Is seizing assets an effective way of collecting debt?

Image Article 6 - Effectiveness of seizing assets_EN

Having a court ruling that recognizes your right to collect a debt from a debtor does not guarantee that you will be able to collect the amount due, in whole or in part. This means that a situation may arise where, after spending time and money in legal proceedings to claim an outstanding debt, even if the court rules in your favour, the debtor may not want to voluntarily pay the debt as ordered by the judgment. What can you do in these situations?

If a court rules in favour of the debt collector, but the debtor does not voluntarily comply with the resulting obligation, proceedings must be commenced to enforce the judgment. The purpose of this is to collect the debt by seizing (and subsequently liquidating if necessary) any assets owned by the debtor. 

What assets can and cannot be seized?

Judicial seizure is a procedure that follows a court order and allows a debtor’s assets to be seized in order to liquidate them and satisfy a judgment debt previously awarded by a court. In Spain, sadly the best-known type of foreclosure is a home foreclosure in the event of mortgage default. 

Other types of property can also be seized in the scope of Article 592 of the Spanish Civil Procedure Act (‘LEC’):

  1. Cash or current accounts of any kind.
  2. Receivables that can be realised immediately or in the short term, and titles, securities or other financial instruments that can be traded on official secondary markets. 
  3. Jewellery and works of art.
  4. Income in cash, regardless of its source and the reason for its accrual.
  5. Interest, income, and revenue of any kind.
  6. Movable property or livestock, non-listed shares, titles or securities and company shares.
  7. Property.
  8. Wages, salaries, pensions, and income from professional and commercial work carried out on a self-employed basis.
  9. Receivables and securities that can be realized in the medium and long term.

The LEC regulates both the order of the assets that can be seized (preferably cash and bank accounts rather than other types of assets), since these are assets whose seizure affects debtors the least and are easier to turn into cash, so they are sought first; and the limit of the value of the assets that can be judicially seized (assets cannot be seized for an amount greater than the debt). This is intended to prevent, for example, a lien on a property for a negligible amount of debt, considering all the negative consequences that this may have for the debtor. 

The LEC also establishes those assets that cannot be seized under any circumstances:

  1. Non-transferable assets.
  2. Accessory rights that are non-transferable, regardless of the principal.
  3. Intrinsically non-estate assets.
  4. Assets that cannot be seized under any legal provision.

In addition, Article 606 LEC establishes that the following assets cannot be seized:

  1. Furniture and household items, as well as the clothes of the individual facing foreclosure and their family, insofar as they cannot be considered to be superfluous. In general, assets such as food, fuel, and others which, in the opinion of the court, are deemed reasonably essential for the subsistence of the individual facing foreclosure and their dependents. 
  2. Any books and instruments necessary for the individual undergoing foreclosure to engage in their profession, art, or trade, provided that their value is not proportional to the amount of the debt claimed.
  3. Sacred objects and those used for worship in legally recognised religions.
  4. The amounts that cannot be seized by Law.
  5. Any assets and amounts that cannot be seized under Treaties ratified by Spain.

Finally, Article 607 of the LEC regulates the seizure of salaries and pensions, and establishes that ‘the wages, salary, pension, remuneration or any similar sources of income shall not be seized if they do not exceed the minimum wage amount.’

Situations that may arise if assets are seized

The fact that the LEC allows seizure of assets and a court recognises this as a possibility (with the limitations discussed in the previous section) does not always mean that there are any assets to be seized, especially when the debtor is a legal person. 

There are a number of different possible scenarios in this case, which are summarised below: 

  • The debtor does not have any assets or receivables that can be seized. In this case, the creditor’s chances of recovering the debt may be practically non-existent, as the company may even have discontinued its business operations. Therefore, it is advisable to run a brief credit check on the person with whom you intend to enter into a contract beforehand; otherwise, it can be done before filing the claim, to determine if there are actually any assets to secure any possible debts. 
  • The debtor only has current accounts, but no other assets. Initially it would be the best-case scenario because it should be the easiest and fastest way to recover the debt (they owe you cash, and cash can be seized). The problem comes when the current account balance is not enough to cover the debt. In this case it should be analysed and confirmed whether the debtor is engaged in any business operations in order to assess if debt can be collected in other ways.
  • The debtor has different types of assets. If there are any current accounts or cash available, this will be the first thing to be seized, according to the LEC. If this is not enough to cover the debt, then other assets (property, cars, personal property, etc.) will be seized. The problem is that, to convert these assets into money to collect the debt, a petition needs to be filed with the Court requesting that an auction sale of the assets of the debtor be held. This procedure is subject to specific requirements and may take a long time, so it is not easy to collect debts in this way either. 

Ultimately, having a favourable court ruling is not always equivalent to recovering the debt, since the seizure of assets may not be effective. Therefore, it is important to analyse the situation of the debtor both before filing the claim and during the legal proceedings. 

In order to recover the debt, it may even be more effective to try to reach a settlement to collect at least part of the debt than to obtain a judgment and the seizure of some assets… which will not  guarantee that the debt will be fully recovered. 

