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Individuals may be considered part of a group of companies for insolvency law purposes

| News | Corporate Compliance

Judgment 1479/2017 of 15 March of the Civil Division of the Supreme Court brings to an end the doubts surrounding the definition of a "group of companies" for the purposes of insolvency law

The Insolvency Act defines "group of companies" in its 6th Additional Provision by remission to article 42.1 of the Commercial Code which provides that a group exists where a company (or legal person) has or may have, directly or indirectly, control of another or others, such control being presumed to exist where:

  • It has a majority of the voting rights
  • It has the power to appoint or dismiss a majority of the directors
  • It is able by virtue of agreements with third parties to control a majority of the voting rights
  • It has with its votes appointed a majority of the directors, who hold their posts at the time the consolidated accounts are to be drawn up and have held them in the two financial years immediately preceding this.

In the specific case before the Supreme Court the insolvency administrator had classified the creditor company's rights as subordinate on the grounds that it was specially related to the debtor as it was part of the same group of companies, on the basis that (i) both companies were wholly owned by two other companies which in turn (ii) were owned by an individual who held 65% of the shares of one and 75% of the other. Also both companies (iii) had the same director, a company which had designated the individual its representative. And (iv) the two companies' main executives had crossed powers of attorney which allowed either of them to act on behalf of either company.

On the basis of these facts and the wording of article 42.1 of the Commercial Code the companies could not be considered a group of companies as the apex of the structure was occupied by an individual, not a company, and there was no unity of control as there was no hierarchical relation between them.

The Supreme Court rejects this, holding that the remission of the Insolvency Act to the Commercial Code only refers to the principles of direct or indirect control, and that it is not necessary for there to be a vertical relationship between two companies for them to be considered a group. There may be a group of subservient companies at the same level which, although they do not present consolidated accounts, act in the market under real or potential control, direct or indirect. Equally, as the Supreme Court had held in its judgment of March 2016, control need not be direct or organic, i.e. by way of the direct holding of voting rights at the General Meeting or on the board of directors, it may also be indirect as in cases of contracts or rights which make it possible to influence and dictate financial and commercial policy.

It is also held that for there to be a group of companies, provided there is control it is irrelevant whether there is a company at the apex, and a group may also exist where control is held by an individual or a legal person other than a company, for example a foundation, as these are equally able to use corporate mechanisms to adopt decisions either in one company or the other.

In summary the Supreme Court holds in this judgment that what matters in the application of insolvency procedures to a group of companies is that there is direct or indirect control over the companies, even if relations between them are horizontal and they do not present consolidated accounts, and regardless of whether the group is controlled by a parent company, an individual or even types of legal person which are not companies.

 

For more information contact:

Claudio Aguiló Casanova

claudio.aguilo@AndersenTaxLegal.es

 

Read the artcile in Expansión.

                                    

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