The subversive capacity of Royal Decree 463/2020

Written on 26 May 2020

Royal Decree 463/2020, of 14 March, declared the state of alarm to manage the health crisis caused by COVID-19 and any future regulating bodies. This article discusses its impact and makes particular reference to section 5 of the Insolvency Act.

The second additional provision of Royal Decree 463/2020 (“RD”) suspends the legal deadlines of all jurisdictional orders, as well as any non-essential judicial actions. The suspension was agreed to by the General Committee of the Judicial Power (Comisión General del Poder Judicial (“CGPJ”)) and was adopted on 14 March 2020. This point also covers the terms of the Commercial Courts that focus on insolvency, among other matters, and which constitute the civil jurisdiction. Therefore, this suspension does not include actions that are essential and central to insolvency proceedings.

Before addressing this issue, we should point out that, under article 365 of Royal Decree-Law 1/2020, of 2 July, which approved the consolidated text of the Companies Act (“CA”), the company's directors are responsible for calling the general meeting. Calling the meeting should be done “within two months to approve the company's dissolution or, if the company is insolvent, to urge the beginning of insolvency proceedings”. However, given the current state of affairs, it would be difficult or even impossible to meet this requirement. Additionally, the legislator did not consider, in the RD, the essential nature of the proceedings or actions that meet these requirements.

Thus, with the entry into force of the RD and the agreements approved by the CGPJ, the different legal actors have urged the alarm legislator, to promote additional regulating bodies to regulate non-essential situations that could be distinctly commuted and whose results are susceptible of a reparation that is either impossible or abrupt at the very least. Specifically, this article exposes the legal effects derived from the entry into force of the RD and consequent regulating bodies, as well as the agreements of the CGPJ that affect, from an insolvency perspective, the debtor's obligation to declare bankruptcy, before calling and holding the general meeting, under article 5 of Law 22/2003, of 9 July, Insolvency, published in the BOE (Spanish Official Gazette) on 10 July 2003 (“LC”).

Following the above, and to safeguard the rights and interests of insolvent debtors, as well as to mitigate the number of possible issues that may be filed because of the lack of efficient regulations for these cases, the legislator gave into the demands of the insolvency operators, and immediately issued Royal Decree-Law 8/2020, of 17 March, of urgent and extraordinary measures aimed at dealing with the economic and social impact caused by COVID-19 (“RDL 8/2020”). The RDL exonerates or suspends the obligation of requesting insolvency procedures during the state of alarm. It also sets out the order to reject essential insolvency requests filed during the two months following the end of the state of alarm.

With the approval of this rule, it is clear that the legislator aims to mitigate the high number of matters that will be filed with the civil courts once the state of alarm ends; this rule is set out under General Provision IV and its article 43. Therefore, the content of article 5 of the LC becomes void of any legal efficiency (under article 365 of the LSC). Additionally, RDL 8/2020 sets out that debtors that notify the court of the discussions specified in article 5 bis of the LC, do not need to request an insolvency declaration, even if the term has lapsed.

RDL 8/2020 has affected the deadlines and the conventional ways of calling and holding the general meetings of a company's governance bodies. Under this RDL, telematics become the only valid method of holding a meeting, in which the resolution to request a bankruptcy declaration could be discussed, among other topics. However, the provisions contained in RDL 8/2020 have raised many questions, particularly about the validity of how these meetings should be held, given the ambiguity and vagueness of the terms used in its art. 40. Expecting a barrage of judicial matters that could be filed during the periods set out in article 43 of RDL 8/2020, Royal Decree-Law 16/2020, of April 28, on procedural and organizational measures dealing with COVID-19 in the field of Justice (“RDL 16/2020”) came into effect on 30 April 2020. Its main objective is preventing the collapse of this public service.

In RDL16/2020, the bankruptcy legislator provides the insolvent debtor with a longer extension than the one set out in RDL 8/2020. Article 11 of RDL 16/2020 sets out that “until 31 December 2020, an insolvent debtor will not have to request a declaration of insolvency”, regardless of whether or not they have notified the competent court of the start of negotiations to reach a refinancing agreement, an out-of-court payment agreement or additions to a proposed agreement.

In summary, and because of the different criteria set out by the RD and the decisions approved by the CGPJ, RDL 8/2020 and RDL 16/2020, the interpretation doubts arising from the first RDL remain, and professionals in the legal sector have new concerns. For example, if the date set out in article 11 of RDL 16/2020, the insolvent debtor would have two more months, under article 5 of the LC to request insolvency proceedings. In this case, under article 40 of RDL 8/2020, the time and form to call or hold a general meeting, where a resolution to request an insolvency declaration may be approved, remain uncertain.