The Spanish Bankruptcy Act (Ley Concursal) imposes the opening, or not, of the rating section depending on the onerous nature of the agreement for the creditors. Thus, there is no need to open the section if the approved agreement is “not onerous” for the creditors, that is, it imposes a deduction of less than a third of the amount or a waiting period of less than three years (Art. 167 LC and Art. 446.2 TRLC).
From which it can be deduced that the possibility of classifying the conduct of the bankrupt party as “guilty” is not so much an instrument in benefit of the bankruptcy as the consequence of a “moral” assessment of the agreement. In its original text the Bankruptcy Law articulated this assessment by means of a legal reproach (if the proposal exceeds the limits, there will be a rating piece); but as a result of the reform introduced with Law 38/2011 it is articulated as a reward: if the proposal does not exceed the limits, there will be no bankruptcy rating, which is at the expense of the compensation of the creditors who see their possibilities of recovering their credits in full reduced.
The “reversal” of the way in which the condition of “onerous” or not of the agreement is articulated has relevant practical effects for the opening of the rating; whereas according to the previous regulation both it removes the rating and the wait should be kept below their respective thresholds; according to the current regulation it is sufficient for one of them to remain below the fixed limit. The paradox of the legal reform is that – despite establishing as a general rule the devaluation of the agreement (all agreements are negative for the creditors) – the way in which the exception to the rule is articulated (rewarding the agreement that is less negative) has made it much easier for the bankrupt party to avoid its rating.
This has been interpreted by Judgment 61/2019 of the First Chamber of the Supreme Court, of 31 January: it is sufficient for the agreement to include “a deduction of less than one third of the amount of its credits” or to include “a waiting period of less than three years” to avoid the opening of the rating section. Before the 2011 reform, a deduction of more than one third or a wait of more than three years would have been enough to trigger the opening of the rating section.
This interpretation, as the Court itself points out, is too beneficial or permissive for the bankrupt party and therefore, in all probability, it could be the result of a drafting error by the legislator; however, as this wording has been reiterated, and not corrected, both by Royal Decree-Law 11/2014 on urgent measures in bankruptcy matters, and by the Revised Text itself, it must be considered the correct secundum tabulas.
An alternative interpretation would be that the legal expression “a deduction of less than one third of the amount of its credits or a waiting period of less than three years” would correctly mean that only agreements that propose a deduction of less than one third of the amount of the credits – but without waiting – or a waiting period of less than three years – but without deduction – would allow the bankruptcy classification to be avoided; This interpretation would be forbidden by the Explanation of Reasons of Royal Decree-Law 11/2014 (Point V), which literally refers to “so that only when each and every creditor classified in the bankruptcy process in the same way is affected by the deductions and waits that are lower than what is provided for in the precept, the formation of the qualification section will not proceed”, thus admitting that the deduction or wait below the “not onerous” threshold coexists or is accompanied (conjunction “and”), respectively, by a wait or a deduction.
Therefore, not harming the creditors excessively is considered, in the valuation substratum of the norm, sufficient merit to be freed from the threat of the guilty classification of the bankruptcy, which allows the administrators, in the broad sense, of the bankrupt company – who are the ones who design the proposal of agreement – not to be threatened with the sentence to cover the bankruptcy deficit. From the point of view of the social creditors, if the agreement does not harm them excessively, they will lose any possibility of being fully compensated for their credit.
In line with the above, the First Chamber of the Supreme Court, in its Ruling 456/2020 of 24 July (rapporteur Ignacio Sancho Gargallo), deals with proposed agreements with alternative “light” content. The Sentence is very reasonable and convincing, although it is not very extensive because the Provincial Court of Oviedo had already done most of the work, which the Supreme Court endorses.
The summary of the facts is as follows: A bankrupt company dedicated to modular construction presents its creditors with a proposal for an agreement whose content offers three alternatives: two of them did not exceed the threshold under which the proposal could be approved with the votes of 50% of the ordinary liabilities (art. 124.1.a LC); and the third – which is the interesting one – was aimed especially at “creditors with credits equal to or less than 2,000 euros” proposing their collection “without removing or waiting for the fifth working day following the firmness of the Judgment approving the agreement”. In other words, all the creditors thus defined – who were barely 1% of the ordinary liabilities – would be paid in full immediately.
