In brief
- Criminal insolvency offences punish certain acts carried out to conceal, reduce or misrepresent a debtor’s assets to the detriment of its creditors, or to improperly alter the treatment they receive.
- Losses, debts or cash-flow difficulties are not an offence in themselves; criminal risk arises where, in a situation of current or imminent insolvency, the conduct set out in the law is carried out.
- The offence in Art. 259 of the Spanish Criminal Code is punishable by imprisonment of one to four years and a fine of eight to twenty-four months; the aggravating circumstances in Art. 259 bis raise the penalty to imprisonment of two to six years.
- The Criminal Code also punishes undue preference of creditors (Art. 260) and the submission of false accounting data in order to obtain a declaration of insolvency improperly (Art. 261).
- Legal persons (companies) may be criminally liable for these offences, with the fines laid down in Art. 261 bis.
Criminal insolvency offences (insolvencias punibles) punish certain acts carried out to conceal, reduce or misrepresent a debtor’s assets to the detriment of its creditors, or to improperly alter the treatment they receive. They may affect sole traders as well as directors, liquidators and other persons acting on behalf of a company.
Losses, debts or cash-flow difficulties do not in themselves amount to an offence. Criminal risk arises where, in a situation of current or imminent insolvency, transactions are carried out without economic or business justification, assets are concealed, the accounts are falsified or certain creditors are improperly favoured.
The criminal insolvency offence in Art. 259 of the Criminal Code
This offence is committed by anyone who, being in a situation of current or imminent insolvency, engages in any of the following conduct:
Concealing, damaging or destroying property or assets that should form part of the insolvency estate.
Transferring money or other assets, assuming debts or making disposals of assets that are disproportionate to the debtor’s financial position and lack economic or business justification.
Selling goods or providing services below cost where the transaction lacks economic justification.
Simulating third-party claims or acknowledging fictitious claims.
Engaging in speculative transactions without economic justification and contrary to the duty of care required in financial management.
Failing to comply with the legal duty to keep accounts, keeping a double set of accounts or introducing significant irregularities that prevent the true financial or asset position from being understood.
Destroying or altering accounting books or documents that the business is required to keep.
Preparing the annual accounts or accounting books in breach of commercial accounting rules, making it difficult or impossible to ascertain the true financial position, or failing to draw up the balance sheet or inventory within the required time.
Any other act or omission that constitutes a serious breach of the duty of care in financial management and that causes a reduction in assets or allows the true financial position of the debtor or of its business to be concealed.
Anyone who, through such conduct, directly causes their own insolvency is also punishable. The offender need not have created the crisis from the outset: anyone who significantly aggravates an existing insolvency may be criminally liable.
What is the penalty for criminal insolvency?
The ordinary penalty is imprisonment of one to four years and a fine of eight to twenty-four months (day-fine system). Where the acts are committed through negligence, the penalty is imprisonment of six months to two years or a fine of twelve to twenty-four months.
When can it be prosecuted?
This offence can only be prosecuted where the debtor has ceased to meet its due obligations on a regular basis or has been declared insolvent in insolvency proceedings (concurso de acreedores). It is not necessary to wait for the insolvency proceedings to end in order to bring or continue criminal proceedings. Furthermore, the classification of the insolvency as culpable or fortuitous does not in itself bind the criminal court.
Aggravation based on the extent of the loss
Art. 259 bis increases the penalty where any of the following circumstances applies:
Financial loss is or may be caused to the public at large, or they are or may be placed in a serious financial situation.
The loss caused to any creditor exceeds €600,000.
At least half of the amount of the claims in the insolvency proceedings is owed to the Public Treasury and Social Security.
In these cases, the penalty is imprisonment of two to six years and a fine of eight to twenty-four months.
Undue preference of creditors (Art. 260)
The Criminal Code also punishes a debtor who, being in a situation of current or imminent insolvency, favours one creditor over the others by means of a transaction lacking economic or business justification.
The first form consists of disposing of assets or assuming an obligation in order to pay a claim that was not yet due or to grant security to which the creditor was not entitled. The penalty is imprisonment of six months to three years or a fine of eight to twenty-four months.
The second form occurs after the application for insolvency proceedings has been admitted. If the debtor, without the authorisation of the court or of the insolvency administrator and outside the cases permitted by law, carries out acts involving its assets intended to pay one or more creditors to the detriment of the rest, the penalty is imprisonment of one to four years and a fine of twelve to twenty-four months.
