Royal Decree-Law 1/2015 of 27 February on the Second Chance Mechanism, Reduction of Financial Burden and Other Social Order Measures

OFFICIAL STATE BULLETIN No. 51 Saturday, February 28, 2015 Sec. I. Page 19058 I. GENERAL PROVISIONS HEAD OF STATE 2109 Royal Decree-Law 1/2015, of February 27, on the second chance mechanism, reduction of financial burden and other measures of social order.

STATEMENT OF MOTIVES I The Spanish economy has shown signs of hopeful recovery for several months and is consolidating economic growth that, thanks to the structural reforms carried out in recent years, is having a beneficial effect on employment and the general perception of the situation held by citizens, companies, and different institutions.

However, this should not lead us to forget two things: the first is that the exit from the crisis is above all and foremost a success of Spanish society as a whole, which has once again shown its ample capacity to overcome difficult situations. The second is that many Spaniards still suffer the effects of the recession. It is the duty of public authorities never to cease in the effort to offer the best possible solutions to all citizens, through appropriate reforms aimed at the common good, legal certainty, and, ultimately, justice.

In this context, the so-called second chance legislation is of special relevance. Its objective is none other than to allow what its name so expressively describes: that a natural person, despite a business or personal economic failure, has the possibility of getting their life back on track and even taking risks on new initiatives, without having to drag indefinitely a burden of debt that can never be satisfied.

Experience has shown that when there are no second chance mechanisms, there are clear disincentives to undertaking new activities or even remaining in the regular circuit of the economy. This obviously does not favor the debtor themselves, nor does it favor creditors, whether public or private. On the contrary, second chance mechanisms are disincentivizers of the underground economy and promoters of a business culture that will always redound to the benefit of employment.

To this end responds the first part of this royal decree-law, which regulates various mechanisms to improve the Extrajudicial Payment Agreement introduced into our insolvency legislation by Law 14/2013, of September 27, on support for entrepreneurs and their internationalization, and introduces an effective second chance mechanism for natural persons intended to modulate the rigor of the application of Article 1911 of the Civil Code. It is worth briefly explaining what the guiding principles of the regulation introduced in this regard are.

The concept of a legal person is one of the most relevant creations of Law. The fiction consisting of equating an organization of goods and people to a natural person has had important and beneficial effects in legal and economic reality. Through this fiction, legal persons, like natural persons, are born, grow, and die. Furthermore, the principle of limited liability inherent to certain capital companies allows them to be liquidated and dissolved (or die in a metaphorical sense), extinguishing debts that remain unpaid after liquidation, without their promoters or shareholders having to face any pending debts once all assets have been liquidated.

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OFFICIAL STATE BULLETIN No. 51 Saturday, February 28, 2015 Sec. I. Page 19059 It can be stated that the principle of limited liability characteristic of capital companies is largely at the origin of economic development over the last three centuries. In essence, this principle of limitation of liability was configured as an incentive for business activity and investment. The legislator incentivized the risking of certain capitals by guaranteeing that such capitals would be the investor's maximum loss, with no possibility of contagion to their personal assets.

However, the limitation of liability is a limitation of the liability of the shareholders, not of the company, which must respond for its debts with all its present and future assets. The question that then arises is the ultimate foundation for the different regime of liability that occurs when a natural person decides to undertake a business activity through an intermediary legal person and when that same natural person incurs obligations directly.

If in the first case they can benefit from a limitation of liability, in the second case they will be subject to the principle of universal patrimonial liability collected in Article 1911 of the Civil Code.

Furthermore, many situations of insolvency are due to factors beyond the control of the good-faith debtor, raising the ethical foundation that the legal system should not offer reasonable exits to this type of debtor who, due to a totally unforeseen and unexpected alteration of their circumstances, cannot fulfill the commitments made. It should not be forgotten that any ethical consideration in this regard must always be reconciled with the legitimate protection that the legal system must offer to the rights of the creditor, as well as with a premise that appears hardly disputable: the debtor who always complies must always be in a better position than the one who does not.

With these premises introduced regarding the scope and eventual limitation of the principle of universal patrimonial liability of Article 1911 of the Civil Code, it is not superfluous to refer to the historical antecedents of said provision, as well as its legislative context.

