Eligibility Conditions for Discharge Under the New Spanish Personal Insolvency Regime

My previous post announced my intention to focus on the new Spanish Insolvency Law’s differences between individual debtors with or without business activities. As I mentioned, the new model clearly differentiates between these two categories of debtors in terms of discharge, offering a more
extended debt remission to debtors engaged in business activities. I will explain in a later post the extent of the difference. In this post, I will focus on the eligibility requirements for discharge that, once again, might lead to differing treatment among insolvent individuals.

To understand the difference, it is important to remember that the extent of the discharge varies depending on whether pre-insolvency mediation has been sought or not. Recall also that eligibility for pre-insolvency mediation is limited to individuals with business activity. Considering that the access to this mediation procedure is, in its turn, conditioned to certain requirements, the net effect is that the terms of eligibility result in a difference in the discharges individual debtors receive.

Before I discuss pre-insolvency mediation in more detail, I’ll begin with the general conditions for eligibility—the conditions strictly tied to the debt remission that all debtors are required to meet before they may access the discharge.

Article 178.2 of the Spanish Insolvency Law grants the discharge to any individual under the following conditions: (i) the insolvency cannot have been declared tortious; (ii) the debtor cannot have been sentenced for the criminal offence defined in the article 260 of the Criminal Code or any other related to the insolvency. (I will omit the details, anybody wanting to know more, can see an aproximate english version here) The use of this methodology –a list of requirements to be granted a discharge- follows the models present in other countries as a way to define more precisely when a debtor has been honest but unfortunate. At the same time, however, several problems arise from not defining specific requirements for the discharge within the Insolvency Act itself, but rather using external references to define who may be granted a discharge. 

This decision, in the first place, forces the reader to look for the real meaning of the conditions in other places of the Insolvency Law or even out of it, in the Criminal Code. This makes it less evident who is eligible for the discharge, and means that any amendment to those other sections scattered throughout Spain’s laws may impact the discharge, maybe for reasons not understandable in the context of the discharge. Second, this option leads to the inevitable question of whether the use of those external references is justified simply because the underlying policy principles are similar enough to use those requirements for a (maybe) very different subject like the granting of a discharge to individuals. In fact, the use of these references has raised some concern, because, as some authors points out (CUENA CASAS, 2013), for and individual to benefit from the discharge might be something completely different than for an individual to be relieved from the punishment present in the tortious insolvency or the criminal offences.

An alternative may be to enact a more general provision referring to good faith. However, the fear (very evident in the previously cited work) is that this sort of more relaxed access to the discharge could lead to abuses, granting it to debtors that hardly fall under the category of honest but unfortunate. These worries have always been present in Spain with regard to discharge. For example, it is not clear= how the Spanish courts would construe a more general provision referring to good faith or a similar approach. In the end, the result could likely be the same, but the rule more difficult to interpret a priori.

In addition, the absence of a formal personal insolvency proceeding, but a simple debt remission rule, makes it questionable that the provisions discussed above regarding eligibility for the discharge can be understood as access requirements. This is important when considering that a system like Spain’s may be less costly (lesser screening costs) and easier to apply if the requirements to access the discharge were transferred to other mechanisms (behavior during the proceedings, time limits for filing for insolvency…). Although, in practical terms, eligibility conditions for the discharge and requirements to access the proceeding itself may be the same on this point, the balancing mechanisms for systems with low entry barriers to avoid moral hazard would be hard to implement under Spanish Law. A quick look to the paragraphs 188 ff. of the WB Report on the Treatment of the Insolvency of Natural Persons helps to understand how difficult (almost impossible) it would be to apply those mechanisms to a system like the one set up in the Spanish Law, where the conditions are not defined to access the insolvency procedure, but to get the discharge after liquidation of the assets, i.e., at the end of the procedure.

Finally, one of the most prevalent provisions in personal bankruptcy systems across the world is some time-limit on filing for this procedure. It is a way to avoid an abusive use of a proceeding where the right of the creditor to be paid would be substantially affected because of the debt remission inherent to the discharge. Two, four, six or more years (see the WB Report on the Treatment of the Insolvency of Natural Persons, par. 193) must pass in different jurisdictions for an individual to be once again allowed to request a discharge. The absence of this limitation in the Spanish Insolvency Law is really surprising, particularly considering that it is present in the access to the pre-insolvency mediation procedure, as detailed below. Maybe this absence is another signal of sloppiness in the amendment.

In the case of individuals engaged in business activities, the discharge is given under the same terms as described above, except in the case that they try to obtain the stronger discharge provided for into the same article. This stronger discharge has one express condition and several others, as a consequence of this added condition. Article 178.2 of the Spanish Insolvency Law provides that this stronger discharge, which I will cover in a later post, is given to debtors who previously tried the pre-insolvency mediation procedure without success. This added requirement comes with a bunch of other requirements. Some of these other conditions are more or less the same as the general ones. Others can be explained because the special nature of the debtor. For example, business activity related behavior, such as the absence of accounting. Among them, I think that the most relevant are those referring to a former pre-insolvency refinancing agreement (another feature of the Spanish Insolvency Law) or an insolvency procedure: no mediation is allowed to the debtor engaged in either before three years are passed. In my next post, I will focus on the extent of the discharge, showing the differences between debtors with or without business activity.