five per cent of the total liabilities and have made allegations of fraud together with their initial statement of credit) may also submit their own qualification report, requesting the bankruptcy to be considered fraudulent. On the contrary, it is no longer necessary for the Public Prosecutor’s Office to make a pronouncement (which was mandatory until 2022).

These reports of qualification can propose to the court, among other pronouncements (such as disqualification for a period of between two and fifteen years) that the affected persons be sentenced to cover the so called bankruptcy deficit. To this end, it is a requirement that the liquidation has been opened in the insolvency proceedings and that there is a “bankruptcy deficit”, i.e. that the value of the assets and rights included in the inventory of the insolvency receiver’s provisional report falls below the sum of the claims recognised in the list of creditors.

Therefore, in order to claim this particular insolvency liability of company directors it is crucial that the assets and liabilities are properly appraised, which is not done in the qualification section, but at an earlier stage.

Once these assumptions have been established, the liability to cover the deficit can only be ruled by the court when evidence is shown that the conduct of the directors which led to qualifying the bankruptcy as fraudulent “did generate or aggravate the insolvency”. In other words, we face a responsibility of a clear “causalistic” nature the proof of which is far from easy. The cases where it is most feasible to establish the causal relationship are those where there is evidence that the directors were late in applying for bankruptcy, and that this delay has caused an increase in insolvency (i.e. more debts), which could have been avoided had the directors acted in a timely manner. On the other hand, when the declaration of bankruptcy is found to be fraudulent only due to relevant accounting irregularities (a very common case), such a conviction is much more difficult to establish, although not entirely impossible if the application is duly justified.

It is therefore advisable that foreign creditors that face a bankruptcy proceeding in Spain count on a reliable legal advice from the very outset of the insolvency, since it is a highly specialised matter, where the Supreme Court has provided very complex intepretation guidelines, which must carefully be taken into account.

Fernando Martínez Sanz

Professor of Commercial Law / Lawyer