The Supreme Court lifts the protection enjoyed by public claims in ‘fresh start’ scenarios
On July 2, 2019, the Supreme Court delivered a landmark judgment dealing with the requirements to be met to secure the discharge of debts through the so-called ‘fresh start’ mechanism. Under Spanish law, ‘fresh start’ refers to the situation where a debtor is relieved of paying outstanding debt. It is a tool that may be used by individuals (traders, freelancers and heavily indebted consumers) to shed their debts, which will be released, enabling them to undertake new ventures.
Let’s take a look at the main conclusions that can be drawn from the judgment.
No more protection for public claims
The first conclusion is that a debtor who receives debt relief will be able to shake off all debt classified as ordinary or subordinated debt, including debt in the form of public claims. Moreover, this possibility exists regardless of whether the debtor has opted for immediate cancellation (which requires prior payment of a minimum amount of debt) or deferred cancellation (through a payment plan).
The clarification provided by the Supreme Court — to the effect that debt cancellation also covers ordinary and subordinated public claims (such as interest) — is extremely important. Until this judgment was delivered on July 2, 2019, it was unclear whether or not public claims were immune from the fresh start mechanism. This most recent judgment of the Supreme Court lifts the protection enjoyed by public claims; from now on, debtors who want a fresh start and desire to free themselves of the debts they owe to the tax or social security authorities will be able to do so without having to repay those public claims in full.
The second conclusion to be drawn from the Supreme Court’s judgment is that the procedure by which distressed debtors may obtain debt relief and a fresh start must be flexible. Thus, the Court confirmed that a debtor may opt for either of the two legal options in order to become debt free (immediate cancellation or deferred cancellation through a payment plan), without their being any impediment to switching between those options, even if one has already been chosen, as occurred in the case under consideration in the judgment. In this way, a debtor may elect both relief options, one after the other, if the first does not work. All the debtor has to do is comply with the legal guarantees and allow any third party to express a view on whether or not the requirements for switching between options are met.
No need for deferral or instalments at a later stage
The third conclusion of the Supreme Court is that debtors may secure debt relief or a fresh start, shedding all of their ordinary and subordinated debt, if, in addition to satisfying the other requirements, the proposed payment plan allows, in the opinion of the court hearing the case, payment of the debt that cannot be canceled by law (post-insolvency order claims and generally preferred claims). In that respect, the Supreme Court makes it clear — this being the main development ushered in by the judgment — that the plan for payment of the ‘non-cancelable’ debt may contain provision for deferral and instalments of the public claims, without there being any need for the creditor (usually the tax or social security authorities) to consent to such deferral or instalments. Until this judgment, the interpretation of the law had pointed in another direction, and it appeared that the tax or social security authorities had to agree to grant such benefits. It will now be a matter for the court hearing the case to decide whether the deferrals and instalments are reasonable, although public creditors will naturally have the right to be heard on the issue of said reasonableness (however, the Supreme Court hinted that their opinion will not be binding on the court hearing the case).
Claim amounts may be reduced
Finally, the recent judgment of the Supreme Court goes a step further and leaves the door open to the possible reduction of claims (including public claims) within the payment plan. On this issue, the interpretation of the judgment that has garnered most consensus is that the court hearing the case may approve, in some cases and after considering all the circumstances, certain reductions so as to adapt the repayment of the claims to what the debtor is objectively capable of paying within the statutory term of five years. To that end, account will be taken of the quantity and status of the debtor’s assets and his disposable income.
This possibility of applying reductions raises a number of issues, which the Supreme Court’s judgment does not address. The most pressing issue is whether distressed debtors who opt for a fresh start through the immediate cancellation route are also eligible for reductions — reductions such as those which, according to the Supreme Court, may be applied by debtors who choose deferred cancellation or the payment plan option.
Winds of change from Europe
In a nutshell, the Supreme Court’s judgment provides a foundation that can be built on enabling the fresh start mechanism to become reality alongside the full cancellation of debts held by traders, freelancers and heavily indebted consumers.
In taking this step, the Supreme Court has carefully considered the European Commission Recommendation of 12 March 2014 and Directive (EU) 2019/1023 regarding the fresh start mechanism.