Liability for debts to employees in the event of acquistion of assets of a company in insolvency

A recent jurisprudential interpretation of the provisions of article 149 of the Spanish Insolvency Law has given rise to some discrepancies regarding the possibility of being subrogated to the employment and Social Security rights and obligations for the acquisition of a productive unit of a company in insolvency.

In order for us to get a clear idea of the salient points of the various interpretations on this issue, we must pay attention, prima facie, to the wording of the provisions of article 57 of the Workers’ Statute (hereinafter, “WS“). The WS sets forth that, in the event of transfers of undertakings or modification or termination of employment contracts connected to insolvency proceedings, the procedural arrangements established in the Spanish Insolvency Law must be applied.

Prior to the entry into force of the Reform of the Spanish Insolvency Law of 2012 (1 January 2012) amended by Law 38/2011, of 10 October, and pursuant to the provisions of article 44 of the WS, the acquisition of a business or productive unit necessarily involved the transfer of any employment rights connected to such business, the new employer being subrogated “to the business’ employment and Social Security obligations”. After the Reform, many critical voices have claimed that the employment and Social Security obligations of a business in insolvency shall not be subrogated to the new employer. In this respect, it is worth noting the new lines of case law established by the Judgment of the High Court of Justice of Castilla and Leon (hereinafter, “HCJ of Castilla and Leon“) dated 7 December 2016, and the Judgment of the High Court of Justice of Catalonia (hereinafter, “HCJ of Catalonia“) passed on 17 May 2016.

The Judgment passed by the HCJ of Catalonia on 17 May 2016 has paved the way in that it allows, for basic reasons of legal certainty, the possibility of limiting or refusing the transfer of the employment and Social Security obligations assumed by the transferring company to the company that is acquiring the assets, although this interpretation is fairly loose and superficial.

The Judgment delivered by the HCJ of Castilla and Leon on 7 December 2016 explores this issue in more depth. Its reasoning differs from the criteria followed until then by this same Court (see judgment No 742/2016 of 18 July 2016), since it argues that the company acquiring the productive unit of a business in insolvency should not be understood as being subrogated in the terms set forth in article 44 of the WS. The Court based its decision on the fact that the companies that acquire the assets of a business in insolvency shall not assume the employment or Social Security obligations undertaken before the transfer when the transfer and the acquirer’s liability with respect to such obligations have been expressly excluded from the conditions agreed therein.

It is worth mentioning that the “turning point” in the case law recently followed by the HCJ of Castilla and Leon and the HCJ of Catalonia took place on 28 January 2015, when the Court of Justice of the European Union (hereinafter, the “CJEU“) delivered an order in connection with case C-688/2013, which interpreted the provisions of article 5 of the Council Directive 2001/23/EC on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses. According to the CJEU the legislation of a Member State may allow that the debts arising from any contracts of employment or employment relationships payable before the transfer or before the opening of the insolvency proceedings are not transferred to the transferee.

In the light of the foregoing and despite the fact that the Spanish High Court has not yet ruled on this issue, it would appear that the most recent case law is changing its interpretation with regard to subrogation in the event of transfers of businesses connected to insolvency proceedings, this is without prejudice to the passing of new judgments that may differ from the criteria followed in the judgments mentioned above.