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Financing and payments made by persons closely related to the debtor under articles 12 and 9.3 Royal Decree Law 16/2020 (di José Antonio García-Cruces, Catedrático de Derecho Mercantil UNED, AbogadoIgnacio Moralejo, Profesor Titular de Derecho Mercantil, Universidad de Zaragoza   )

Spanish Royal Decree-Law 16/ 2020 provides a set of rules of an exceptional nature whose purpose is to define measures to mitigate the impact of the COVID-19 health crisis on struggling businesses. Temporary rules are established to remove certain impediments that may prevent the persons closely related to the debtor from financing her professional or business activity. Specific provisions define how financing provided by persons closely related to the debtor is to be ranked if the beneficiary becomes insolvent and files for bankruptcy. Certain rules intend to facilitate the reaching of composition agreements or renegotiations involving specially related persons.

Keywords: Spanish Law – Covid 19 – financing


1. The problem of financing provided by persons closely related to the debtor. - 2. The response offered by Royal Decree Law 16/2020. - 3. Assessment of these rules. - NOTE

1. The problem of financing provided by persons closely related to the debtor.

An immediate problem posed by the current economic crisis resulting from the health pandemic is the urgent need of businesspersons for financing and liquidity. The temporary cessation of their business activity, as a result of the quarantine, has led to a drain on their cash flows, that, along with the continuity of expenses, has resulted in a radical reduction of their income. To deal with this issue, the search for financing sources to maintain business activity is a necessity that each and every business has to face and this notwithstanding the fact that maintenance of the business activity has been partially subsidized through public resources (this last with no recorded success so far). In this attempt to preserve business activity, and to prevent insolvency and bankruptcy, any source of financing is valuable irrespective of whom may provide for it. On this regard it must be considered that in a near to insolvency scenario, those who are to finance struggling businesses bear in mind how their claims are to be dealt with if filing for bankruptcy finally takes place. Among the various sources of financing available to struggling business persons the possibility of reaching those who are closer to them becomes quite real. These people are not only linked to the business person on a business/ family bases, but, in many cases also have a very direct and deep interest in helping in the continuity of the debtor’s business activity. This is the case, for instance, of business company’s members and directors, as well as, where appropriate, of the other companies that belong to the same group. All these may provide, if they deem it appropriate, further financing for a company undergoing financial turmoil. Similarly, and now for individual debtors financing might be provided by their relatives or, alternatively, by those companies under their control or by companies controlled by those persons to whom they are related to. However, the debtor being financed by people close to her is extremely complicated as a result of certain burdens resulting out of provisions set in the Spanish Bankruptcy Law Consolidated Version (hereinafter, TRLCon [1]). In case of companies, both their members (under certain conditions), their directors and companies that belong to the same group as the company in need of financing when bankruptcy proceedings are opened are considered, ministerio legis, as persons especially related to the insolvent debtor (personas [...]

2. The response offered by Royal Decree Law 16/2020.

In order to avoid the aforementioned inconveniences regarding financing provided by those closely related to the debtor in case she may become insolvent, article 12.1 of Royal Decree Law 16/2020 provides that the credits granted by these especially related to the struggling debtor will be ranked, if the latter’s bankruptcy is ultimately declared, as ordinary claims [4]. This is to be so provided that these claims were born after the date on which the state of alert (estado de alarma) came into effect in Spain. This was March 14th. [5] The rule broadly frames its objective scope – cash income from loans, credits or other businesses of a similar nature provided by persons closely related to the debtor are to be ranked as ordinary credits – in order to cover all forms of financing. However, this exceptional rule is limited in time, in the sense that it will only apply to those insolvency proceedings which are declared within two years of the date of the declaration of the state of alert. Thereto the rule set by article 12.1 of Royal Decree Law 16/ 2020 provides a window of opportunity for companies members, shareholders, directors, companies belonging to the same group and other persons linked to the debtor to provide financing to business persons that are expected to struggle in the foreseeable economic crises to come after the COVID-19 pandemic. This rule is expected to contribute to solving legal entities and natural persons difficulties without those related to them being exposed whatsoever to the risks that in case the former financial struggles are not overcome and become insolvent the claims arising from the financing provided will be ranked as subordinated. In short, the rules for ranking bankruptcy claims have been altered – temporarily and exceptionally – in order to favor intra-group financing and financing provided by persons especially related to struggling legal entities and natural persons, given that the claims resulting from such financing will be ranked as ordinary bankruptcy claims if the debtor at the end has to file for bankruptcy. Given the urgent nature of the drafting of these notes, only two comments can now be made. Firstly, and this is a common feature in Royal Decree-Law 16/2020 provisions, the setting of the dies ad quem for the deadline of the application of the rule we are now dealing with is that of the date of the debtor declaration of bankruptcy. That is, the ranking as ordinary [...]

3. Assessment of these rules.

At this point, it is necessary an assessment of the new rules that govern financing provided by persons closely related to the struggling debtor due to the foreseeable economic crises resulting from the COVID 19 sanitary crises. And, to this end, it should not be forgotten that both articles 12 and 9.3 of Royal Decree-Law 16/2020 constitute, like the rest of the provisions set by the aforementioned Royal Decree-Law, rules of an exceptional nature, lacking an expansive force, with respect to which there is no room for analogical application and characterized by their temporary effects. Notwithstanding this characterization, the rules are a correct response insofar as it is a useful instrument for trying to cover the financing needs of those who are/will be undergoing difficulties as a result of the economic crisis. In other words, the aim pursued is correct, since removing any burdens that may prevent those persons closely related to the debtor from financing and, therefore, maintaining her professional or business activity must be welcome. It is a different matter if the rule, probably drafted with the urgency required by the current crisis situation, may incur in some unforeseen events that could lead to unexpected unwanted or, at least, questionable results. In this sense, and as an example of such results, we can refer to two examples. Thus, the person especially related to the insolvent party may negotiate and acquire liabilities held by creditors of the employer in difficulty, so that the latter, in view of the situation of the debtor, decide to transfer the claims for an amount reduced in relation to their nominal value. In this way, and when the insolvency proceedings are ultimately declared, the person specially related to that debtor will nevertheless have a liability for the full nominal amount of the acquired claim despite of the fact that she had paid a lower (or much lower) amount. The consequence will be, then, that this creditor, by having her credit ranked as an ordinary one, will have a voting power that is not proportional to the payment made to have the credit transferred, and will be able to adopt the decisions it seems appropriate and extend its effects to the rest of the ordinary and subordinate creditors when voting on a composition agreement. On the other hand, and as a second example, it is possible that the application of the provisions of article 12.1 of Royal Decree Law 16/2020 will allow, if I may say so, the recovery of [...]