5. Right holders and insolvency problems (2016)

Apunte Inglés
Universidad Universidad Pompeu Fabra (UPF)
Grado International Business Economics - 1º curso
Asignatura Introduction to business law
Año del apunte 2016
Páginas 11
Fecha de subida 16/06/2016
Descargas 32
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Descripción

Notes from professor Gómez

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avillagrasa IBE, 1st year - 3rd Term Business law II Right holders Outline Individuals ......................................................................................................................... 2 Ability to become right holder (Capacidad juridica) .................................................... 2 Ability to act according to the law (Capacidad de obrar) ............................................. 2 Right/liability .................................................................................................................... 3 Legal entitities .................................................................................................................. 4 Historical background ................................................................................................... 4 Non-Business legal entities............................................................................................... 5 Association .................................................................................................................... 5 Foundation (charity) ..................................................................................................... 5 Business legal entities....................................................................................................... 7 Personal companies...................................................................................................... 7 Capital companies ........................................................................................................ 7 Legal entities around the world ................................................................................... 8 Piercing the Veil (levantamiento del velo) ................................................................... 8 Insolvency ....................................................................................................................... 10 Principio de responsabilidad universal ....................................................................... 10 Par conditio creditorum ............................................................................................. 10 Insolvency proceedings .............................................................................................. 10 1 avillagrasa IBE, 1st year - 3rd Term Business law II 09.06.16 We have to distinguish between contractual and property rights. Now we have to deal with he question of who’s the right holder, who has the rights.
The right holders can be of two kinds: individuals or legal entities.
Individuals Individuals’ law is constrained by our own nature, as babies can’t behave according to the life. There’s a period in the life of every individual where he can’t manage any kind of right.
A solution to it would be to say that only individuals who can manage their rights can be right holders. According to this solution, only individuals who can interact in the market will have rights. This would have a lot of problems because babies and very old people can’t manage their assets, so who would manage them? Another objection is moral. If the legal system said that, any individual who doesn’t have the ability to comply with the law will not have any right, then the society will be divided in two type of citizens, and that wouldn’t be fair.
We have to distinguish between: Ability to become right holder (Capacidad juridica) Everyone has the ability to become right holder from the moment of birth or even during pregnancy. For example, if the grandfather dies and in he wants to leave something to his grandson but the grandson has not been born yet (we’re in a pregnancy state).
Ability to act according to the law (Capacidad de obrar) They start where the individual becomes an adult. In Spanish law, the maturity age (juridicaly speaking) is at 18 years old. When someone has the maturity age he has both the ability to become right holder and the ability to act. The ability to act is automatically granted when someone is 18 years old, and then the ability to act can be changed according to the specific circumstances of the individual. Minors can’t exercise their rights, and when they hit the maturity age a judge has to determine if the individual is competent. As minors don’t have the ability to act, his parents are entitled to act in their behalf.
2 avillagrasa IBE, 1st year - 3rd Term Business law II Someone with Alzheimer can be the right holder of a building but he can’t sell it because he doesn’t have the ability to act.
If someone is incompetent (minor or someone ill) they will have a tutor/parent who will manage their assets. For example, if your child is the owner of a building, you, as a parent, can manage this asset and rent it, for example.
If an incompetent person or a minor inherits a debt, they will only perceive the positive inheritance. This means that the debt will be paid with the inherited assets, but never with the assets/money of the minor or incompetent person. 1 10.06.16 Right/liability It is important to give the rights to people because that imposes the ability to be liable.
However, some rights, like the right of life, don’t impose any liability.
The ability to have a right (capacididad juridica) implies the ability of taking liability.
There’s a principle very important according to which the law works. The principle says that any the rightholder is subject to being liable to exercise his debts. This means that, if I have a debt, all my assets should go to pay for it. It is called universal liability principal debt (principio de responsabilidad patrimonial universal). The word universal implies that it is for everyone. In summary, the principle is saying that if you don’t pay for the asset and you owe some money to the supplier, you will have to pay him with your assets; so you won’t become the right holder until you pay to have the asset.
1 This is out of the scope of this course.
3 avillagrasa IBE, 1st year - 3rd Term Business law II Legal entitities Historical background When the transatlantic exchanges began, the Europeans realized that having only individuals’ law had some problems: 1. If individuals had to pay their debts with their personal assets, not a lot of people would be willing to establish a company, as they would be risking their own patrimony. We have to remember that that were tough times and people didn’t have as information as we have now.
2. If the legal system only recognizes that individuals can be right holders, it means that all the contracts could be signed by all the members of the enterprise. For example everyone in the company should sign when making a contract to buy a ship.
The fact of not having legal entities law caused a problem of collective action and problems of agency. It also make it very difficult to manage a firm because contracts had to be signed by everyone, which make everything most costly.
Because all of this it was made clear that there was a need of making a law for legal entities.
