Culpable vs Fortuitous Insolvency: Key Differences

MGG Maite

Written by Maria Teresa Garasa

Corporate lawyer

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Insolvency proceedings will be classified as culpable when:

Article 443 of the Spanish Insolvency Act:

Where the debtor has misappropriated all or part of their assets — that is, where they have diverted assets to the detriment of creditors.
Where the debtor has taken any action to delay, obstruct or frustrate the enforcement of an attachment order in any enforcement proceedings already initiated or foreseeably imminent.
Where assets or rights have fraudulently left the debtor's estate during the two years prior to the date on which insolvency proceedings were declared.
Where the debtor has fabricated a fictitious picture of their financial position prior to the declaration of insolvency.
Where the debtor has included a material inaccuracy in any of the documents submitted with the application for a declaration of insolvency or filed in the course of the proceedings.
Where the debtor has submitted or filed falsified documents in the insolvency proceedings.
Where the debtor has substantially failed to comply with the obligation to maintain proper accounting records.
Where the debtor has kept double sets of accounts.
Where the accounting records contain irregularities that are material to understanding the debtor's financial or economic position.
Where liquidation has been ordered by the court on its own motion due to breach of a creditor arrangement attributable to the insolvent debtor.

INSOLVENCY PROCEEDINGS SHALL BE PRESUMED CULPABLE:

Article 444 of the Spanish Insolvency Act:

Insolvency proceedings are presumed culpable, unless proven otherwise, where:

They failed to fulfil their duty to file for insolvency proceedings.
They failed to fulfil their duty to cooperate with the insolvency judge.
They failed to fulfil their duty to cooperate with the insolvency administrator.
They failed to provide the necessary or relevant information to the judge or the director.
They failed to attend the creditors' meeting, where their participation would have been decisive in reaching an agreement.
They failed to prepare the annual accounts for the three preceding financial years.
They failed to submit the accounts to audit, where required to do so.
They failed to file the accounts with the Commercial Registry once approved.

Who may appeal the ruling on the classification of insolvency proceedings:

The Supreme Court has granted creditors in fortuitous insolvency proceedings standing to appeal the ruling on classification.

In insolvency proceedings — the judicial process to which insolvent companies are subject — there is a phase known as the "sixth section" or classification phase. This phase determines whether the insolvency is fortuitous or culpable — that is, whether the debtor bears responsibility for the failure to pay, due to mismanagement, failure to maintain proper accounting records, or other grounds set out in the law.

WHO CAN BE FOUND CULPABLE IN INSOLVENCY PROCEEDINGS:

Directors and liquidators affected by a finding of culpable insolvency may be ordered to answer to creditors from their personal assets for the portion of the debt that could not be satisfied through the liquidation of the company.

CREDITORS MAY CHALLENGE A FORTUITOUS CLASSIFICATION:

The court may classify the insolvency as fortuitous (thereby releasing directors and liquidators from liability), yet creditors may disagree with that finding. In such cases, creditors may appeal the ruling — even where the Insolvency director had requested a finding of no culpability — provided the following requirements are met:

The creditors bringing the challenge must have appeared as parties in the classification section of the proceedings: by submitting pleadings, providing documents, etc.
The classification ruling does not uphold all the claims brought by the Insolvency Administration or the Public Prosecutor.
The creditors do not introduce any new claims beyond those put forward by the Public Prosecutor and/or the Insolvency director, as these are the only parties entitled to submit proposed resolutions that the judge will take into consideration.

Creditors are not entitled to request a specific classification, but they may intervene to support and request that the particular classification sought by the Insolvency Administration and/or the Public Prosecutor be upheld, and to lodge an appeal.

This position is confirmed by the Supreme Court ruling of 21 May 2020 (ruling 191/2020), in which the appellants introduced no new claims but instead requested that the classification sought by the Public Prosecutor (culpable insolvency) — which differed from that proposed by the Insolvency director and the Judge (fortuitous insolvency) — be upheld.

Accordingly, creditors may appeal a ruling that has not upheld all or part of the claims sought by the Insolvency Administration and/or the Public Prosecutor, even where neither the Insolvency Administration nor the Public Prosecutor has itself lodged an appeal.

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