Reflections on Second Chances and Debt Relief: Analysis of the CJEU Ruling of November 7, 2024

On November 7, 2024, the Court of Justice of the European Union (CJEU) issued a landmark ruling that provides crucial insight into the application of Directive 2019/1023 on restructuring and insolvency.

This legal framework aims to harmonize insolvency procedures across Europe, granting insolvent individuals and legal entities the opportunity for a fresh start through debt relief under specific conditions.

The Spanish Case and Preliminary Questions

The ruling addresses preliminary questions raised by two Spanish courts, which expressed doubts about the compatibility of certain restrictions in Spanish law with the European Directive.

These doubts centered on the following issues:

• Extension of debt relief to individuals: While the Directive primarily focuses on insolvent entrepreneurs, it allows member states to extend its application to individuals not engaged in economic activities.

Spain, through its Insolvency Law, includes such individuals in its second chance regime but under more restrictive conditions.

• Excluded debts: Spanish law almost entirely excludes public debts from debt relief, except for very limited amounts.

It also stipulates that certain past behaviors, such as serious administrative sanctions, may disqualify an individual from accessing this benefit.

How Does the CJEU Respond?

The CJEU reaffirmed that member states have discretion to impose restrictions on debt relief, but such restrictions must be justified and proportionate. The key points of the court’s decision include:

Applicability to Individuals

The court confirmed that the Directive permits the inclusion of non-entrepreneurial individuals in the relief framework.

However, it emphasized that the regime must comply with the principles of proportionality and the guarantees provided by European law.

Exclusion of Public Debts

The exclusion of public debts is permissible if it serves a legitimate public interest, such as safeguarding fiscal revenues, and is duly justified under national law.

For instance, excluding public debts may be legitimate if their relief would severely undermine the state’s financial stability.

Good Faith

In relation to the requirement of good faith for accessing debt relief is also consistent with the Directive, provided that the criteria for determining a lack of good faith are clearly defined and not disproportionate.

Also, the ruling stresses that the definition of “good faith” must be coherent and uniformly applied, allowing case-by-case assessments to avoid arbitrariness. Specifically, it notes that:

• Negligence by the debtor alone is insufficient; a serious or intentional breach of duties must be demonstrated.
• Administrative or tax sanctions cannot, by themselves, justify denial of relief unless they clearly indicate manifest bad faith.

Example: The Corván Case

In this case, a Spanish debtor accumulated various debts, including tax penalties, and sought debt relief. The Spanish Tax Administration Agency (AEAT) opposed the request, arguing that the debtor’s firm sanctions precluded a finding of good faith.

The CJEU upheld Spanish law as long as these restrictions are reasonably justified.

Said court further emphasized that:

• National legislation must establish mechanisms enabling courts to assess whether the exclusion of certain debts or denial of relief is adequately justified.
• Proportionality must be the guiding principle to ensure that excessive restrictions do not deprive debtors of a genuine opportunity for rehabilitation.

Conclusions: Impact on Spanish and European Law

To sum up, the analyzed CJEU ruling marks a milestone in the application of Directive 2019/1023 and has significant implications for Spain:

1. Strengthened European Harmonization: Member states must ensure that imposed restrictions are justified by legitimate public interests and remain proportionate.
2. Regulatory Adjustments in Spain: Spanish legislation must align with the Directive’s principles, ensuring transparency and reasonableness in exclusions, such as those concerning public debts.
3. Flexible Interpretation of Good Faith: National courts now have the opportunity to assess individual circumstances, fostering a more equitable application of the debt relief framework.

Autor

Susana Domínguez Romero 
Attorney

Contact information
 + 34 697 302 341 
 susana.dominguez@lariostreslegal.com

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