Necessary Insolvency Proceedings and the hasty or ruinous liquidation of assets by the debtor.

The hasty or ruinous liquidation of assets by the debtor is a revealing fact of its insolvency. Thus, it is contemplated by the Consolidated Text of the Insolvency Law in its second article. Consequently, when a creditor requests a debtor’s insolvency proceedings, it may do so on the basis of this fact.

Are asset stripping and hasty or ruinous liquidation the same thing in the context of insolvency proceedings?

When creditors file for insolvency proceedings against one of their debtors, they must do so on the basis of established facts. These facts are known as facts revealing insolvency. One of these facts is the lifting of assets and the hasty or ruinous liquidation.  Although both concepts are united in the legal precept, they refer to different situations.

On the one hand, asset stripping in insolvency involves the debtor concealing assets through contracts without cause. On the other hand, in ruinous or hasty liquidation, the debtor disposes of its assets through a lawful transaction. However, the reprehensible conduct of the debtor is the manner in which the liquidation is carried out. This type of liquidation is detrimental to the creditors.

It is also noteworthy that the insolvency law does not refer to the crime of concealment of assets as defined in the criminal code.

What is asset stripping?

The concealment of assets consists of hiding assets  or rights of the debtor or even making them disappear . This concealment is done through legal transactions without cause and lacking publicity. In addition, in order for there to be concealment, there must be damage, either actual or potential, to the rights of a creditor. The purpose of this conduct is to keep such assets out of the reach of creditors for collection.

Si te ha interesado este artículo no dudes en leer:

Rescission in the Bankruptcy Procedure. The Reintegration

The purpose of the rescission action is to prevent the debtor, in anticipation of insolvency, from safeguarding assets, hurting creditors.

What is a hasty or ruinous liquidation?

Liquidation refers to the sale of assets and rights to pay debts. However, what the insolvency law considers to be a fact revealing insolvency is not the liquidation itself. In order for the liquidation to reveal insolvency, a series of requirements must be met. In the first place, it must be a total liquidation of the debtor’s assets or of its most relevant assets. This was established, among others, by the Commercial Court No. 6 of Madrid, in its order 290/2014. In addition, one of the following requirements must be considered in addition to the previous one, that the liquidation is either hasty or ruinous. The hasty liquidation refers to that which is carried out with particular speed. Ruinous liquidation, on the other hand, refers to a sale resulting in serious losses to the debtor’s assets. The latter occurs, for example, when assets are sold at prices well below market prices. Likewise, order 290/2014 also mentions the existence of ruinous liquidation on another occasion. Ruinous liquidation will be appreciated when the conditions of the transfer of the assets are not stated.

What are the requirements for asset stripping?

The asset stripping, although generally associated with the criminal jurisdiction, has been discussed by the civil jurisdiction. Specifically, it has been analyzed by the commercial courts and the provincial courts in the area of insolvency.

Thus, the lower courts have developed the concept of asset stripping, especially in relation to bankruptcy qualification. Among others, it has been explained in judgment 185/2019 of the Mercantile Court No. 1 of Murcia. This is because art. 443 TRLC (Insolvency Act) contemplates it as a presumption “iuris et de iure” of guilt. Specifically, the lifting must meet the following requirements:

1. Prior existence of a credit right of a creditor.
2. A displacement of assets that does not originate from an existing and legitimate legal transaction.
3. That the debtor’s assets are totally or partially reduced. It is not a question of the debtor’s assets being reduced to zero. A sensu contrario, it can be considered as an insolvency proceeding only with a decrease in assets.
4. The reduction of the assets must prevent or hinder the creditor’s collection of its claim. The insolvency law establishes that this must prevent or hinder a seizure, whether potential or in execution.
5. It is necessary that this asset displacement causes or may cause damage to the creditor’s right. Therefore, it does not require a direct, real and effective damage, a potential damage is sufficient.
6. Finally, unlike in the criminal order, no intention of the debtor is required. Only an objective element is required, the damage to the creditor, but not a subjective element, the will and knowledge of such damage. In insolvency proceedings it is sufficient that the debtor knows the possibility of causing damage.

