Article 192 of the Consolidated Text of the Bankruptcy Law (TRLC) introduces the concept of the 'active mass' of a bankruptcy, which constitutes all of the assets and rights integrated into the bankrupt's assets on the date of the declaration of bankruptcy, as well as those that are reintegrated to the bankrupt or acquired before the conclusion of the bankruptcy proceedings.
The active mass incorporates the principle of universality derived from Article 1.911 of the Civil Code (ie, the debtor is liable for all of its present and future assets).
Under Article 198 et seq of the TRLC, the bankruptcy administration must prepare an inventory of the insolvent party's assets and rights, including their value, by the end of the day immediately preceding the day on which it presents its report (for further details please see "Composition of active mass: inventory of goods and rights"). This article discusses the valuation of goods and rights included in the inventory.(1)
Under Article 201 of the TRLC, each of the assets and rights which form part of the active mass must be subject to an individual appraisal according to their market value.
In addition to the market value, the inventory must set out:
- the value resulting from deducting the rights, encumbrances or charges of a perpetual, temporary or redeemable nature that directly affect the assets and rights;
- security interests; and
- encumbrances or liens that guarantee or secure credits which are not included in the passive mass.
The valuation criterion established in the TRLC is the market value, which is neither the acquisition value nor the liquidation value (SJM 6 Madrid, 4 April 2011).
According to a 29 September 2014 Murcia court decision, a good's 'market value' is the price that an average consumer is willing to pay to acquire such good, regardless of cost criteria. Market value will fluctuate depending on the sector or economic circumstances which are outside the parties' control.
According to the International Valuation Standards, 'market value' is the estimated amount by which an asset or liability should be exchanged at the valuation date between a willing buyer and a willing seller under conditions of perfect competition.
Who bears the burden of proving that the appraisal corresponds to the market value?
According to a 20 November 2012 Valladolid Court of Appeal decision, the party challenging the inventory must prove that a valuation is not in line with the market value. For such claim to succeed, the mismatch must be duly evidenced and be of a certain amount, since appraisals are approximate based on the market circumstances at any given time.
A 21 February 2014 Madrid Court of Appeal decision confirmed this approach.
Determination of fair value of special privilege
Creditors which formally have a special privilege but materially do not because the value of their collateral is insufficient are subject to a covenant since, in practice, they will not be able to satisfy their claim with the realisation of the property obtained as collateral.
Under Article 272 of the TRLC, the special privilege limit applies only for the purposes of agreements, refinancing agreements and out-of-court payment agreements.
The special privilege of an asset or right is limited to its fair value on which the guarantee has been constituted, to which the deductions provided for in Article 275 of the TRLC must be applied.
If the resulting value is insufficient to cover the entire claim, the difference must be classified as appropriate in accordance with the other criteria for the classification of claims under the insolvency regulations.
Under Article 273 of the TRLC, the special privilege limit will be determined based on the fair value of the asset or right.
Real estate
In case of real estate, the limit must be based on a report from an approved appraisal company registered with the Bank of Spain. Such report must be no older than six months.
Finished dwellings
For finished dwellings, the report of an approved appraisal company registered with the Bank of Spain may be replaced with an updated valuation provided that no more than six years have elapsed. Such a report can be obtained by applying the accumulated variation found in the fair value of properties located in the same area which have similar characteristics to the last value certified by an appraisal company.
Listed securities
In the case of listed securities, the limit is based on the weighted average price in the quarter prior to the date of filing for bankruptcy.
Other assets
For other assets, the limit will be based on a report by an independent expert in accordance with the generally recognised valuation standards for such assets. Such report must be no older than six months.
Deductions from reasonable value
Under Article 275 of the TRLC, the following must be deducted from the reasonable value of assets and rights included in the inventory:
- 10% of the fair value of the asset or right on which the guarantee is constituted; and
- the amount of outstanding receivables secured by a preferential security interest in the same asset or right.
In no case may the guarantee be:
- less than zero;
- greater than the value of the credit with special privilege; or
- greater than the value of the agreed maximum mortgage or pledge liability.
Endnotes
(1) This article is part of a series on the active mass under the TRLC. For other articles in the series, please see:
