EMPLOYMENT LAW ASPECTS OF THE NEW INSOLVENCY ACT
Written by Josep Conesa
Employment and insolvency lawyer
The new Insolvency Act, passed on 9 July of this year and due to enter into force on 1 September 2004, introduces significant reforms to the procedures governing corporate insolvency proceedings.
The insolvency reform has a direct impact on employment relations. Its effects can be summarised across the following areas:
· A reorganisation of the procedures through which employees may enforce their rights against the company.
· A reform of the classification and ranking of employment-related claims relative to other creditor claims against a company subject to insolvency proceedings.
· A reorganisation of the procedures and grounds for agreeing the termination or suspension of employment contracts within companies subject to insolvency proceedings.
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JURISDICTION OF THE INSOLVENCY JUDGE OVER EMPLOYMENT CLAIMS
Employment claims seeking recognition of an individual or collective employment right against a company will continue to fall within the jurisdiction of the Labour Courts, even where the company is subject to insolvency proceedings.
However, the division of jurisdiction between the Commercial Judge and the Labour Judge is subject to the following limitation:
· The jurisdiction of Labour Judges is confined to the declaratory stage of proceedings; they do not have jurisdiction to enforce judgments handed down against the company. It is the Insolvency Judge who holds jurisdiction to enforce the ruling and give effect to any award made. In other words, the Labour Judge may issue a ruling, but has no power to enforce it.
· The new law has also reserved certain matters for the exclusive jurisdiction of the Commercial Court Judge, including those relating to the collective termination, modification or suspension of employment contracts. The insolvency judge is responsible for adopting the relevant measures, and no
ORDER OF PRIORITY OF CLAIMS AGAINST THE INSOLVENT company
Enforcement proceedings assigned to the Commercial Court Judge are stayed for the duration of the insolvency process. When the law refers to enforcement, it means monetary enforcement — that is, the recovery of debt.
The new law provides for the abolition of the right to separate enforcement of employment-related debts. This represents a profound change to the protections previously afforded to employees, which were designed to ensure payment of wages and dismissal compensation that the company may owe its workforce.
Separate enforcement had served the purpose of shielding employees' personal finances from the impact of company insolvency. Employees are in a fundamentally different position from the company's other creditors, since the company's debt inevitably affects the employee's own personal and family finances.
Furthermore, the new law ties employees' rights to the outcome of the insolvency proceedings. The insolvency legislation has introduced a new ranking system for employment-related claims, applicable when they compete with the payment rights of other creditors of a company subject to insolvency proceedings.
Priority of post-insolvency debts over employment-related debts:
Employment-related debts are subject to a dual system of priorities, depending on whether or not the company is subject to insolvency proceedings:
· Under normal business conditions, the priority regime set out in the Workers' Statute applies, which grants preferential status to employment-related claims.
· Where the company has been declared insolvent, different rules apply — under which the priority afforded to employment-related debts is significantly stronger.
Under normal business conditions, the system of preferential recovery for employment-related claims applies.
However, once the company is declared insolvent, different rules apply and the priority afforded to the recovery of employment-related debts is considerably weaker.
The only exception is the claim for wages for the last 30 days of work, which takes precedence over any other insolvency claim, as it is classified as a super-priority claim.
The new law sets out two measures regarding wages for the last 30 days of work:
· Payment of this debt does not need to await the outcome of the insolvency proceedings — it falls due on its maturity date. However, in the event of non-payment, late payment consequences will apply.
· These 30 days of salary take priority over any other claim in the insolvency proceedings.
Claims with special security: claims secured by mortgage or other real guarantee.
Claims with special privilege include those secured by real estate or movable property mortgages, financial leases, securities collateral, or pledges.
Where several claims with special privilege exist over the same asset, priority is determined by the temporal precedence of each claim against third parties.
Claims with general privilege: wages and dismissal compensation.
These claims include:
· Wage claims not recognised as having special privilege, calculated by multiplying three times the minimum interprofessional wage by the number of outstanding days of salary owed.
· dismissal compensation up to the statutory minimum, calculated on a basis not exceeding three times the minimum interprofessional wage.
· Claims arising from personal work carried out on a non-dependent basis.
· Tax claims and Social Security claims.
· Civil liability claims.
These claims rank below all debts of the company that arose or fell due after the insolvency proceedings commenced, which significantly reduces the likelihood of them ever being recovered.
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WHEN IS IT BETTER TO FILE A Collective Dismissal Procedure (ERE)? BEFORE OR AFTER INSOLVENCY PROCEEDINGS?
Whether it is better to do so before or after will depend on the strategy adopted and the possibilities available within the insolvency proceedings.
- If the Collective Dismissal Procedure (ERE) is initiated before insolvency proceedings are declared, the claims generated will be classified as ordinary claims, since they predate the proceedings. These will be paid on a pro-rata basis, after the estate claims (those arising during the proceedings) and preferential claims (such as mortgage-secured debts) have been settled.
- If the Collective Dismissal Procedure (ERE) is carried out during insolvency proceedings, the claims generated will be classified as claims against the estate, meaning they must be met on an ongoing basis throughout the proceedings — unless the provision on insufficiency of the active estate applies.
MODIFICATION, SUSPENSION AND TERMINATION OF THE employment contract DURING INSOLVENCY PROCEEDINGS
The new Insolvency Act seeks to regulate the situation of a company in financial distress, as well as the effects that insolvency proceedings have on contracts, agreements binding the company, and collective bargaining.
The reform effectively repeals the employment law protections previously afforded to workers, placing decisions on the modification, suspension and termination of employment contracts in the hands of the Insolvency Judge and the insolvency administrators. It is the Judge or the administrators who are responsible for taking measures to restructure the workforce or terminate contracts.
This new system for the termination and suspension of contracts and the collective modification of working conditions removes the negotiating role of workers' representatives.
The only recourse available to workers against such measures is to lodge an appeal before the same judicial body. Since it is that body which orders the termination of contracts or workforce adjustments, any review must be pursued exclusively through the process of challenging judicial decisions. The legal framework only provides for an appeal before the Insolvency Judge themselves.
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