Which claims are paid first in insolvency proceedings?
When a company is involved in insolvency proceedings, the first task is to classify the creditors’ claims, because it is essential to determine who will recover its claims from the bankrupt company first.
Firstly, a distinction is made between the bankruptcy claims (“créditos concursales”) and claims against the estate (“créditos contra la masa”). Bankruptcy claims are liabilities of the company; they are all those debts that the bankrupt company has as a result of its activity, which existed before the declaration of the insolvency proceeding.
Credits against the estate are all those debts that have been generated after the declaration of the insolvency proceeding, plus those included in section 2 of Article 84 of the Bankruptcy Law which, in summary, correspond to the following: (I) salaries for the last thirty days of effective work prior to the declaration of the insolvency proceeding, with some limits; (II) costs and legal expenses necessary for the application and declaration of the insolvency proceeding, costs caused for publication of the judicial resolutions in accordance with the Bankruptcy Law, and the legal assistance and representation of the bankrupt entity and the bankruptcy administration throughout the complete procedure, (III) judicial costs and expenses incurred for the assistance and representation of the debtor, which continue or are initiated in accordance with the provisions of the Bankruptcy Law, (IV) maintenance, (V) those costs generated by the exercise of the business activity of the debtor after the declaration of the bankruptcy, including labour credits.
Claims against the estate have priority over bankruptcy claims. This means that, once the company has been declared bankrupt, any assets that may enter into the insolvency proceeding will be used directly to satisfy the claims against the estate on a pro-rata basis. Only once the credits against the estate have been satisfied will the bankruptcy credits be satisfied.
The Bankruptcy Law distinguishes between the following categories of bankruptcy claims (I) Prieferential credits, (II) Ordinary credits and (III) Subordinate credits.
Privileged credits are collected immediately after claims against the estate: (a) Claims with special priority (e.g. claims secured by mortgage or non-possessory pledge, claims arising from financial leases or sales contracts with deferred payment, claims secured by a pledge in an official document, and so on); (b) Claims with general priority, that will be paid after the claims with special priority have been satisfied (e.g. salaries with no special privileges with some limits, compensation following both the termination of contracts and accidents at work or occupational diseases, amounts corresponding to tax and social security deductions due by the debtor in fulfilment of a legal obligation, tax and other public-law claims and social security claims not enjoying special privileges, claims for non-contractual civil liability, claims for civil liability arising from offences against the Treasury and the Social Security, claims involving new cash receipts granted under a refinancing agreement, claims held by the creditor who requested the insolvency proceeding until fifty percent of their amount, and so on).
Ordinary credits are those defined by exclusion, as they are neither privileged nor subordinated, and shall be paid after the credits against the estate and the privileged credits, but before the subordinated ones.
Subordinated claims are the last credits that are going to be paid. Subordinated claims are, for example, claims that are included in the list of creditors by the insolvency administrator after the deadline; claims that had been considered as subordinated by an agreement; claims for surcharges and interest of any kind, including default interest, only excluding those with rights in rem, to the extent of the respective security; claims arising from fines and other financial penalties; claims held by creditors who are especially connected with the debtor, and so on.
Partner and lawyer in charge of the Litigation area at Devesa & Calvo Abogados