As can be seen, the three-way proposal for the arrangement combined the relative ease of its approval (50% of ordinary liabilities) with a formula specially designed to avoid the opening of the rating section. And, finally, the agreement met the two majorities required for its approval (Art. 125 LC, Art. 378 TRLC), and so the Court issued a ruling declaring the agreement approved, as the effects of the tender had concluded and the bankruptcy administration had ceased, and all of this – in accordance with that established in Article 167.1 (II) LC – without the qualification of the tender being appropriate.
However, two of the ordinary creditors appealed against this resolution, as they considered that the approved agreement contained an alternative that was exclusively motivated by the need to avoid the opening of the bankruptcy qualification section.
The Provincial Court of Oviedo stated in its ruling that
“the alternative provided for appropriations of less than EUR 2 000, which provides for their full payment on the fifth working day following the date on which the judgment approving the agreement becomes final, could not exempt the opening of the assessment section either. We can effectively admit the holders of such credits as one of the classes referred to in Art. 167-1 LC as recipients of a non-burdensome content of the agreement, bearing in mind that the reform of Royal Decree Law 11/2014 also introduces into its objective scope the classes established in Art. 94-2 LC, which means a non-exclusive extension of other types of classes provided that their members can be identified by any objective criterion such as the amount of their credits, as occurs with art. 125 LC when regulating agreements with special treatment for certain creditors or groups of creditors determined by their characteristics. However, in order to avoid the introduction into the agreement of this type of alternative proposals with the sole purpose of avoiding the opening of the rating section, it will be necessary to add the requirement that the recipients of this beneficial treatment must be qualitatively (as occurs with the groups of creditors in Art. 94-2 LC) or quantitatively significant, since otherwise, if the vast majority of creditors are subject to sacrifices that the legislator considers excessive, the agreement will continue to be onerous. And this is precisely what happens in the present case in which it seems clear that the wording of this alternative for credits of less than 2,000 euros has no other objective than to avoid the opening of the rating section, and since this type of creditor does not meet the requirements to which we have referred, the agreement must be considered burdensome in accordance with the regulation of Art. 167-1 LC, and consequently the appeal on this point must be accepted in order to revoke it”.
To which the Supreme Court responds that, in effect, the artificial creation of classes of creditors implies fraud by law (art. 6.4 CC) and that
“With this, to the doctrine set out in the aforementioned ruling 61/2019, of 31 January, we now add the clarification that the exception to the opening of the rating section will not operate when the most beneficial treatment affects a class of creditors that is so irrelevant, qualitatively or quantitatively, that it makes it clear that, under the apparent formal fulfilment of the legal condition for the exception to operate, there is a fraud of law that seeks to evade the bankruptcy rating.”
In accordance with this doctrine, it will henceforth be required that, in order for the rating section not to be opened, the class of creditors to whom a special arrangement proposal is addressed should enjoy a dual relevance: quantitative and qualitative.
From a quantitative point of view, the judgment does not enter into the determination of the threshold of relevance in the passive mass that a class of creditors must have, which, in my opinion, could be determined in accordance with either of the two quantitative parameters that the passive mass has: the number of creditors that the class has and the percentage of the total passive mass that the class’ credits represent.
And from the qualitative point of view, it should be noted that Article 446 of the TRLC has substantially changed the wording of the rule with respect to the former Article 167 LC, since the revised rule limits the classes and subclasses of credits to which a light agreement proposal is addressed to those established by the TRLCU itself (Articles 269 and ff.), thus imposing the requirement of legal classification of the class of creditors to which the proposal is addressed.
The conclusion of these brief lines is that the class of creditors to whom a proposal for a light agreement that can avoid the opening of the rating section is addressed must meet the requirements of (1) quantitative relevance and (2) legal typicality, conditions that prevent the artificial creation of classes of creditors to whom an ad hoc proposal is addressed to avoid the bankruptcy rating section.
* Article published in its original version in “Almacén de Derecho” on 14.12.2020