Solution The solution to avoid those problems was to create legal entities. However, they are a fictional thing, as companies don’t exist physically. They are fictions that we need to understand that in some circumstances, an association will be considered as an individual.
The association is understood as a single individual, which allows it to enter into contracts assume rights and assume liabilities. This protects the individuals behind the entity because if the firm can’t pay, it will have to respond with its assets, not with its owners’ assets. The debt is of the firm, not of the owners.
In the Spanish legal system we distinguish between business and non business legal entities.
4 avillagrasa IBE, 1st year - 3rd Term Business law II Non-Business legal entities They can be made with the objective of making money or just to achieve some goal.
They are usually subject to a higher control than the non-business legal entities.
Association It consists in a group of people that share a common objective without “ánimo de lucro”. They enter in it without the intention of becoming richer. With individuals its easy to state that they become right holders when they are born, however it is not so clear with associations. They are “born” (become right holder) when they agree in the statutes, as the most important thing is to make the owners agree on something. The association will be legally recognized once the statutes have been approved, when there’s a common agreement. When the law recognizes the legal entity it receives personalidad jurídica.
Foundation (charity) This is a group of assets, under Spanish law. These assets should be devoted to a special use. The most important thing is the assets used to fulfill the specific goal.
Because of this, to start the foundation we need money or assets. The owner of the assets gives them to the foundation and the foundation uses them to persuade a goal.
The foundation can be established during the lifetime of someone (I’m rich and I want to make a foundation to give scholarships to poor students) or after his death (the person left in his will that he wanted X amount of his patrimony to be given to poor children who want to study). The patronato is the board composed by the people who will decide how to use the assets to fulfill the goals of the foundation. They are less important than the assets. The law thinks that someone might say in his will to make a foundation for X purpose, but who prevents that the patronato is actually using the money/assets to fulfill the foundation goal? They are subject to a control board (protectorado). In Catalunya, for example, the protectorado is someone from the Generalitat, while in other parts of Spain the foundation can choose who will control it.
The protectorado should make sure that the patronato is using the assets well. In any case the foundation has to be registered because as the foundation is formed mainly by assets, so nobody can say if they have been correctly used. The registration has to be made by public organs.
Registration Registration is important because: - Without registration there’s no foundation. It means that it can’t make any type of contracts. The foundation is subject to the analysis of the public body.
5 avillagrasa - IBE, 1st year - 3rd Term Business law II Under Spanish law, the charities only can have a public interest goal. They have to persuade goals of general and public interest.
You can’t make a foundation to look after your children when you die, but you can make a foundation in your town to look after children who have lost their parents.
Foundations receive a lot of tax benefits, so the state has to control to avoid opportunism.
If the interest goal can’t be fulfilled anymore, the foundation will be liquidated.
The fact that they are sin ánimo de lucro doesn’t mean that they can’t do economic activities. It does only mean that the money they will get will be used to accomplish the goal of the association; it can’t be distributed among the owners. 70% of the accounts of the foundation should be devoted to the foundation’s goal.
6 avillagrasa IBE, 1st year - 3rd Term Business law II 16.06.16 Business legal entities They are commercial companies and there are different types. Legal entities are an invention of the legal system made to limit the liability of the owners and to make easier to manage sophisticated business (goals seen in the historical background). The types of legal entities we have were decided by the legal system of the country, so they vary depending on the type of legal system.
Personal companies2 The company is based on he people who is part of it. this means that the owners only put work and they respond with their assets.
a. Sociedad colectiva b. Sociadad comanditaria Capital companies The company is based on the capital and they don’t have to respond with their assets to the company’s liabilities (debts). The personal assets are safe.
a. Sociedad anónima (SA) b. Sociedad limitada (SL) 2 In class we only commented that there are this types, but they were not explained.
7 avillagrasa IBE, 1st year - 3rd Term Business law II Legal entities around the world As we have said, different systems have reached different ways of trading legal entities. This might be a problem due globalization. In Holland, Switzerland and other countries any citizen is able to ground a foundation with the only goal to put the shares of the company (paraíso fiscal?). This is because they recognize that foundations can be made for personal interests. However, in Spain this is not possible; foundations can’t have personal interests as a goal.
Then, maybe a company is legal in a country but in another it can’t be recognized as a legal entity (so it can’t operate). To avoid that problem the European Union has established some common directives to know which companies can be considered as a legal entity. Thanks to this the majority of business companies (SA, SL…) are recognized as such. However there is still the problem with foundations.
Trusts Trusts are a legal entity in the US, but they are not recognizes as such in Spain. They are a typical structure in Common law.
The trust consists in one person (settler) who manages the property of somebody else (trustee) to get benefits. It is very difficult to understand because it is like the assets have a goal (benefits) but not a real owner. In other words, the trust allows people to put assets subject to a goal (benefices) without being owned by anyone. This structure works well in common law but it is strange for the civil law tradition.
Spanish law doesn’t understand the trust as a right holder.