The complete understanding of this article had to be completed with two other provisions of the same Civil Code systematically located in the same chapter. We refer to Articles 1919 and 1920 of the cited legal body, now repealed, which stated respectively as follows: "If the debtor fulfills the agreement, their obligations will be extinguished in the terms stipulated therein; but, if they fail to fulfill it in whole or in part, the right of the creditors to the amounts they have not received from their original credit will be revived, and any of them may request the declaration or continuation of the insolvency proceeding" and "In the absence of an express pact to the contrary between debtor and creditors, the latter will retain their right, upon conclusion of the insolvency proceeding, to collect, from the assets the debtor may subsequently acquire, the part of the credit not realized."

According to these two provisions, two main ideas appeared: the exoneration of liabilities linked to an agreement between debtor and creditors and its fulfillment, as well as the principle of limitation of the exoneration in case the debtor comes to better fortune, but also circumscribed to the course of the agreement itself. But paradoxically, there seemed to be no provision regarding the exoneration of the debtor in the case where they had liquidated their assets, i.e., in the case where they had simply lost everything.

Article 1920 soon raised doctrinal controversies. Manresa, in his comments on the Civil Code, pointed out the following: "This provision criticized by some for leaving uncertain the rights of the debtor derived from the agreement is, however, extremely fair, if one takes into account the reasons and motives, by virtue of which the debtor is authorized to celebrate agreements with creditors inside or outside the insolvency trial (...) considering the difficult circumstances in which the person who, lacking sufficient assets to cover their liabilities (...) cannot satisfy all their obligations punctually; (...) it is not strange (...) that disappearing said reason due to the cessation of difficulties (...) the debtor comes to be obliged to satisfy the part of the credit not realized by their creditors." And the same author continued by pointing out that with this, "the doubts that interpreters of our ancient law suggested by the understanding of Law 3rd of Title 15th of Partida 5th" had been dispelled.

But the truth is that Article 1920 did not establish any gradation of the improvement of fortune nor any limitation of the creditors' right to collect, from what the debtor could subsequently acquire, the unsatisfied part of the credit. This entailed a manifest limitation of the debtor's capacity to improve their fortune and also a low incentive to actually attempt such improvement.

And it is that the Law of the Partidas, which in Manresa's opinion had been superseded by Article 1920 of the Civil Code, was in a certain way more favorable to the debtor by stating the following: "The abandonment that the debtor makes of his goods (...) has such force that afterwards the debtor cannot be summoned, nor is he obliged to respond in judgment to those to whom he owed something: unless he had made such great gain that he could pay all the debts, or part of them, and that there remained to him that from which he could live." Thus, the Law of the Partidas already provided for the release of the debtor after a process of liquidation of their assets (which did not necessarily require an agreement with creditors) and, in a certain way, established a modulation of better fortune by not allowing this to play to the detriment of the debtor unless the debtor could pay all their debts (or, in a certainly somewhat confusing expression, part of them) without prejudice to their own living conditions, all related to "such great gain" which in principle should be considered atypical.

In 2015, exactly 750 years have passed since the completion of the great legislative work of Alfonso X the Wise, which has inspired the legal systems of Hispanic America for several centuries, but it is surprising to see how in this matter some aspects had reached more advanced provisions than the nineteenth-century codification.

The second chance collected by this royal decree-law obviously responds to a more modern legislative technique but is inspired by principles already present, as just demonstrated, in our historical law. The principles inspiring legal norms should always constitute a source of confidence in that they do not obey improvisation, but rather the result of many years or even centuries of reflection on the matter. It is necessary that the legislator always shun any demagogic temptation that in the long run could turn against those whom it intends to benefit. For the economy to grow, credit must flow and the applicable legal framework must give confidence to debtors; but without undermining that of creditors, for in such case the opposite effect to that intended would occur: the withdrawal of credit or, at least, its expensive nature.

Therefore, the second chance mechanism designed by this royal decree-law establishes the necessary controls and guarantees to avoid strategic insolvencies or facilitate selective deed in lieu of foreclosure. It is about allowing that one who has lost everything by liquidating their entire assets for the benefit of their creditors, can be freed from most of the pending debts after said liquidation. And it is equally about quantifying the improvement of fortune that, eventually, will allow revoking said benefit for reasons of justice towards creditors as accurately expounded by authors like Manresa.

