Liability for transfer of undertaking in insolvency proceedings

We analyze the existence of transfer of undertaking in the framework of an insolvency proceeding according to the different judgements of the High Court (among others, the recent STS 4156/2019 of 12 November, STS 4265/2019 of 17 December and STS 4319/2019 of 12 December).

These judgments rule on whether companies acquiring a production unit of another company, in the context of the liquidation phase of the insolvency proceedings, must be considered liable for the rights and obligations of their employees. Among others, for the amounts not paid by FOGASA and those corresponding to the compensation for the termination of the employment agreements – considering, therefore, that there is a transfer of undertaking. The foregoing, even if in case that the Commercial Court expressly states that there is no transfer of undertaking between both parties.

Competent jurisdiction

The competence for the resolution of this issue lies with the social jurisdictional order. This is because the acquiring company has not been a party to the insolvency proceeding, either as a debtor or as a creditor. Its relationship with the insolvency proceeding has been limited to the purchase of an asset from the insolvent company.

Transfer of undertaking in Spain

Article 44 of the Worker’s Statute establishes the concept of transfer of undertaking and provides:

1. The change of ownership of a company, a work centre or an independent production unit will not extinguish the employment relationship. The new employer is subrogated to the labour and Social Security rights and obligations of the previous employer, including pension contributions, under the terms provided for in its specific regulations, and, in general, any obligations of complementary social protection that the transferor may have acquired, and

2. […] there will be a transfer of undertaking when the transfer affects an economic entity that retains its own identity, the economic entity must consist of an organized group of means that are able to carry out an economic activity, whether essential or auxiliary.

The above-mentioned judgments understand that the acquisition of a productive unit in the insolvency proceedings implies the application of Article 44 of the Workers’ Statute. And this, insofar as it is a mandatory rule applicable in any case of transfer of a company that involves a change of ownership, without the existence of a bankruptcy proceeding making it inapplicable. In this way, the transferee takes over the position of the insolvent employer with respect to its former employees.

Pronouncements of the Insolvency Law

The wording of Article 148.4 of the Insolvency Law is particularly relevant since case law understands that it does not exclude the transfer of undertaking when a productive unit of the insolvent company is transferred. This, provided that said article refers to the operations provided for in the liquidation plan that involve substantial modifications, transfers, suspensions or collective extinctions of contracts to Article 64 of the Insolvency Law.

Likewise, Article 64 of the Insolvency Law establishes the procedure for the substantial modification of working conditions of a collective nature once collective proceedings have been declared (including collective transfers and the collective suspension or termination of labour relationships).

In light of the two articles indicated above, the case law understands that, in these cases, there is a transfer of undertaking.

Conclusion

It is clear from all the above that, in principle, in the event of the acquisition of a production unit of another company during the liquidation phase of the insolvency proceeding, the provisions of Article 44 of the Workers’ Statute will be applied. Therefore, the acquiring company will be considered jointly and severally liable for the rights and obligations of the employees arising from their previous relationship, even in cases where the Commercial Court expressly states that there is no transfer of undertaking.

For more information concerning the liability for a transfer of undertaking, do not hesitate to contact us.

This article is not considered as legal advice

Rosario Rodríguez

Having graduated with a Law degree, Rosario Rodríguez specialises in business law and company formation in Spain. Working languages: Spanish, French and English. For any query Contact Rosario Rodríguez