Involuntary bankruptcy proceedings in Spain
Unlike voluntary bankruptcy proceedings which are commenced by the debtor,involuntary (necessary) bankruptcy proceedings are those which are requested by a legitimate creditor in accordance with Article 3.1 of the Bankruptcy Act.
In order for the creditor to begin the process, the debt must not have to been accrued in the 6 months previous to the presentation of the request and the creditor must be solely entitled to the debt.
Involuntary (necessary) bankruptcy may also be commenced by the partners or board members of a legal entity, who are personally liable for the debts. (3.3 Bankruptcy Act)
To initiate an involuntary (necessary) bankruptcy the application should be based on any of the acts lawfully prescribed by the Bankruptcy Act for this purpose. These requirements are detailed in the Exposition of Motives II, which are “based on any of the facts … which allege insolvency as prescribed in the Act”.
It should be pointed out that to initiate aninvoluntary (necessary) bankruptcy the burden of proof lies with the creditor, requiring him to include in the initial application all the evidence available to him supporting his claim. He must also prove his position as a creditor and any of the facts described in Article 2.4 of the Bankruptcy Act, namely the failure on the part of the debtor to pay:
– Tax obligations payable during the three months previous to the application for Liquidation.
– Social security payments and other contributions during the same period
– Wages, allowances and other benefits arising from labor relations for the previous three months.
Once the request for bankruptcy is presented to the Judge can:
1. Decide the application is complete: the Judge on the same day or by the latest the following day, can dictate a decry of automatic admission of the application. If there are defects in the application the Committal will still take effect following the rectification of any defects within a maximum of 5 days.
At this point the judge will send a summons to the debtor, along with the application for bankruptcy, requesting that he appear before him in a maximum of 5 days. The debtor can oppose the application but it must be done in the manner prescribed and offering the proofs that he deems support his opposition.
The evidence of witnesses is not enough to prove the facts alleged by the creditor
It should be advised that at this point that it is possible that the creditor or any other person with a legitimate interest can request the judge to adopt Precautionary Measures to secure the assets of the debtor. To this end the judge can require the creditor to pay a bond to the court to indemnify the debtor against any prejudice or damages that the Precautionary Measures may cause.
2. Find the Documentation inadequate. If the paperwork or the application for a declaration of bankruptcy is defective and the creditor does not rectify it within 5 days, the Judge can dictate a decry of automatic in-admission of the application. However, it is possible to appeal this decision.
3. Find acquiescence or inactivity on the part of the debtor. Bankruptcy will be declared without holding a hearing or an examination of evidence attesting to the state of insolvency of the debtor (Article 18.1 Bankruptcy Act). This process then follows the same course as for a Voluntary Creditor´s Bankruptcy, when it is instigated by an insolvent debtor.
4. If the debtor disputes the application: the debtor must present his opposition in writing within 5 days of the summons and base it on the following facts:
– Non-existence of the facts (detailed in Article 2.4 of the Bankruptcy Act)
– Existence of the facts but not insolvency
– The debtor must prove his solvency and he must also show his books of accounts to the court
The Bankruptcy Act defines insolvency of the debtor as the inability to pay debts. What is relevant for the purposes of declaration of insolvency is that the debtor is in a situation that cannot pay his debts as they fall due.
5. In case ofnon-appearance of thecreditor, orthe appearance and failure of corroboration of his opposition: if the judge finds that the objective facts prescribed by the Bankruptcy Act exist and that there are other possible creditors he will call a hearing of the other creditors before deciding on the application.
Once the involuntary (necessary) bankruptcy has been declared, the debtor´s powers of administration and disposition of its assets are suspended and transferred to the appointed Administrators of Bankruptcy.
Finally, it must be highlighted that although it is true that the law in Article 3.1 states that the request for a declaration of bankruptcy can be made by a single creditor, for the declaration of the necessary budget multiple creditors are required. If there are not multiple creditors at the time of the request, the judge can deny the commencement the insolvency process.
Monika Bertram
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