These kinds of problems only exist with capital companie s. With individuals this doesn’t happen because we are individuals everywhere, but the legal entities (fictions) are not the same everywhere.
Piercing the Veil (levantamiento del velo) Legal entities were created with the main goal of separating the liabilities of the company from the personal assets of the owners. This is something positive because it makes possible to invest in huge projects.
This could cause an opportunistic problem: the only shareholder withdraw all the assets from the company and only leave the liabilities, so when the company has to pay for its debts doesn’t have assets to respond with, it is declared insolvent and doesn’t pay.
To avoid it all legal systems have concluded that, though the legal entity exists and it is separated from the owner, if the state discovers that the owner has acted opportunistically, fraudulently, then they will state that the company is a fiction. This 8 avillagrasa IBE, 1st year - 3rd Term Business law II means that the company doesn’t exist anymore and the owner has to respond with his personal assets (firms’ debt=owners’ debt).
The piercing the veil doctrine exists to avoid frauds. This is also applied if there’s a big company and a lot of small ones responding to the liabilities while keeping most of the assets (and benefits) in the big one.
If as a shareholder you don’t act to avoid the piercing of the veil, since you’re benefiting too, you would be found liable.
9 avillagrasa IBE, 1st year - 3rd Term Business law II Insolvency Principio de responsabilidad universal If I’m an individual entering into a contract I will have to pay for it with all the necessary personal assets.
One of the main ideas in private law is the responsibility of debts. All the assets of any right holder are subject to pay for the debts of his right holder. This works well in normal situations in which the value of the assets corresponds to the liabilities’.
In Europe, as the market got more and more complicated and sophisticated, we saw that this principle was difficult to apply when there was insolvency (assets<debts).
The insolvency state generates trust problems and if the only solution was this personal universal responsibility principle the creditor should monitor the debtor, which is costly; or evaluate the risks and decide.
If I’m a creditor I might be confident to grant you 1.000€, because I think I will have they back.
However, if I discover that my debtor has debts with other people, I will be less confident and I will want to collect as soon as possible (because my debtor won’t be able to pay back to all his creditors, and I want to minimize the risk).
Par conditio creditorum So when the market got more sophisticated the first insolvency problems appeared (late middle ages) we saw that the personal universal responsibility principle was not enough. So at the moment that someone was suspected to be close to insolvency or in a “weak position”, all the creditors would start asking the money back, thus making the company actually insolvent.
The par conditio creditorum says that, if the debtor can pay, all the creditors will get the money back. If the debtor doesn’t have enough to pay all, the losses will be distributed among all creditors, meaning that they will get, for example 70% of the quantity granted each. This way no one has incentives to ask all at the same time and thus cause the insolvency of the company. This is applied within the different types of creditors.
Insolvency proceedings Without insolvency proceedings (solutions) there wouldn’t be a long term liability market, which is needed to carry out huge projects.
Insolvency in Spain Spanish insolvency act (2009): it deals with insolvency proceedings in Spain. Before the change of the insolvency act there were 3 proceedings: 10 avillagrasa IBE, 1st year - 3rd Term Business law II 1. Individual: special procedure if the debtor was an individual 2. Suspensión de pagos (companirs): the debtor has enough assets to pay but not at the moment.
3. Quiebra (companies): when the company doesn’t have any assets at all.
Now the act has been modified and the new one changed in: a. Unification: Now they have been unified in one: concurso de acreedores. By the unification the proceedings solved the problem of having to decide which proceeding to use (lack of assets or lack of liquidity).
b. Starting point: The concurso de acreedores starts when someone (company or individual) is not able to pay regularly his debts.
c. Creation of specialized courts: they are specialized in insolvency proceeding and they are able to answer all questions regarding to the insolvency, it doesn’t have to be specialized in accounting, labour, etc.
Thanks to this modifications the Spanish insolvency proceeding is one of the fastest, even though now they have too much work due the crisis.
The insolvency ends in: a. Plan (convenio): i. The plan might entail a reduction the amount of the debt: reduce up to 50% of the credit to be paid ii. Increase the time (extend the maturity a maximum of 5 years) iii. Mixture of i and ii.
b. End-up (liquidación): sell part of the company to pay the debts. This is when the company can’t survive in the market.
Creditors The courts classify the creditors in three different kinds of creditors: Privileged creditors: they are the 1st to be paid. They are taxes, workers (limit of 3 times the minimum salary3) and mortgage (which explains why mortgage is very used in Spain to lend money).
Ordinary creditors: they are neither privileged nor subordinated.
Subordinated creditors: they don’t deserve to be paid, at least, at the 1st stage. They are, for example, the payment of interests, fines, some debts with specific type of creditors that the law understands that are specially attached with the creditor (debts with family). They will be the last credits to be paid.
3 Pay to the workers 3 times the minimum salary first. The rest of the wages they owe are ordinary.
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