On 7 November 2024, the Court of Justice of the European Union (CJEU) issued a judgment in joined cases C-289/23 and C-305/23, which analysed the compatibility of the reform of Royal Legislative Decree 1/2020, of 5 May, approving the revised text of the Bankruptcy Law (TRLC) operated by Law 16/2022 with Directive (EU) 2019/1023 of the European Parliament and of the Council, of 20 June 2019, on preventive restructuring frameworks, debt discharge and disqualifications, and on measures to increase the efficiency of restructuring, insolvency and debt discharge procedures, and amending Directive (EU) 2017/1132.

Context of the Sentence

Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 establishes a framework for preventive restructuring and debt discharge, with the aim of increasing the efficiency of restructuring, insolvency and debt discharge procedures. This directive seeks to harmonise the insolvency laws of the Member States, ensuring that insolvent businesses and individuals have access to mechanisms that allow them to obtain a second chance.

However, the directive allows Member States to exclude certain categories of debts and debtors from the exemption, provided that such exclusions are duly justified and pursue a legitimate interest. In this context, Spain established in the reform of the TRLC operated by Law 16/2022 that public credits are not susceptible to full exoneration and excluded from access to exoneration debtors who, in the ten years prior to the request for exoneration, had been sanctioned by a final resolution for serious or very serious tax, social security or social order violations, or when within the same period a final agreement had been issued to transfer liability, unless on the date of submission of the request for exoneration they had fully satisfied their liability.

Commercial Courts No. 1 of Alicante and No. 10 of Barcelona referred several preliminary questions to the CJEU regarding the interpretation of Directive 2019/1023, in relation to the exclusion of debtors sanctioned for serious tax violations or subject to a derivation of tax liability from access to the exemption of public credit and debtors sanctioned for serious tax violations or subject to a derivation of tax liability.

CJEU ruling

The CJEU concludes, in essence, that:

• Article 23 of the Directive does not preclude national legislation which excludes access to debt relief for a debtor who has engaged in negligent or imprudent behaviour, such as where, in the ten years prior to the application for relief, he has been sanctioned by a final administrative decision for serious or very serious tax, social security or social order offences, or where a final agreement on the transfer of liability has been issued against him; or which requires the payment of non-privileged public credits in order to qualify for debt relief; provided that such exceptions are duly justified under national law.

• Article 23.4 of the Directive must be interpreted as meaning that the list of specific categories of claims contained therein is not exhaustive and that Member States have the right to exclude from the discharge of debt specific categories of claims other than those listed in that provision, such as claims under public law, on the ground that the settlement of such claims is of particular importance for a just and solidary society based on the rule of law, provided that such exclusion is duly justified under national law.

• Where a national legislator decides to exercise the power provided for in Article 1.4 of the Directive and extends the application of the procedures allowing for the discharge of debts incurred by insolvent entrepreneurs to insolvent natural persons who are not entrepreneurs, the rules applicable to such natural persons must comply with the provisions of the Directive.

Privileged treatment for public creditors

In particular, in response to the Spanish Courts' argument that the Spanish regulation on the Exoneration of Unsatisfied Liabilities (EPI), in practice, modified the order of priority of bankruptcy claims, the CJEU recalls that “ the bankruptcy procedure and the debt discharge procedure are two different procedures that pursue their own objectives. The fact that the granting of debt discharge is subject to the payment of public credits does not affect the classification of these credits as "privileged", "ordinary" or "subordinated" following a declaration of insolvency. Consequently, it does not appear that the obligation to pay non-privileged public credits in order to be eligible for a debt discharge implies a modification of the order of priority of the credits following a bankruptcy procedure. ”

Similarly, the CJEU recalls that Member States have the power to lay down provisions denying or restricting access to the discharge in well-defined circumstances other than those listed in the Directive, even if this means granting preferential treatment to public creditors compared to other creditors, not only by excluding public credits from the discharge but also by preventing access to the discharge to certain debtors of the Public Treasury, provided that such exclusions relate to "certain well-defined circumstances" and are "duly justified" under national law, so as to ensure a balance between the protection of public interests and the right of debtors to a second chance.

Justification for the privileged treatment of public credit

In this regard, the CJEU already recognized in its judgment of April 11, 2024 (case C-687/22) the conformity with the Directive of the Spanish system of public credit privilege in relation to the EPI, stating in section 54 that “To the extent that it has been established that the Spanish legislator justified the exclusion of the exemption of debts from public law credits in the preamble of Law 16/2022, it seems, a priori, that said legislator has provided a justification in accordance with national law… ”.

This justification, moreover, does not derive only from Law 16/2022 itself but, as the CJEU already admitted in the judgment of May 8, 2024, (Instituto da Segurança Social et al., C 20/23), it also results from the entire Spanish legal system, which contemplates, both at the Constitutional and legal level, this privileged status of public credits.

In general, because the contribution of all citizens to the maintenance of public expenditure in accordance with their economic capacity through a fair tax system inspired by the principles of equality and progressivity constitutes a constitutional obligation, imposed by art. 31 CE.

These principles are generally reflected in art. 3 of Law 58/2003, of December 17, General Tax Law (LGT) which establishes the principles of the tax system as justice, generality, equality, progressiveness, equitable distribution of the tax burden and non-confiscation, even going so far as to prohibit “ any extraordinary instrument of tax regularization that may entail a reduction of the accrued tax debt ”. Thus, STC 73/2017, of June 8, 2017, stated that

“ … With this, the effect that has been produced on those who have opted for regularization is, as we have previously warned, the partial forgiveness of the main tax obligation and the total forgiveness of the possible accessory consequences associated with the non-compliance existing up to the time of regularization.

In the aforementioned STC 189/2005, FJ 8, we considered that the modifications made by Royal Decree-Law 7/1996, of June 7, in the tax regime of patrimonial increases and decreases in the Personal Income Tax, had affected the essence of the duty to contribute to the support of public expenses stated in article 31.1 CE; the method of distributing the tax burden that must be borne by the majority of taxpayers had been altered. We cannot now come to a different conclusion; The provision contained in the First Additional Provision of Royal Decree-Law 12/2012 has had a direct and substantial impact on the determination of the tax burden that affects all types of persons and entities (physical and legal, resident or non-resident), by replacing the amounts that, in accordance with the regulations of each tax, would have been accrued by the income generated - although hidden from the public treasury - by a single tax of 10 percent, exempt from interest, surcharges and sanctions (administrative and criminal).

It must be concluded, in short, that this regulatory measure has affected the very essence of the duty to contribute to the maintenance of public expenditure stated in article 31.1 CE, by altering the method of distribution of the tax burden that must be borne by the generality of taxpayers, in terms that are prohibited by article 86.1 CE.”

On the other hand, specifically, art. 77 of the LGT recognises the privileged nature of tax credits and other provisions, such as article 18 of the LGT or article 7 of Law 47/2003, of 26 November, General Budget, establish the general principle of the unavailability of public credit and the exceptional nature of the granting of exemptions, pardons, reductions or moratoriums in the payment of rights to the Public Treasury.

Conclusion

The judgment of the CJEU of 7 November 2024 in cases C-289/23 and C-305/23 has confirmed the power of Member States to exclude public credits and certain debtors of the Public Treasury from debt discharge procedures, provided that such exclusions refer to well-defined circumstances, are duly justified and pursue a legitimate interest, a decision that strengthens the position of Spanish bankruptcy legislation.