Does insolvency really mark the end?
Spain’s insolvency reform, introduced by Law 16/2022, substantially amended the rules governing so-called “no-asset insolvency proceedings” (concurso sin masa). These are insolvency proceedings in which the insolvent company has no assets, or virtually no realisable assets, with which to cover the costs of the proceedings or satisfy creditors’ claims. Originally conceived as a mechanism to simplify proceedings with no realistic prospect of recovery, they have since become the most common form of corporate insolvency proceedings in Spain. According to the latest statistics, they account for more than 80% of all corporate insolvency proceedings.
For many creditors, this creates the impression that the conclusion of the insolvency proceedings marks the definitive end of any possibility of pursuing their claims. Recent case law, however, paints a different picture: the closure of no-asset insolvency proceedings does not automatically preclude claims against those responsible for the company’s management. On the contrary, directors and members of the company’s governing bodies are increasingly coming under judicial scrutiny.
From “express insolvency” to the new rules
Before the reform, insolvency proceedings could often be concluded as soon as they were opened if it was evident that there were no realisable assets. This practice, known as the concurso exprés, was widely criticised because it gave creditors very little opportunity to investigate potential breaches of duty by the company’s management.
The reform therefore introduced a new procedure. Creditors may now request the appointment of an insolvency practitioner, provided that certain statutory requirements are satisfied and that they bear the associated costs, where there are indications that clawback actions, directors’ liability claims or the classification of the insolvency as culpable may be warranted. However, the requesting creditors must represent at least 5% of the company’s total liabilities and submit the corresponding application within a short period of 15 days.
In practice, this threshold remains difficult for many creditors to meet. The question of which claims may be pursued outside the insolvency proceedings is therefore becoming increasingly important.
The company’s “legal limbo”
One of the most interesting consequences of the reform concerns the company’s status following the conclusion of no-asset insolvency proceedings. According to the prevailing view, the company does not automatically cease to exist when the court issues the order concluding the proceedings. Instead, it retains a residual legal capacity for as long as outstanding legal relationships or assets still need to be dealt with.
The Spanish Supreme Court has confirmed that the conclusion of insolvency proceedings due to a lack of assets neither extinguishes all outstanding liabilities nor renders any remaining assets ownerless. This leaves scope for creditors to pursue further claims.
Do directors automatically become liquidators?
There is growing support in both case law and legal literature for the view that, following the conclusion of no-asset insolvency proceedings, the former directors automatically assume the role of liquidators. Their task is then to ensure the proper winding-up of all outstanding legal relationships.
This entails extensive obligations. Among other things, they must identify any remaining assets, deal with outstanding contracts and, observing the statutory order of priority among creditors, carry out the final liquidation in accordance with the applicable legal requirements. A breach of these duties may give rise to personal liability.
Personal liability under Article 241 of the Spanish Companies Act
Of particular relevance is the individual action for liability provided for under Article 241 of the Spanish Companies Act (Ley de Sociedades de Capital or LSC).
This provision allows individual creditors to bring a direct claim against a director where they have suffered a personal loss as a result of the director’s unlawful conduct. Unlike claims pursued within insolvency proceedings, this action does not concern the body of creditors as a whole, but rather the individual loss suffered by a specific claimant.
As a general rule, the courts require evidence of an act or omission by the director, a breach of the director’s duties, a specific loss and a direct causal link between the conduct and the loss.
This form of liability may be of particular significance where a director continues to enter into contracts despite knowing, or being expected to know, that the company will never be able to perform its obligations. Concealing the company’s true financial situation or failing to conduct the liquidation properly may likewise result in personal liability.
In such cases, Spanish case law is becoming increasingly favourable to creditors and, in some circumstances, is making it easier for injured creditors to discharge the burden of proof.
Liability for company debts under Article 367 LSC
Liability under Article 367 LSC may be even more extensive. Under certain conditions, this provision establishes the director’s personal and joint and several liability for the company’s debts.
Such liability may arise where a statutory ground for the company’s dissolution already exists but the directors neither take the necessary steps to dissolve the company nor apply for the opening of insolvency proceedings within the prescribed period.
Importantly, this liability is largely objective in nature. Unlike an individual action for liability, there is no requirement to prove fault or a specific loss. It is generally sufficient to establish that the relevant statutory duties were breached and that the debt in question arose after the ground for dissolution occurred.
This represents a considerable risk for directors. In no-asset insolvency proceedings, it frequently becomes apparent that the company’s financial crisis began long before the insolvency application was filed and that new liabilities continued to be incurred. In such cases, the director’s personal liability can quickly become substantial.
What does this mean for creditors?
Taken together, recent legal developments send a clear message: no-asset insolvency proceedings should not be regarded as a convenient means of definitively eliminating creditors’ claims. On the contrary, the conclusion of the proceedings may open the door to claims against the individuals responsible for the company’s management.
Creditors should therefore examine the circumstances surrounding the insolvency carefully.
In particular, they should assess:
- when the company’s financial crisis actually began;
- whether the directors breached any of their statutory duties;
- whether the company’s assets and contractual relationships were properly dealt with and
- whether personal claims against the directors may be brought under Articles 241 or 367 LSC.
Conclusion
Although Spain’s insolvency reform has made no-asset insolvency proceedings more efficient, it has not necessarily strengthened the position of creditors in all circumstances. At the same time, case law reflects a growing willingness to hold directors and other members of a company’s governing bodies accountable for conduct that prejudices creditors.
For companies, this means that insolvency situations require timely and legally sound advice. For creditors, it offers a noteworthy opportunity: even where a company no longer has any assets, the personal liability of its directors may still represent a viable avenue for the recovery of legitimate claims.