Vol 4 (2007) - Issue 5

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Insolvency Law and Claw-back Actions

1. Introduction

The Insolvency Law 22/2003, of 9 July (the ‘Insolvency Law’) introduced a new system of ‘rescission’ actions which has replaced the ‘retroaction’ mechanisms formerly contemplated under the bankruptcy provisions in the Spanish Commercial Code of 1885. The Preamble of the Insolvency Law itself explains that one of its purposes is that ‘the disturbing system of retroaction is replaced by specific claw-back actions aimed at the rescission of acts prejudicial to the insolvent’s estate’.

The new regulation means a necessary and awaited overcoming of the prior situation in two different ways:
1. The absolute ‘retroaction’ provided for in article 878 paragraph 2 of the Spanish Commercial Code is repealed. According to this article, any and all of the acts carried out within the retroaction period of the bankruptcy became null and void ipso iure without the need for any judicial resolution on the matter. The categorical terms in this article resulted in an intense debate onto whether the effects of the nullity those terms were absolute or it was possible to cure those acts in any way. The Supreme Court case law, however, maintained a mostly rigid interpretation of this article, whereby any and all acts caught by the retroactivity were null and void regardless of whether or not such act had been in fact detrimental for the insolvent’s estate and without the need for an express judicial resolution on each of those.

2. A relative claw-back system is adopted, and a twoyear period is fixed by law for the exercise of the insolvency claw-back action.

Some scholars have argued that this period is not realistic and have criticised that it should be set by the law. In their view, it is the court that should fix this period, without any time limit. In our opinion, however, having the time period set by the law seems more appropriate, namely because of the following:
On the one hand, the Insolvency Law has tried to make legal certainty prevail and to eliminate uncertainty in relation to acts and contracts that were entirely valid when they were entered into and that after a long period of time might be rescinded. The new regulation offers the dealers increased certainty in respect of the period after which an insolvency rescission cannot take place.

On the other hand, creditors are not unprotected against a possible agreement entered into prior to this two-year period from the declaration of insolvency. The truth is that, in such cases, the new regulation allows creditors to challenge those agreements on the basis of general provisions of Spanish law such as the so-called rescission based on creditor’s prejudice under the Spanish Civil Code.
In a way, with the new system regulated under articles 71 to 73 of the Insolvency Law under the title ‘Of the effects of the declaration of insolvency for the assets’, the legislature has tried to give away with the subjective component or consilius fraudis. The result is an ‘objectivation’ of the special rescission system, although with nuances.

Therefore, fraud disappears as a requirement to bring a claw-back action within insolvency proceedings and the only requirement is to prove a detriment to the insolvent’s estate and the execution of an act or transaction by the insolvent within two years prior to the declaration of insolvency.

Notwithstanding the referred objectivation of clawback actions within insolvency proceedings, bad faith is also relevant in this kind of action since, in many cases, the insolvency administrators will not only attempt to obtain the rescission of an act or transaction but also to prove the bad faith of the creditor in order to avoid the reimbursement of assets or rights.