Insolvency proceedings with criminal risk: key defence points for business owners

Filing for insolvency (concurso de acreedores) is not an admission that an offence has been committed. Many companies become insolvent for legitimate reasons: falling sales, the loss of a key customer, more expensive financing, a sector-wide crisis or late payments. The problem arises when, alongside the insolvency, there are signs of hidden assets, irregular accounts, unjustified payments or decisions aimed at harming creditors.

That is why, when a company is in difficulty, the defence should start before the insolvency application is filed. The information must be put in order, the documents preserved and the decisions of the preceding months analysed. Speed matters, but it should not lead to incomplete documents, contradictory explanations or a version of events that cannot be sustained later.

What conduct may create criminal risk?

The Criminal Code punishes with one to four years’ imprisonment a debtor who, being insolvent or about to become insolvent:

• hides, damages or destroys assets;
• disposes of assets or takes on debts disproportionately and without economic or business justification;
• sells goods or services below cost without justification;
• simulates claims or acknowledges fictitious debts;
• fails to keep accounts, keeps a double set of books or alters them;
• hides or destroys documents it is required to keep;
• draws up its accounts in a way that prevents its real position from being understood (Article 259(1) of the Criminal Code).

The same penalty applies to anyone who causes their own insolvency through such conduct (Article 259(2)). The penalty rises to two to six years’ imprisonment where the harm affects people generally, where a creditor loses more than €600,000, or where at least half of the claims in the insolvency proceedings are held by the Tax Agency and Social Security (Article 259 bis).

An offence may also be committed where, while insolvent, a creditor is favoured by paying a debt that was not yet due or by granting it security to which it was not entitled, without economic or business justification (Article 260(1) of the Criminal Code). Once the insolvency application has been admitted, paying some creditors ahead of the rest without authorisation from the court or the insolvency administrator is punishable by one to four years’ imprisonment (Article 260(2)). Knowingly submitting false accounting data in order to obtain a declaration of insolvency is also an offence (Article 261). The company itself may be held criminally liable for these offences (Article 261 bis).

The defence must look closely at transfers to shareholders, directors or related companies, transactions carried out shortly before the insolvency application and assets leaving the company without clear consideration.

A bad business decision, a mistaken financial forecast or a failed transaction are not, in themselves, an offence. But the law does punish a serious breach of the duty of diligence in management that reduces the company’s assets or conceals its real position (Article 259(1), point 9), and also criminal insolvency committed through negligence, with a lower penalty (Article 259(3)). The line is drawn by analysing the financial position at each point in time, the purpose of the transaction, its business justification, knowledge of the insolvency and the link between the decision and the harm. That is where the defence is won or lost.

In addition, criminal insolvency can only be prosecuted where the debtor has stopped regularly meeting their obligations or has been declared insolvent (Article 259(4)).

Culpable insolvency and criminal liability are not the same

Insolvency is classified as culpable where the debtor, or its de jure or de facto directors, general managers or those who held those positions in the previous two years, acted with intent or gross negligence in causing or worsening the insolvency (Article 442 of the Insolvency Act). It is also classified as culpable in any event in certain cases, among others: where the debtor concealed its assets, where assets fraudulently left the debtor’s estate in the two years before the insolvency, where a fictitious financial position was simulated, where false or seriously inaccurate documents were submitted, or where there was a substantial failure to keep accounts (Article 443).

The Insolvency Act also presumes the insolvency to be culpable, unless proven otherwise, where it was not applied for in time, where there was no cooperation with the court and the insolvency administrator, or where in any of the last three financial years the accounts were not drawn up, audited or filed (Article 444). Those presumptions operate within the insolvency proceedings. In criminal proceedings, the presumption of innocence applies: the prosecution must prove every element of the offence.

The classification of the insolvency has its own consequences within the insolvency proceedings, but it never binds the criminal courts (Article 259(6) of the Criminal Code). A finding that the insolvency was not culpable does not therefore, in itself, guarantee that a criminal investigation will be dropped. And a finding that it was culpable does not amount to a conviction.

The defence must therefore work on two related but separate files. In the insolvency file, the composition of the estate, the debtor’s conduct and the directors’ liability are analysed. In the criminal file, every element of the offence and the individual involvement of each suspect must be proved.

Debts owed to the Tax Agency and Social Security

Companies in insolvency often owe taxes and social security contributions. Failing to pay them is not an offence: tax offences and offences against the social security system require fraud, not merely a debt (Articles 305 and 307 of the Criminal Code). Contributions withheld through concealment, refunds or rebates improperly obtained, or workers not registered with Social Security may, however, be criminally relevant.

Those debts also weigh on criminal insolvency: if at least half of the claims in the insolvency proceedings are held by the Tax Agency and Social Security, the penalty rises to two to six years’ imprisonment (Article 259 bis, point 3). If there is an ongoing or recent audit, see also our page on what to do in a tax or social security audit with criminal risk.

What business owners should do from the outset

The first step is to preserve the documents. Emails must not be deleted, files destroyed, accounting entries altered or documents reconstructed without recording their origin. The accounting books, bank statements, contracts, invoices, payslips, tax returns, communications with suppliers and customers, corporate minutes and financing documents should all be secured.

It is also advisable to draw up an internal timeline: when the first cash-flow difficulties appeared, what decisions were taken, who approved them, what advice was received, what payments were made and what assets were transferred. That timeline should not become an improvised defensive narrative. It serves to detect inconsistencies and to locate the documents supporting each decision.

The insolvent debtor and its directors, including those who held office in the previous two years, must appear before the court and the insolvency administrator whenever required, and cooperate and provide information on everything needed for the proceedings (Article 135 of the Insolvency Act). Failing to cooperate leads to a presumption of culpable insolvency (Article 444). The documents should therefore be handed over complete and in order. But where a criminal investigation exists or is expected, every statement or explanation must be coordinated with the criminal defence: the duty to cooperate in the insolvency does not remove the right not to testify against oneself or to plead guilty (Article 24(2) of the Spanish Constitution).

What happens if a criminal complaint has already been filed?

Criminal proceedings do not wait for the insolvency proceedings to end: the offence may be prosecuted without waiting for their conclusion and without prejudice to their continuation. Civil liability arising from the offence is, where applicable, added to the insolvency estate (Article 259(5) of the Criminal Code).

The defence must establish exactly which facts are alleged, against whom, on what dates and on the basis of what documents. A generic reply that the company was going through a crisis is not enough. Where appropriate, it will be necessary to explain the business rationale of each transaction, the consideration received, the valuation of the assets, where the funds went and the company’s real financial position at the relevant time. An expert accounting report commissioned by the defence is often the tool that makes this possible.

A defence strategy based on traceability

The best defence is neither to present the insolvency as an all-purpose explanation nor simply to deny every decision under challenge. It is to reconstruct how the company’s finances evolved, distinguish business error from fraud and show that the transactions served a reasonable purpose or were backed by sufficient documents.

The aim is for there to be a single economic explanation, consistent and documented, before the insolvency administrator, the insolvency court and, where applicable, the criminal court.

Frequently asked questions

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