Dispute resolution

The Supreme Court rules on the judicial competence to recognise the compensation of debts after the declaration of insolvency proceedings

Published on 15th Jun 2021

The Supreme Court judgement (Civil Division) no. 315/2021 of 13 May considers that the competent court to assess the compensation of debts alleged after a declaration of insolvency is the same court that heard the action claiming for payment brought by the insolvent company.

The Supreme Court sheds light on a much-discussed issue: the relevant prosecution service to hear the plea of the compensation that is raised after the declaration of insolvency.

The compensation of debts is a way of extinguishing obligations when two parties are reciprocally debtors and creditors of each other, regulated in Article 1195 et seq. of the Civil Code. For compensation to take place, the debt must be liquid (a determined amount of money), due (the payment period has expired) and payable (without collection being subject to any charge).

On the other hand, Article 153 of Royal Legislative Decree 1/2020, of 5 May, which approves the revised text of the Insolvency Act (hereinafter, "TRLC") establishes, as a general rule, the prohibition of the compensation of debts after the declaration of insolvency.

However, there are two exceptions to this prohibition: (i) when the debts have their origin in the same legal relationship; and (ii) when the compensation has arisen prior to the declaration of insolvency and the debt is liquid, due and payable, which in this case will be examined by the insolvency judge (Commercial Court) through a special procedure of the insolvency incident.

The reason for the aforementioned limitation resides in the principle of equal treatment of the rights of the creditors that make up the insolvency estate (better known as par conditio creditorum), which aims to satisfy all claims in an orderly manner, without alterations and depending on their classification, in accordance with Articles 269 et seq. of the TRLC.

From a Procedural Law point of view, in the case of a claim for an amount, it is possible to: a) prove the non-existence of the debt; b) verify that the amount claimed is not liquid, due and payable; c) allege compensation, when the amounts are liquid, due and payable; and/or d) counterclaim, in order to claim the difference.

In this judgment, the Supreme Court considers that the defendant cannot be deprived of the right to set-off its debt by means of compensation, despite the fact that it is asserted after the declaration of insolvency and the debts do not arise from the same legal relationship. The requirements for assessing the existence of such compensation were met prior to the declaration, and the First Court had jurisdiction to hear the case, as no counterclaim had been filed.

The Law 1/2000, of 7 January, on Civil Procedure (hereinafter, "LEC"), grants a different procedural treatment to the compensation ( Article 408 of the LEC) and counterclaims (Article 406 of the LEC), because while the second paragraph of the aforementioned Article 406 contemplates the inadmissibility of the counterclaim when the judge lacks objective competence to hear it, there is no similar paragraph in the provision that regulates set-off.

Therefore, if a defendant company, in addition to claiming compensation, were to claim the excess debt in its favour via counterclaim, the application of the second paragraph of Article 406 of the LEC would make it impossible to admit such a claim, as the insolvency judge would be exclusively and exclusively competent, in which case the compensation and the counterclaim would have to be settled by means of an insolvency proceeding.

In terms of procedural economy, this pronouncement of the Supreme Court is clearly an advancement, as it considers the First Court to be competent to hear the plea of the compensation brought by the defendant company for debts that do not arise from the same legal relationship. In this way, the defendant avoids being summoned to pay the debt and the costs of the proceedings, and eludes the need to resort to an insolvency proceeding to compensate the debt.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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