Debtor, What Debtor?

The recent World Bank Report on the Treatment of the Insolvency of Natural Persons  highlighted in its first pages (13 and ff.) the alternatives regarding which debtors to be include in this special regime. Although the solutions to this question are not the same among different countries, the problem is identical: whether to include persons without any business activity—that is, “pure” consumers—or to limit its particular provisions to individuals engaged in business activity.

Although it has different grounds, the discussion reminds me of the classic insolvency/bankruptcy problem of limiting these proceedings only to businesses. As many of the readers know, this was a classical question when the old insolvency and bankruptcy procedures were part of a special set of norms for businesses (for instance, the mandatory accounting or a special public register). Seeing this question arise again in the context of personal insolvency brings back memories of the good ol’ times when I started studying our old quiebra and the discussions on the nature of the debtor and his eligibility for that procedure (a problem usually present in the old spanish suspensión de pagos). To avoid nostalgia for those times, and for the sake of our readers, I’ll turn my eyes to the present. How has the amendment of the Spanish Insolvency Law dealt with the problem of the nature of the debtors?

One of the main features of the 2003 Spanish Insolvency Law was the unification of the previous four proceedings into one (concurso de acreedores) for which the nature of the debtor was irrelevant. The proceeding, however, as it usually happens, was clearly designed for business insolvency, even if available to any type of debtor. This design makes the procedure hardly attractive for individuals without business activity. I pointed this out in 2006 and this situation had not changed since then until this latest reform. Though the graph to the right shows an increase in the number of debtors withou t business activity filing, the increase does not reflect that bankruptcy became any more beneficial to “pure” consumer debtors. There was no amendment to the Insolvency Law that might explain the increase. Rather, the increase was driven because of different reasons. This is evident in that it decreased again even in 2011, 2012 and 2013, during a worse economic situation. A possible source of the increase may be that the option of filing for bankruptcy was mentioned in the media, and people thought filing might be a good idea, but, upon filing, they discovered that the Spanish Insolvency Law was not as good as they though it would be. The 2013 amendment to the Spanish Insolvency Law follows this model in the context of personal insolvency, and there seems to be no difference in its recognition of the discharge for natural persons with or without business activity. The remission of outstanding debts in case of liquidation is given to the debtor natural person. The wording is clear and has no limitation. Apparently.

This solution could be criticized by those who think that business activity, and the debts there originated, should be omitted from any discharge or specific individual insolvency model. However, there are many reasons to support a unified model. First of all, in a local sense, opting for a different solution would be inconsistent with the unified nature of the insolvency procedure and, in my opinion, should have required a separate law. Second, as the World Bank Report acknowledges, the boundaries between both categories not always are clear, which causes many problems when applying the rules, as the centenary experience of Spanish quiebra and suspension de pagos (limited to business activities) showed. And third, in a wider sense, the problems are similar and the solutions needed probably the same or very similar, policy consideration apart. As the World Bank Report states: “any debtor’s status as a natural person raises unique considerations that are at least equally central, if not more so, to the proper structure and assessment of a system for addressing natural person insolvency”. But, is it really true that there is only one solution and that it is independent of the nature of the debtor?

The impression is rather the opposite when the provisions regarding debt remission in liquidation for natural debtors (i.e., discharge, art. 178) are read together with the newly introduced mediation procedure for preinsolvency workouts (arts. 231 ff.). Natural persons, among others, can use this mediation procedure, but only if they develop a business activity.  This mediation can be unsuccessful and, therefore, the insolvency procedure should be opened. In this case, there is a special provision regarding debt remission in this procedure, with a different extent that the one generally given for insolvency of natural persons (art. 242). At the same time, the use of this special preinsolvency mediation is conditioned to certain requirements (art. 231.3), which, in the end, would serve as added eligibility conditions for this special discharge. I will cover both discharge and eligibility conditions in later posts; at this moment it is enough to say that they are different from the ones set up in general. As a consequence, under the new Spanish Insolvency Law, individuals with business activity could receive a different treatment in terms of discharge that individuals without if they try that preinsolvency mediation. In fact, they are treated better in that case. There is no express motivation to this difference, which has been criticized among us (CUENA CASAS, 2013) and could eventually raise questions of unconstitutionality because of inequality. In my opinion, a possible explanation could be the intention of promoting and supporting entrepreneurship, as the changes made have a clear connection with this goal.

The amendment of the Spanish Insolvency Law is the consequence of a law aimed at promoting entrepreneurship (Law 14/2013, of 27th of September). This origin could help to explain the different approach that provides entrepreneurs a better solution to insolvency and a more useful tool to start anew, with fewer restrictions. Nothing leads clearly to this conclusion, but if we need to think of a rational legislature, this reason seems plausible enough: si non è vero, è ben trovato. Furthermore, this question (how entrepreneurs assets are affected by his activity) is clearly present in other provisions of the Law 14/2013. It should be noted that this law has introduced what is called Entrepreneur with Limited Liability that, basically, consists of the possibility of preserving the entrepreneur’s main residence from being seized by the creditors for debts arising from the business activity (under certain conditions and with may limitations). This rule, however, plays no role in case of insolvency (in that case, insolvency rules seem to replace the Law 14/2013). Moreover, the protection given is frankly limited and, even if applied in insolvency, it would have a very limited effect (every other asset is seizable and creditors secured with that asset are not affected). A detailed explanation here is not necessary, but mentioning this figure was important because, in my view, it shows the possible connection of the insolvency reform with the protection of entrepreneur, as a way to promote that activity. In my new post, I’ll discuss the different regime for common and business natural debtors.