What is the difference with the fraudulent disposition of assets?

Although the debtor’s asset stripping leads to the guilty qualification, this is not the only presumption of guilt. The insolvency proceeding will also be declared guilty in the case of fraudulent disposition of assets. Both are concepts that a priori seem closely linked, but which have significant differences. These differences have been recently emphasized by judgment 2508/2020 of the Commercial Court No. 6 of Madrid. They are summarized below:

A) With respect to the business:

In the fraudulent exit of goods there is no concealment of goods. The displacement of assets is carried out by means of an external legal transaction known by third parties. On the other hand, the asset seizure is a fictitious asset displacement, without any cause that justifies it. While, in the fraudulent removal of assets, the legal transaction is not only known but licit and it justifies the displacement. Thus, fraudulent conveyance of goods includes actions such as the so-called due acts. Among these acts is the payment of due and payable debts.

B) Regarding its temporality:

The lifting implies a displacement of assets that can occur both before and after the declaration of the insolvency proceeding. On the contrary, the fraudulent removal of assets takes place before such declaration. This is how it was assessed by the judgment 185/2019 of the Mercantile Court No. 1 of Murcia. Specifically, the fraudulent exit of assets must have occurred in the two years prior to the declaration of the insolvency proceeding.

C) Regarding the fraudulent intent:

In the assets stripping the objective is to hinder the creditor’s collection by means of seizure of assets or rights of the debtor. However, a specific intention in the debtor’s will is not required. It is sufficient that the debtor knows of the possibility of harming the creditor in order for the uprising  to be appreciated. On the other hand, fraudulent disposition requires that the debtor knows that a prejudice is being caused. Thus, this distinction in the volitional element is fundamental. Because in one the debtor assumes the possibility and in the other the debtor knows that he is causing damage. Therefore, the difference between both presumptions is in the “scientia fraudis”. This Latin concept alludes to the knowledge of causing damage.  This difference was appreciated by STS 1409/2015 of April 10.  However, “animus nocendi” is not required, understood as the will of the debtor to cause damage to the creditor. It is required exclusively in the words of the high court “a simple consciousness of causing it”.

How to prove the assets stripping?

In the insolvency field, this fact revealing insolvency in applications for insolvency proceedings is the most difficult to prove. Mainly, this difficulty is due to the improbability of a creditor knowing these facts before the application. However, in the qualification of the insolvency proceeding, the insolvency administrator may know these facts and have the evidence. This is because the insolvency administrator has inside knowledge of how the company acts or has acted.  In fact, the courts themselves speak of the difficulty of this being proved by a creditor. As the AAP Baleares 49/2007 states, the proof of the insolvency facts must be based on documentary evidence. But, in the case of the lifting it is complicated that the creditors have access to such documents.

Therefore, when the creditor wants to prove the asset stripping, it will only be necessary to provide documents that prove evidence of the asset stripping. Examples of evidence of asset stripping could be:

• The donation of assets to relatives.
• The transfer of assets between the debtor company and another company of new creation in which the administrator coincides.
• The transfer of assets close to the date on which certain credits will be due and payable.
• The apparent divorces between administrators spouses, when they divorce, but continue living together and sharing expenses.
• Encumbering an asset with a security interest in favor of a close relative.

The disadvantage, then, is that the circumstantial evidence does not constitute full proof of the facts and may be disregarded.

Conclusions

The asset stripping in insolvency law does not have the same requirements as in criminal law. For example, the purpose of harming the creditor is not required. However, the volitional element is taken into account when differentiating it from the fraudulent disposition of assets. The latter requires that the debtor knows that his act causes damage to the creditor. Unfortunately, proving a creditor’s fraudulent conveyance is difficult due to the inability to obtain documentary evidence beyond indications.

If this article has been of interest, we also suggest you to read the following article published on our website:

Liability for aggravation of insolvency

Relevant accounting irregularities

Delay in the Bankruptcy Procedure´s Application