Second chance after the announced bankruptcy reform: opportunity, but less so

On January 14, 2022, the draft reform of the Insolvency Law was published in the Official Journal of the Spanish Parliament, whose main objective is the transposition of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on restructuring and insolvency, and which, if approved in the terms established in its text, it will be a turn of the screw to the "Second Chance" procedure, just when the increase in insolvency proceedings is foreseeable when the last insolvency moratorium agreed in December 2021 expires.

"Second Chance" refers to the mechanism that exists in bankruptcy proceedings so that individuals and the self-employed can eliminate, under certain requirements, totally or partially, the debts that they have been generating, and that due to a bad economic situation caused by excessive indebtedness they cannot satisfy.

This remedy was introduced with Law 25/2015, of July 28, 2015, on the second chance mechanism, reduction of the financial burden and other social measures, with the aim of extending the effects of the economic recovery after the 2008 crisis so that, according to its explanatory memorandum, "a natural person, despite a business or personal economic failure, have the possibility to get their lives back on track and even to take risks to new initiatives, without having to drag indefinitely a slab of debt that they will never be able to satisfy."

The aim was thus to modulate the rigour of one of the basic principles of our legal system contained in Article 1911 of the Civil Code, according to which the individual debtor is liable for his obligations with all his present and future assets, and to bring it closer to the limited liability enjoyed by the partners in companies with respect to the paid-up capital; This is achieved not only with the recognition of agreements between creditors and the debtor in which debt reductions and deferrals in their payment are agreed, but also, in the event that this is not possible, and all the assets of the former have been liquidated, the "forgiveness" of what is owed, which has come to be called, from a technical-legal point of view, exoneration of unsatisfied liabilities. the true foundation of the second chance.

For the application of this mechanism at present, two conditions must be met: that the debtor has acted in good faith and that the debtor's assets must be liquidated beforehand. Good faith must be understood as the creditor who has not been declared "guilty" in the insolvency proceeding, it being understood that this fault exists when the debtor delays the request for bankruptcy proceedings to the detriment of his creditors, or when the debtor has previous convictions in a final judgment for crimes against property, against the socio-economic order, forgery of documents, etc. against the Public Treasury and Social Security, against the rights of workers in the ten years prior to the declaration of insolvency. On the other hand, the debtor must make its assets available to creditors so that it can be liquidated through its sale, and with the result obtained pay the creditors accordingly.

With these two basic conditions, once it has been determined that it is impossible to cover debts with the realized assets, the judge may grant the exoneration of the unsatisfied liabilities, leading to the closure of the insolvency proceedings, so that the debtor can obtain his recovery and reintegration into economic life.

Well, until the entry into force of the Consolidated Text of the Insolvency Law approved by Royal Legislative Decree 1/2020, of May 5, 2020, that "clean slate" that the exoneration of unsatisfied liabilities entails also affected public credits, that is, the debts that the insolvent individual may have with the Public Treasury or with the General Treasury of the Social Security, and this by application of a criterion of the Supreme Court (Judgment 381/2019, of July 2) that extended forgiveness to this type of credits; however, the Consolidated Text of the Insolvency Law, going beyond the mandate given for the recasting, excluded this type of credit from the exemption.

It is true that during the months following the entry into force of this rule, the Courts that have been in charge of processing insolvency proceedings have been applying the interpretation given by the Supreme Court in a majority manner; However, the new reform of the Insolvency Law, the draft of which was published last January, although it will allow recourse to this mechanism without the need to completely liquidate the debtor's assets, explicitly recognises the limits of the exoneration to a certain type of debt, including those under public law. together with maintenance debts or debts arising from criminal offences or non-contractual liability.

Unfortunately, this limitation will actually prevent the reintegration into economic life of individuals and individual entrepreneurs, taking into account that throughout this time of pandemic the bulk of the debts most likely derive from instalments and deferrals of tax or Social Security payments that have not been able to be satisfied due to the lack of liquidity in the face of closures and reductions in business activity as a measure adopted to curb the pandemic due to COVID19, as well as the impossibility of repaying ICO COVID-19 credits.

In addition, this shielding of public credit will require not only the absence of a criminal record in economic crimes on the part of the insolvent party, but also that he or she has not been sanctioned for tax, Social Security or social infractions in the ten years prior to the request for exemption, thus making it difficult to grant the exoneration.

Therefore, if the insolvency reform is approved in the terms contained in the bill, it will fail with respect to the reason that gives meaning to the second chance; It will be difficult to rescue from economic death debtors who are deprived of the possibility of exonerating the debts contracted with the treasury, reducing the efficiency of the system, and condemning, once again, to resort to the underground economy to alleviate the consequences of this death.

Hortensio Santos (T&L Lawyer)