Discharge of Public Debt in Insolvency Proceedings

CAN DEBTS OWED TO THE Spanish Tax Authority AND Social Security BE DISCHARGED IN INSOLVENCY PROCEEDINGS?

The new Insolvency Act 2022 expressly states that public credit — whether debts owed to Social Security, the Tax Authority, or the Spanish Tax Authority — cannot be discharged through the BEPI (now known as EPI, the Discharge of Unsatisfied Liabilities mechanism).

However, in light of the prior case law discussed in the sections below, as well as existing EU case law, there are judicial decisions and rulings affirming that public credit can indeed be discharged. See the following judgments:

• Commercial Court No. 3 of Alicante
• Commercial Court No. 17 of Madrid

And now, in March 2025, the Supreme Court has once again held that public credit may be discharged:

Background Facts

1. First Instance: The General Social Security Treasury (TGSS) brought a claim by way of insolvency incidental proceedings before the Court of First Instance No. 6 of Logroño, opposing the application for discharge of unsatisfied liabilities filed by María Consuelo. The General Social Security Treasury (TGSS) argued that the public debt should not be included in the payment plan and should be governed by its own specific rules (the court dismissed the General Social Security Treasury (TGSS)'s claim and granted María Consuelo the benefit of discharge of unsatisfied liabilities, with the exception of preferential public law credits and maintenance obligations) .

2. Second Instance: The General Social Security Treasury (TGSS) appealed the first-instance ruling, but the Provincial Court of Logroño dismissed the appeal and upheld the original ruling .

3. appeal on Points of Law: The General Social Security Treasury (TGSS) lodged a cassation appeal alleging infringement of Articles 491.1 and 497 of Royal Legislative Decree 1/2020, which exclude public law credits from the scope of discharge.

Legal Grounds

1. Interpretation of Article 491.1 TRLC: The Supreme Court examined whether Article 491.1 of the Consolidated Insolvency Act (TRLC) of 2020 — which excludes public law credits from discharge — exceeded its proper scope. The court concluded that this exclusion had not featured in the previous legislation and that its introduction upset the balance of interests carefully weighed in the original Act.

Supreme Court Ruling

The Supreme Court dismissed the cassation appeal lodged by the General Social Security Treasury (TGSS), confirming the established judicial interpretation that the discharge of unsatisfied liabilities may extend to General Social Security Treasury (TGSS) claims, except those classified as claims against the insolvency estate or insolvency claims.

View ruling here

BACKGROUND ON THE DISCHARGE OF PUBLIC-LAW CLAIMS UNDER INSOLVENCY LAW

On the question of extending discharge to public-law claims, the relevant benchmark is the Supreme Court's ruling of 2 July 2019, which established, in essence, that public-law claims must be included within the discharge mechanism — both the general and the special regimes (in the terminology of the current Consolidated Text). In practice, this means that preferential public-law claims and claims against the insolvency estate are included in the payment plan, with the remaining public-law claims subject to provisional discharge.

Written by Josep Conesa

Employment and insolvency lawyer

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The Legislative Overreach of the Consolidated Insolvency Act

The entry into force of the Consolidated Text of the Insolvency Act, and the amendment to the rules on the extension of discharge effects introduced by Article 491 of that Act, should not alter the prior case law. Article 491 ought to be disapplied, as it infringes Article 82.6 of the Spanish Constitution.

This infringement arises from the fact that the Consolidated Text introduces in Article 491 a provision that is manifestly contrary to the rule it was intended to restate — specifically, Article 178 bis 3(4) of the previous legislation. This constitutes an ultra vires excess in the delegation granted for the consolidation exercise. Ordinary courts may disapply a provision that exceeds the scope of the consolidation mandate without the need to raise a formal question of unconstitutionality (see, among others, the Constitutional Court ruling of 28 July 2016).

Indeed, Article 178 bis 3(4) of the Insolvency Act regulated what was known as direct discharge (now referred to as the general regime), based on the satisfaction or payment of preferential claims and claims against the insolvency estate, and — where no out-of-court payment agreement had been attempted — 25% of ordinary claims.

As the Supreme Court judgment of 2 July 2019 sets out, the regulation of debt discharge under Article 178 bis gave rise to considerable uncertainty, some of which has been clarified in the Consolidated Text, in keeping with the proper aims of a consolidating instrument.

 However, the fact that the direct discharge mechanism under Article 178 bis 3(4) had the effect of discharging the entirety of unsatisfied liabilities — both ordinary and subordinated claims, without exception and without any exception for public-sector debt — was a point that was beyond doubt in legal doctrine and undisputed before the courts.

The only doctrinal and practical debate concerned the scope of discharge under the provisional discharge regime through a payment plan (now referred to as the special regime). Article 178 bis 5, first paragraph — which applied exclusively to this regime — carved out public-sector debt and maintenance claims from the scope of provisional discharge. Meanwhile, the first paragraph of Article 178 bis 6 opened by stating that claims not discharged under the preceding paragraph (which were to include public-sector claims) could be discharged through the payment plan. However, it then appeared to refer back to the administrative deferral and instalment payment system for public-sector debt. This deficient drafting was interpreted by the aforementioned Supreme Court judgment of 2 July 2019 to mean that public-sector debt could be subject to provisional discharge and satisfied through the payment plan mechanism by including unpaid preferential and estate-related public-sector claims within the plan.

It is therefore considered that Article 491 fundamentally alters a clear and undisputed rule of the system it was intended to consolidate, thereby disrupting the delicate balance of rights that system was designed to regulate — and, by extension, the equal treatment of creditors — in a manner that cannot, by any reasonable interpretation, be regarded as a mere clarification, systematisation, or tidying-up of the existing law.

Disapplying Article 491 means that the Consolidated Text retains, with respect to the special regime, the same substantive wording — albeit in a different structural arrangement — as Articles 178 bis 5 and 6, which were interpreted by the Supreme Court judgment of 2 July 2019 in the manner described above.

This means that Article 497, which governs the scope of discharge under the special regime, must be interpreted in the manner set out in the Supreme Court ruling of 2 July 2019.

Case law:

Barcelona Provincial Court, Order 89/2022, 11 May. appeal 73/2022 (LA LEY 71426/2022)

Case law also establishes that any discharge of public debt must have an explicit legal basis: see the ruling of the Alicante Provincial Court.

CONCLUSION

For the time being, pending the outcome of the reform of the Insolvency Act, public debt may be eligible for discharge. The judge will assess the payment plan and may issue an order approving it, making the public debt subject to compliance with that plan and requiring the relevant authority to accept the agreed haircut and deferral.

Once the payment plan period has elapsed — whether 1, 2 or 5 years, or whatever term is set out in the plan — the debtor may apply to the court for a final order discharging the remaining debts.