If you are looking for an expert lawyer in commercial law  and litigation law to advise you on a possible seizure of assets, contact me here. I can help you!

Is it possible to register a company’s liquidation when there is only one creditor involved?

liquidate a company

Every year more than 90,000 companies are incorporated in Spain and about 20,000 are dissolved, according to the Company Statistics provided by the  Spanish Institute of Statistics (INE). One in four liquidations are voluntary, but the rest are the result of insolvency proceedings that attempt, as far as possible, to respect the rights of creditors.  A common question asked is whether it is possible to liquidate a company when there is only one creditor involved and there are not enough assets to pay the outstanding debts. What can be done in these cases?

Corporate liquidation is the process by which a company is wound up by a liquidator. This involves, firstly, conducting an inventory and a balance sheet review to assess the company’s assets and liabilities; secondly, paying debts and collecting receivables; and, lastly, preparing a final liquidation balance sheet, which will include any surplus cash to be distributed to each shareholder.

A basic principle of Spanish corporate law, and therefore a requirement for the liquidation of a company, is that all creditors must be paid in full before any equity holders receive anything and. In other words: no distributions can be made to shareholders unless all existing debts have been paid.

The prerequisite involving paying creditors in full (or consigning or securing their claims) assumes that either there is sufficient equity or there are assets available to satisfy any outstanding debts. The question is, what happens in those cases in which there are no assets to pay the debts? Is the company forced to remain in business indefinitely?

The doctrine of corporate liquidation when only one creditor is involved

If there are insufficient assets available to pay the debts and there are multiple creditors, the procedure to liquidate a company is to commence  insolvency proceedings . However, if there are no assets available to pay outstanding debts and there is only one creditor involved, engaging in insolvency proceedings may not be the right option, since having several creditors is a requirement to initiate and conduct insolvency proceedings.

There may be companies that have only one creditor and insufficient assets to pay their outstanding debts, but cannot commence insolvency proceedings because they do not meet the requirement indicated above. In these cases, the liquidation may not be accepted and entered in Companies House on the basis that it is necessary to have satisfied all the creditors claims for a company to be regarded as having been liquidated.

In these cases, the General Directorate of the Registry and Notaries (DGRN) has established the doctrine of allowing the liquidation to be officially registered and, therefore, cancelling such company’s register entries. The DGRN has held that shareholders cannot be ‘forced’ to keep a dissolved company registered with Companies House once the liquidation procedure has been carried out (even if insolvency prevents the company from satisfying the debts owed to its only creditor).

This doctrine is based on the following:

  • Strictly speaking, for the purposes of registration with Companies House, there is no rule that makes the removal of register entries of a company conditional upon its lack of assets prior to being declared insolvent.
  • In order to remove the company from the register at Companies House, it is an essential requirement to have a liquidation balance sheet that shows the lack of assets to pay the creditor’s claims. These statements are made under the responsibility of the liquidator and, therefore, the liquidator will assume any consequences resulting from the balance sheet misrepresenting the company’s actual figures.
  • The removal of a company’s entries from the register does not harm the creditor, because the company’s ability to hold rights and duties remains. Nor does it prevent any subsequent liability of the company – and of the liquidator – if, after removing the company from the register, new corporate assets emerged that had not been taken into account for the liquidation. Likewise, this does not leave the only creditor unprotected, as the creditor can take legal action against the company, shareholders, administrators, or liquidators if the lack of payment is attributable to any of them.

However, the doctrine of the DGRN does not apply automatically, and there are some registrars who are reluctant to remove liquidated companies when the liquidation balance sheet states that there is only one creditor.

Effects of the new Insolvency Act

Regarding the application of this doctrine, it will be necessary to monitor how the DGRN approaches this type of situation in the light of   Royal Legislative Decree 1/2020, of 7 May, which approved the consolidated text of the Insolvency Act . The new Insolvency Act provides for insolvency proceedings to be terminated when the insolvent debtor’s assets are insufficient. Termination will therefore be simultaneous with the declaration of insolvency.

This means that the Court may decide that the proceedings must be terminated while at the same time declaring insolvency when the available assets are found to be insufficient to satisfy the costs of the proceedings, and when it is not it is foreseeable that actions for reimbursement or for third party liability will be lodged; or that insolvency may be considered fraudulent. It also provides for the termination of the insolvency proceedings when only one creditor appears on the creditors’ list.

Therefore, despite the options provided by the doctrine of the DGRN, it is always advisable to either conduct an orderly liquidation, seeking to pay all creditors involved; or to commence insolvency proceedings to be declared insolvent and have the proceedings terminated. This would be the previous step to the company being registered with Companies House as having been liquidated. In this way, the option of having the process involving a single creditor registered, without engaging in insolvency proceedings, is clearly exceptional and should be used as a last resort if an orderly liquidation has not been possible.

Are you involved in insolvency proceedings or corporate liquidation? Seek legal advice!