Employer succession in the sale of productive units: the state of the question following the latest judicial rulings

Employer succession in the sale of productive units: the state of the question following the latest judicial rulings

  • 08/01/2018

During recent years it has been possible to save numerous jobs through the sale of productive units within the context of insolvency proceedings. This is because sales of this type make it possible to keep business units economically viable by leaving behind insolvency liabilities, combined with subrogation of employment contracts as necessary in order to ensure this continuity.

Spanish courts had ruled that transfer of a productive unit did not represent an employer succession, which meant that debts owed in relation to salaries and Social Security were not assumed by the acquirer. However, although the most recent reforms to Spain’s Insolvency Act (Ley Concursal in Spanish) were theoretically designed to make such sales more flexible, they have in practice done just the opposite.

 (i)      The Latest Legal Reforms

Royal Decree-Law 11/2014 of 5 September, on Urgent Measures Related to Insolvencies, introduced article 146 bis to the Spanish Insolvency Act (the IA) in order to establish special rules for the transfer of productive units, with these special provisions also being retained under the reforms produced by Spanish Law 9/2015 of 25 May. However, the latter reforms introduced a significant novelty: they transformed the supplementary rules from article 149 IA into mandatory provisions, in a manner that left no uncertainty regarding their applicability to all liquidation scenarios.

Although article 146 bis.4 of the IA states that such a transfer will not give rise to an obligation for the acquiring party to settle debts remaining unpaid by the insolvent company prior to the transfer, it also includes the exception “without prejudice to the provisions found in article 149.4 IA”.

The aforementioned article 149.4 of the IA states that when a productive unit is transferred it will be understood, for purposes of employment and Social Security, that an employer succession is taking place. Given this new wording, both employees and Spain’s General Social Security Treasury (TGSS in Spanish, and hereinafter) have asserted that the acquiring party must assume all debts owed to workers and to the TGSS.

In order to avoid such disastrous consequences, some Commercial Court judges ruled that the reference made by article 146 bis.4 IA to article 149.4 IA had to be interpreted in the sense that the acquirer only had to assume debts to the TGSS derived from employment contracts that were in force at the time of the transfer or adjudication, and that therefore the acquiring party did not also assume debts owed to Social Security from contracts that had already been extinguished at the time of the effective adjudication. With respect to amounts owed to employees, these rulings indicated that the only debts taken on by the acquirer were those derived from the employment contracts in which the acquirer was being subrogated.

This interpretation, held by the majority of the Commercial Court judges, has been contested and challenged both by workers and by the TGSS. Meanwhile, during these last two years a very strong sense of legal uncertainty has been felt by those acquiring productive units.

 (ii)      Court Rulings during 2017

Firstly, it must be pointed out that the Supreme Court of Spain (Tribunal Supremo) has ruled that Spain’s regional Employment Courts (Juzgados de lo Social) are competent to rule upon the existence of employer succession under circumstances involving the sale of productive units during insolvency proceedings, with relevant citations including rulings from 11 January 2017 (appeal 1689/2015) and 18 May 2017 (appeal 1645/2015).

With respect to the underlying issue, during 2017 the Employment Chambers of various regional appeal courts (Tribunales Superiores de Justicia or TSJ in Spanish) have affirmed that in situations regulated by the new legislation (i.e., when the liquidation phase of the insolvency proceedings was opened on or after 26 May 2015), article 44 of the Spanish Workers’ Statute (Estatuto de Trabajadores) will apply if a productive unit is sold. This means that employer succession does exist at the employment level, and the party acquiring the productive unit therefore becomes jointly and severally liable for the salary-related and Social Security debts of the insolvent company with respect to all workers (including both those subject to subrogation and those are not), by virtue of the provisions of articles 146 bis.4 and 149.4 of the IA.

This is what has been indicated in rulings by the Employment Chamber of the TSJ of Galicia on 16 June 2017 (appeal 325/2017), by the Employment Chamber of the TSJ of Andalusia (Seville) on 22 June 2017 (appeal 2581/2016), and by the Employment Chamber of the TSJ of Catalonia on 18 October 2017 (appeal 4177/2017).

This last ruling cited is especially significant because it contains an analysis of how the amendments made to articles 146 bis and 149.4 of the IA, as part of the latest legislative reforms, have represented a 360-degree turnaround on this issue: whereas previously liquidation plans were able to limit the liability of a party acquiring a productive unit in terms of debts owed to workers and the TGSS, such limitation is no longer possible, because article 149.4 IA is a mandatory provision that expressly establishes the existence of employer succession for purposes of salaries and Social Security.

In practice this case law represents, firstly, granting of a privileged status, that the IA does not establish in principle, to all debts related to salaries and Social Security since the acquirer will be compelled to pay such debts.

Secondly, and more importantly, this case law could checkmate the sale of productive units, since such rulings increase the amount that parties interested in acquiring productive units will have to invest and may scare off prospective buyers, leading instead to disappearance of the insolvent company and loss of its jobs entirely.

 (iii)     Conclusions

After approval of Spanish Law 9/2015 we could already foresee the pernicious effects that its reforms would surely have in relation to the sale of productive units. At the time, we were disappointed that the parliamentary process had not remedied the state of absolute uncertainty surrounding the issue of employer succession in terms of salaries and Social Security, a matter now expressly addressed in article 149.4 IA.

What is most desirable now is for the legislature to finally understand that the only way to preserve the country’s industrial fabric, and the associated jobs, is to once again reform articles 146 bis.4 and 149.4 of the Spanish Insolvency Act, in order to clearly and expressly state that when transfer of a productive unit occurs during insolvency proceedings there is no employer succession, since this type of sale is overseen by the insolvency judge, and it is taking place in an effort to maintain the viability of the business units.

Although such further reform is desirable, until it occurs any parties interested in acquiring productive units will have to carefully analyse the insolvent company’s debts related to salaries and Social Security, so that they can adapt their offers to the existence of such contingencies and avoid unpleasant surprises after the acquisition.

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