SECOND CHANCE AFTER THE ANNOUNCED BANKRUPTCY REFORM: OPPORTUNITY, BUT LESS

On January 14, 2022, the draft reform of the Bankruptcy Law was published in the Official Gazette of the General Courts, whose main objective is the transposition of Directive (EU) 2019/1023 of the European Parliament and of the Council, of June 20, 2019, on restructuring and insolvency, and which, if approved in the terms established in its text, will mean a twist on the “Second Chance” procedure, just when the increase in insolvency proceedings is foreseeable when the last agreed bankruptcy moratorium expires in December 2021.

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

This remedy was introduced by Act 25/2015, of 28 July, of second-chance mechanisms, reduction of the financial burden and other social measures, with the aim of amplifying the effects of the economic recovery after the 2008 crisis so that, according to his explanatory memorandum, “a natural person, despite a business or personal economic failure, has the possibility of getting their life back on track and even risking new initiatives, without having to carry indefinitely a slab of debt that they can never satisfy”.

This was intended to modulate the rigor 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 responsible for his obligations with all his present and future assets, and to bring it closer to the limited liability enjoyed by partners in companies with respect to paid-up capital; this is achieved, not only with the recognition of agreements between creditors and debtors in which debt reductions and deferments in payment are agreed, but also, in the case of that this is not possible, and since all his assets have been liquidated, the “forgiveness” of what he owes is allowed, what has come to be known from a technical-legal point of view as exoneration of dissatisfied liabilities, the true basis of the second chance.

For the application of this mechanism, two conditions must currently be met: that the debtor has acted in good faith and that their assets must be liquidated beforehand. By good faith, we must understand the creditor who has not been declared “guilty” in the bankruptcy, understanding that this fault exists when the debtor delays the request for bankruptcy proceedings, harming his creditors, or when the debtor has previous convictions in a final judgment for crimes against property, against the socio-economic order, documentary falsehood, against the Public Treasury and Social Security against the rights of workers in the ten years prior to the declaration of bankruptcy. On the other hand, the debtor must make his assets available to creditors so that they can be liquidated through their sale, and with the result obtained he pays the creditors as appropriate.

With these two basic conditions, once the impossibility of covering debts with the accumulated assets has been determined, the judge can grant the exemption of the dissatisfied liabilities, leading to the closing of the bankruptcy, so that the debtor can obtain their recovery and reintegration into economic life.

Well, until the entry into force of the Consolidated Text of the Bankruptcy Law approved by Royal Royal Decree Legislative Decree 1/2020, of May 5, that “clean slate” that implies the exemption of dissatisfied liabilities also affected public credits, that is, the debts that the bankrupt natural person might have with the Public Treasury or with the General Treasury of Social Security, and this by application of a judgment of the Supreme Court (Judgment 381/2019, of July 2) that extended the pardon to this type of credit; however, the Consolidated text of the Bankruptcy Law, going beyond the mandate given for the consolidation, excluded this type of credit from exemption.

It is true that during the months following the entry into force of this rule, the Courts that have been responsible for processing bankruptcy have been applying the interpretation given by the Supreme Court in a majority way; however, the new reform of the Bankruptcy Law, whose draft was published last January, although it will allow access to this mechanism without having to completely liquidate the debtor's active estate, explicitly recognizes the limits of exemption to a certain type of debt, including those of public law, together with food debts or debts derived from criminal offence or non-contractual liability.

Unfortunately, this limitation will actually prevent individuals and individual entrepreneurs from reintegrating into economic life, taking into account that during this pandemic period, the bulk of the debts are most likely to derive from fractions and deferrals of tax or Social Security contributions 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 COVID-19 pandemic, as well as the impossibility of returning ICO credits. COVID-19.

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

Therefore, if the bankruptcy 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 debtors from economic death who are deprived of the possibility of exonerating debts contracted with the treasury, reducing the efficiency of the system, and condemning, once again, to go to the underground economy to alleviate the consequences of this death.

Hortensio Santos (T&L Attorney)