Imposing sanctions as a new measure to fight corporate default

Written on 21 Mar 2018

Spanish Congress debates a legislative proposal (Propuesta de Ley) to reinforce the fight against late payment in response to the European Union demand for the correct implementation of the Insolvency Directive (2011/7/EU). This proposal would establish a penalty system against defaulting companies.

The fight against late payment became relevant in Spain with the publication of Law 3/2004, of 29 December (national transposition of Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000). However, despite the number of amendments, Spanish Insolvency Law has been called into question over the years, as default is still a constant in business operations, mainly due to the lack of coercive measures to enforce the law.

Said failure to comply has driven the European Union to alert and formally demand from Spain (together with Greece, Italy and Slovakia) the proper application of its Directive on combating late payment in commercial transactions.

The legislative proposal presented to the Congress of Deputies in response to the demand of the European Commission intends to reform the existing regulations and includes, as a distinguishing element, an infringement and sanctioning procedure (non-existent until now) which, in the most serious cases, could exceed 800,000 euros of penalty.

Likewise, in order to facilitate the sanctioning task, it is proposed that the Treasury Department activates a mailbox, which would act as a whistleblowing channel, to anonymously communicate the supposed infringements in matters relating to late payments made in commercial transactions.

On top of that, the proposal defines the nullity of contractual terms in a more precise way and it also regulates a late payment arbitration system (Sistema Arbitral de Morosidad). The system works as an ADR, and would be of compulsory submission in agreements concluded with public entities. In addition, for the sake of transparency, both companies and the Administration would be required to make their average payment periods public.

Finally, with the aim of reinforcing institutional control, the creation of an Observatory on Default (Observatorio de la Morosidad) attached to the Ministry of Finance is proposed, whose role would be to prepare reports and action proposals to fight late payment.

With this set of measures, the Congress seeks to reinforce the binding nature and enforceability of the regulation and, at the same time, respond to the continuous claims of companies to remedy the fight against default.

In any case, the legislative proposal still has a long way to go through the Congress, so time is needed until the definitive law is published in the Spanish Congress Gazette.