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Changes on insolvency proceedings for individual debtors in Spain

29/07/2015

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Spain

The Spanish Parliament recently passed Organic Act 7/2015 of 21 July, which will come into force on 1 October 2015 and will amend certain aspects of the Organic Act on the Judiciary (Ley Orgánica del Poder Judicial, LOPJ) and the Civil Procedure Act (Ley de Enjuiciamiento Civil, LEC). A new feature of this law relevant to the area of insolvency is the fact that, from this point onwards, courts of first instance will have jurisdiction over insolvency cases involving individual debtors not carrying on a business, whereas cases involving commercial debtors will continue to be handled by the commercial courts.

Up to now, all insolvency proceedings have been handled by the commercial courts, whether debtors were carrying on a business or not. From October 2015, all natural persons not deemed to be carrying on a business will be required to apply to the court of first instance in the territory that has jurisdiction over him or her by virtue of his or her address, in order to be declared insolvent.

The main issue to consider, for which no clear explanation is offered in the recently passed law, is what defines a ‘natural person not carrying on a business’. In an attempt to shed some light on this issue, we can refer to Article 231.1(2) of the Insolvency Act (Ley Concursal). Though confined to the area of out-of-court settlements, natural persons carrying on a business are defined as those having that status under commercial legislation, but also those who carry on professional activities or are conferred such status for the purposes of social security legislation. Self-employed persons would also be viewed as natural persons carrying on a business. Conversely, it can be inferred that a natural person not carrying on a business refers to all persons not falling under the above criteria, i.e. any person working as an employee.

Regarding the above definition, it is also necessary to consider the particular circumstances of company directors, these being classified under social security regulations as self-employed persons despite the fact that, strictly speaking, they themselves do not carry on a business. Despite not carrying on business activities, purely for social security legislation purposes company directors fall into the category of those persons ‘carrying on a business’ and are therefore required, hypothetically speaking, to file for insolvency with the relevant commercial court, as has been the case up to now.

More explicit recognition must therefore be given to the foreseeable lack of coordination between the first instance and commercial courts when hearing insolvency cases which, being linked, should be heard by the same court in the form of coordinated joint proceedings. For example, a company or its director will file an application for insolvency with the commercial court, as they would have done up to this point. However, any potential managers (natural persons or spouses) who are not deemed to be carrying on a business, and who may also act as guarantors for the company or its director, will be required to file for insolvency with the first instance courts. It is clear that insolvency cases such as this, in which the link between debtors is so readily apparent, should be heard by the same court to avoid any potential lack of coordination or encumbrance to their handling.

Although the number of insolvency cases involving individuals is not very high, until the law comes into force and specific case-based reasoning emerges from the judgments delivered, the impact that the conducting of some insolvency proceedings in some courts and other insolvency proceedings in other courts might have upon the judicial system, that is expected to be modern, flexible and effective, remains to be seen. Of course, the first impression is that the harm and problems that might be caused by this particular legislative innovation may outweigh the benefits it purports to create.

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