Not every selective payment is an offence. For criminal liability to arise, the specific circumstances laid down in the law must be present and there must be no sufficient economic or business justification, and the rules of the insolvency proceedings must, where applicable, be observed.
False accounting data to obtain insolvency proceedings improperly (Art. 261)
Art. 261 punishes anyone who, in insolvency proceedings, knowingly submits false data on the state of the accounts in order to obtain a declaration of insolvency improperly.
The penalty is imprisonment of one to two years and a fine of six to twelve months.
The conduct requires knowing falsity and a specific purpose: improperly obtaining the declaration of insolvency. Accounting errors or technical discrepancies that do not serve that purpose are therefore not enough.
Can the company be criminally liable for criminal insolvency?
Yes. Legal persons (companies) may be criminally liable for the offences in this chapter where the general requirements for corporate criminal liability are met.
In particular, the offence must have been committed in the name or on behalf of the company and for its direct or indirect benefit by its legal representatives, directors or persons with powers of organisation and control. Liability may also arise where the offence is committed by a subordinate in the course of the company’s activities and this was made possible by a serious failure to perform the duties of supervision, monitoring and control.
The company’s liability does not automatically exclude the liability of the natural person involved. Both may be liable, each in accordance with its own legal requirements.
Penalties for the legal person
For the legal person, Art. 261 bis provides for the following fines:
A fine of two to five years if the offence committed by the natural person carries a prison sentence of more than five years.
A fine of one to three years if the prison sentence provided for exceeds two years without falling within the previous case.
A fine of six months to two years in all other cases.
In addition, the court may impose other penalties on the company, such as suspension of activities, closure of premises, a ban on carrying out certain activities, loss of the ability to enter into public-sector contracts or to obtain grants and tax benefits, and judicial administration to protect the rights of employees or creditors. These measures may have a direct impact on the continuity and operations of the business.
Civil liability and effects on the insolvency proceedings
A criminal conviction may give rise to an obligation to return the concealed or diverted assets, make good the damage and compensate any material and non-material loss as appropriate. In criminal insolvency offences, restitution may consist of returning to the insolvency estate the property or rights improperly removed from the debtor’s assets.
Where there are insolvency proceedings, the amount of civil liability arising from these offences must, where applicable, be added to the insolvency estate. This ensures that asset recovery follows the rules applicable to all creditors and prevents the criminal proceedings from becoming a means of debt collection outside the insolvency proceedings.
The civil liability of the legal person, where there is corporate criminal liability, is joint and several with that of the natural persons convicted for the same facts, on the terms laid down in the Criminal Code.
Example in a business context
A company in financial difficulty transfers machinery it owns to a related company without consideration, keeps the transaction off the books and, shortly afterwards, applies for insolvency proceedings without disclosing that outflow of assets.
If it is proven that the transaction lacked economic justification, was carried out in a situation of insolvency and hindered recovery by the creditors, the facts may amount to the criminal insolvency offence. In addition to the liability of whoever decided on or carried out the transaction, the company itself could be criminally liable if the conduct was carried out for its benefit and the requirements for corporate criminal liability are met.
Frequently asked questions
Is having debts or losses a criminal insolvency offence?
No. Losses, debts or cash-flow difficulties do not in themselves amount to an offence. Criminal risk arises where, in a situation of current or imminent insolvency, transactions are carried out without economic or business justification, assets are concealed, the accounts are falsified or certain creditors are improperly favoured.
What is the penalty for criminal insolvency?
The ordinary penalty under Art. 259 of the Criminal Code is imprisonment of one to four years and a fine of eight to twenty-four months; where committed through negligence, imprisonment of six months to two years or a fine of twelve to twenty-four months. In the aggravated cases of Art. 259 bis, the penalty is imprisonment of two to six years and a fine of eight to twenty-four months.
Is it an offence to pay one creditor before the others?
Not every selective payment is an offence. Art. 260 punishes a debtor who, in a situation of current or imminent insolvency, favours one creditor over the others by means of a transaction lacking economic or business justification, in the specific forms laid down in the law.
Do you have to wait for the insolvency proceedings to end before reporting the offence?
No. It is not necessary to wait for the insolvency proceedings to end in order to bring or continue criminal proceedings, and the classification of the insolvency as culpable or fortuitous does not in itself bind the criminal court.