Spain: Corporate Succession And The Sale Of Production Units – It Is Worthwhile Limiting Their Scope In Judicial Insolvency Proceedings?

The current article 149.4 of the Law on Insolvency (LC), after its amendment by Royal Decree 11/2014 that was subsequently confirmed by Law 9/2015, establishes that in the event of the transfer of production units it will be held "for employment and Social Security purposes, that a corporate succession has taken place".

If we review the Preamble to the aforementioned Royal Decree 11/2014, we see how legislation has explicitly resulted in the transfer of the liability for Social Security by the purchaser of the production unit.

In spite of the corporate succession being evident, the current text of article 149.4 has caused the Commercial Courts to question if this corporate succession must apply to all of the employees of the insolvent company or instead merely to those employees transferred as part of the sales process relating to a production unit.

In this respect, there are three theories advanced in order to resolve this matter, which have given rise to contradictory rulings:

The first theory is a wide-ranging theory which argues that article 44 of the Workers' Statute (ET) must apply to its fullest extent, incorporating all of the employment and Social Security liabilities not covered by FOGASA (Fondo de Garantía Salarial – Wage Guarantee Fund) in accordance with the same article 149.4 LC. This has been the decision, for legal certainty, of Barcelona Commercial Courts nos. 9 and 10 in their Orders dated 24 July 2015 and 23 December 2015 respectively, by taking the view that the jurisdiction to resolve such a matter belongs to the employment courts, in light of the Ruling of the Supreme Court of 29 October 2014 (Ruling 1573/2013). In spite of this judgment, it is worth noting that both decisions demonstrate explicitly that the criterion to follow should be the application of the succession solely to the subrogated employees.

The second, more limited theory is of the view that there is only a corporate succession with regard to the transferred employees. In this regard, the Commercial Courts, such as Valencia Court no. 1 in its Order dated 29 April 2016, believe that, to the extent that article 149.4 LC, when it establishes the existence of corporate succession for employment and social security purposes, does not make it clear if it is referring to the general liability for the transferred employees or to the other employees as well, a wide-ranging interpretation thereof cannot be drawn but, departing from the Community Directive that talks of the "employment contract in force" at the time of the sale, we can advocate the succession merely in respect of the employment contracts in force to which the purchaser is transferred.

Finally, the third theory, which lies between the other two, maintains that the corporate succession must apply to the employment contracts in force at the time that the offer is made, regardless of whether or not the purchaser is transferred to the production unit, as Barcelona Commercial Court no. 2 declared in its Decision of 7 May 2015.

Given that to date the Supreme Court has not declared their opinion on this matter, we find ourselves with contradictory judicial decisions from the Commercial Courts at the very time of deciding as to the extent of commercial succession, thereby causing serious legal uncertainty for the bidder for the production unit.

The existence of a risk that corporate succession may be ordered according to the liberal version is causing a breakdown in the sales of production units due to either the lack of offers being put forward, or offers at meagre prices where the bidder discounts this price by the cost corresponding to the total liability represented by the employees and Social Security.

This is the case for those interested in purchasing production units, since they are aware that, as Barcelona Commercial Courts nos. 9 and 10 have pointed out, it will be the Courts who will rule as to whether or not there is a corporate succession, and practice has shown that indeed corporate succession is being determined liberally, namely by including both subrogated and non-subrogated workers in the liability incurred.

In view of the above, although legislation via this method attempts to guarantee the collection of Social Security contributions, the fact is that corporate succession in the area of insolvency has translated itself into an increase in liquidation proceedings culminating in the isolated sale of the assets of the bankrupt, the termination of all the jobs and ultimately the demise of the company.

Taking into account the criteria of the Commercial Courts who maintain that succession applies solely to transferred workers, and bearing in mind that the Law on Insolvency seeks to preserve companies or production units, as is explicitly apparent in its Preamble, there is a need for legislative reform which limits, in judicial insolvency proceedings, corporate succession for employment and Social Security purposes.

It is only in this way that, with the requisite legal safeguard, the sale of production units could be encouraged guaranteeing the continuity of business operations and the maintenance of jobs, all of this thus resulting in, incidentally, an increase in Social Security Contributions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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