With this, the due balance and necessary justice that should inspire any legal norm are achieved.

In addition to the regulation of the second chance mechanism and the improvement of certain pre- or para-insolvency institutes, this royal decree-law contains other provisions of which systematic detail is given below.

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OFFICIAL STATE BULLETIN No. 51 Saturday, February 28, 2015 Sec. I. Page 19061 II This royal decree-law is structured in eleven articles, grouped into two titles, six additional provisions, three transitional provisions, one single repealing provision, and three final provisions.

Title I, under the rubric "Urgent Measures for the Reduction of Financial Burden," contains three articles of a modifying nature through which new wording is given to certain provisions of three different legal norms: Law 22/2003, of July 9, Insolvency; Royal Decree-Law 6/2012, of March 9, on urgent measures for the protection of mortgage debtors without resources, and Law 1/2013, of May 14, on measures to reinforce protection for mortgage debtors, debt restructuring, and social rental.

Title II, "Other Measures of Social Order," is structured in three chapters.

The first of them collects in its four articles a series of measures related to the tax and Public Administrations sphere, through the modification of specific aspects of the following four legal norms: Law 35/2006, of November 28, on Personal Income Tax and partial modification of the laws on Corporate Tax, on Non-Resident Income Tax, and on Wealth Tax; Law 7/2007, of April 12, on the Basic Statute of the Public Employee; Royal Decree-Law 20/2012, of July 13, on measures to guarantee budgetary stability and promote competitiveness, and Law 27/2014, of November 27, on Corporate Tax.

Chapter II contains three measures related to the promotion of employment within the Social Security sphere. Thus, on the one hand, a new incentive for the creation of stable employment is established, consisting of setting a minimum exempt amount in the employer's contribution for common contingencies to Social Security for the indefinite hiring of workers. Secondly, the number of actual working days required from occasional agricultural workers in certain provinces to be beneficiaries of the unemployment subsidy contemplated in Royal Decree 5/1997, of January 10, and in article three of Law 45/2002, of December 12, on urgent measures for the reform of the unemployment protection system and improvement of employability, as well as of the agricultural income regulated by Royal Decree 426/2003, of April 11, is set at 20. Thirdly, and finally, Social Security benefits are established for those cases where the self-employed professional must attend to family obligations that may influence their activity.

The dispositive part of the norm closes with Chapter III, "Measures related to the sphere of the Administration of Justice," of Title II, in its only article, which modifies Law 10/2012, of November 20, regulating certain fees in the sphere of the Administration of Justice and the National Institute of Toxicology and Forensic Sciences, to adapt the fee regime to the concrete situation of the subjects obliged to pay the same.

With regard to the final part of this norm, the first to fifth additional provisions complement the modifications introduced by its Title I, by regulating the functions of insolvency mediation, the remuneration of the insolvency mediator, the non-mandatory nature of the debtor's representation in consecutive insolvency, the computer application intended to act as a solvency meter, or the way in which adherence to the "Code of Good Practices for the viable restructuring of debts with mortgage guarantee on the habitual residence" will occur with the modifications introduced in it. All these provisions regulate issues that are directly related to those contained in Title I and are necessary for their immediate effectiveness. In the sixth additional provision, the impetus and coordination of collective bargaining is regulated.

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OFFICIAL STATE BULLETIN No. 51 Saturday, February 28, 2015 Sec. I. Page 19062 Regarding the transitional provisions, the first of them establishes the transitional regime in insolvency matters, while the second provides for the regime applicable to indefinite contracts formalized prior to the entry into force of this royal decree-law, and the third covers applications for the unemployment subsidy or agricultural income submitted prior to the entry into force of this royal decree-law.

The single repealing provision contains the repealing clause referring to any provisions of equal or lower rank that oppose what is established in this royal decree-law, while the three final provisions regulate respectively the competence title, the authorizations for the development, execution, and application of the norm, and its entry into force.

III The initiatives contained in Title I of this royal decree-law to allow families and companies to reduce their financial burden represent additional improvements to those already adopted during this legislature destined for those who are in a situation closer to insolvency due to their economic and social vulnerability circumstances, whether SMEs and self-employed individuals, or natural persons in general.

These initiatives can be summarized by grouping them into three blocks.

First, it is proposed to flexibilize extrajudicial payment agreements and provide a true second chance mechanism.

Secondly, the "Code of Good Practices for the viable restructuring of debts with mortgage guarantee on the habitual residence" is also improved, introduced by Royal Decree-Law 6/2012, of March 9, on urgent measures for the protection of mortgage debtors without resources, from which nearly 14,000 families have already benefited.

Finally, the suspension of evictions on habitual residences of especially vulnerable groups contained in Law 1/2013, of May 14, on measures to reinforce protection for mortgage debtors, debt restructuring, and social rental, is extended for an additional period of two years, as well as the group that can benefit from this measure.

With regard to the extrajudicial payment agreements regulated in Title X of Law 22/2003, of July 9, Insolvency, the modifications contained in this royal decree-law aim to flexibilize their content and effects, assimilating their regulation to that of refinancing agreements in additional provision fourth. As main elements of the new regime are the expansion of its scope of application to non-business natural persons, with a simplified procedure regulated for them; the possibility of extending the effects of the agreement to dissenting secured creditors, which represents an advance over the voluntary submission regime in force prior to this; and the strengthening of the figure of the insolvency mediator, introducing the possibility that Chambers of Commerce, Industry, Navigation, and Services act as such if the debtor is a businessperson, or notaries if it concerns non-business natural persons.

As a fundamental novelty, a regime of debt exoneration for natural person debtors is established within the insolvency proceeding. The exoneration system has two fundamental pillars: that the debtor is in good faith and that their assets are previously liquidated (or that the conclusion of the insolvency is declared due to insufficient mass).

Meeting the above conditions, the debtor will be able to see their pending debts automatically exonerated when they have fully satisfied the claims against the estate, privileged insolvency claims, and, if they have not attempted an extrajudicial payment agreement, 25 percent of ordinary insolvency claims.

Alternatively, when they have been unable to satisfy the aforementioned claims and always that they accept to submit to a payment plan during the following 5 years, the debtor may be provisionally exonerated from all their claims, except public ones and those for alimony, against the estate, and those enjoying general privilege. For the definitive release of debts, the debtor must satisfy in that period the non-exonerated debts or make a substantial effort to do so.

Regarding the Good Practices Code for mortgage debtors, the subjective scope is expanded, increasing the annual income limit of beneficiary families, which will be calculated based on the annual IPREM of 14 installments, including as a new case of special vulnerability that the debtor is over 60 years old and introducing a new way of calculating the limit of the price of acquired real estate. Additionally, the definitive inapplicability of floor clauses for those debtors situated in the new exclusion threshold who had them included in their contracts is introduced.

Finally, the period of suspension of evictions on habitual residences of especially vulnerable groups is extended until 2017, and it is made possible, in terms similar to those provided for the Good Practices Code, that more people can avail themselves of the suspension.

The present regulation meets the circumstances of extraordinary and urgent necessity required by Article 86 of the Spanish Constitution for the approval of royal decrees-laws. The justification of the measures of Title I, which are complemented by the provisions contained in additional provisions first to fifth and in transitional provision first, is based on the need to alleviate the precarious financial situation borne by some debtors who, despite their good faith and effort, cannot satisfy their pending debts even after the liquidation of their assets. A greater delay in the implementation of the measures contained in this title and in the cited provisions would only aggravate the situation of these people. Likewise, it is convenient that the beneficial economic effects of debt restructuring and the second chance -such as the maintenance of viable but indebted small and medium-sized enterprises, the reduction of incentives to operate in the informal economy, or the increase in opportunities to undertake new economic activities, to name only two of them- are deployed as quickly as possible. Various studies have shown that insolvency legislation has contributed relatively little to the de-leveraging of Spanish households. After the essential sanitization of part of the Spanish financial system, the introduction of the second chance, the improvement of the functioning of the extrajudicial payment agreement, and the expansion of the scope of application of the Good Practices Code will contribute to accelerating the fall

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