THE PROBLEM OF THE TEMPORARY LIMITS OF INSOLVENCY.

REAL PROPERTY RIGHTS vs PERSONAL RIGHTS.

Article Published in “FORO COMPLUTENSE” Magazine of the Lawyer’s Bar

Association of Alcalá de Henares. Number 4. Madrid: ICAAH, 2005.
By Juan Palao Uceda. Lawyer.

When the Insolvency Proceedings are declared, two values of the

system contend, in an indubitable duel of titans, which must be
reasonably considered. On one side, property, as described in Section 33
of the Spanish Constitution, this is, subordinated to its “social function”.
And, on the other, the institution consecrated in Section 38 of the Spanish
Constitution, this is “market economy” and its “planning”.

At the origins of Human existence, the Real Property Rights1

appeared in first place. These implied an origin of direct dominion over a
good (animal skins, spears,...), thus, property is also known as
“dominion”. These Real property Rights are imposed by the individual
who possesses and conserves this property; afterwards, these rights are
acknowledged externally, in the first human groups, such as Kelsen
states:

“The subjective rights appeared at the beginning of times (through original

appropriation) only afterwards did the objective rights appear in the form of State rules,
protecting, acknowledging, guaranteeing the right, independently from their subjective
birth” 2 .

When some of the goods turned into economy goods, that is, there
were not so easy to obtain and were only possessed by some by technique
and dedication employed over them 3, this was the moment where
Personal Rights entered into the scene of human relations, to be exchanged
(quid pro quo) 4, the right to receive a good in exchange of another5 was

1 We speak about the civil area and not the criminal one, which contains the right to life which
necessarily appears with the establishment of any legal system.
2 Reine Rechtslehre. Hans Kelsen. 1 Auflage. 1985 Scientia Verlag Aalen. Pag. 41. “erst entstehen

subjektive Rechte, vor allem das Eigentum, dieser Prototyp des subjektiven Rechts (und zwar
im Wege der ursprünglichen Aneignung), erst später kommt das objektive Recht als staatliche
Ordnung schützend, anerkennend, gewährleistend zu den unabhängig von ihm entstandenen
subjektiven Rechten hinzu” Kelsen continues stating that this vision is clearly shared by the
Historicist School of Law (rechtshistorische Schule).
3 Theory of the Obligations (“Teoría de las Obligaciones”). J. Giorgi. Reus., S.A. Madrid. 1928.

Vol. I. Page 2. “ The obligation …represents the bonds of the mutual right of easement that
bounds some with others in the satisfaction of their necessities, which no individual could
satisfy by himself or herself, or in the limits of each individual’s activity.”
4 “One thing in exchange of another”.
5 Law of Obligations. Volume I (“Derecho de Obligaciones. Tomo I.”) Editorial Revista de

Derecho Privado. Madrid. 1958. Karl Larenz. Page 16. “Frequently the Law of Obligations is

1
born. Thus, the institution of the Market is born. Later, money 6 will arrive
to facilitate this exchange. At an earlier time, each Cro-Magnon man
could elaborate his own spear with no need to establish a personal
relation or bond with another, but when knowledge and technique were
more far developed, the specialization of the work obliged individuals to
establish relations among them, to transfer the goods created by each
specific profession, giving birth to trade and personal rights.

The degree of development in ancient societies could be established

by the grade of organisation and the existing relations amongst the
members of a community. In the measure that a society could work
organically and in a synergic manner, each member developing his/ her
specific task; societies could consider themselves as more fully-
developed. This intelligent and developed functioning is similar to the
human organism where each organ has a final aim and depends on the
rest, giving a real reason of being to what has been called the Social Body.

The market as a necessary instrument for this negotiation, is the

origin of this magnificent production that makes possible to satisfy the
most varied of human needs. If the credit rights were to remain unpaid in
a market, nobody would converge in such market. Thus, it is justified
that, first, “the debtor must stop taking as the Law deprives him of a defence that
was before guaranteeing his good”7, and, secondly, that if “the patrimony (of
the debtor) cannot yet cover his responsibility, the creditor will also have, apart of
the enforcement of his rights, the right to use actions to revoke and to subrogate,
to the limit of his complete satisfaction”8 as a guarantee of his credit rights.
These two legal formulas form the body of the rules relevant to
insolvency proceedings, universal execution of goods and bankruptcy’s
retrospective annulment of bankrupt’s dealings with property and other
goods, on the basis of these all the rest is formed. To encourage the
accomplishment of these two legal techniques is a task of national interest

classified as the “Law of the traffic of goods or of the exchange of goods, in opposition to the
Law of Goods which is considered more a Law of dominium (permanent dominium) over such
goods”.
6 The Time of Enterprise Ethics (“La hora de la Ética empresarial”). Ortiz Ibarz. McGraw-Hill.

Madrid. 1996. Page 43 “[…] men have the need to establish relations, it is not possible for them
not to establish these, and one of the consequences of the work division is the appearance of
money.”
7 Temporary Receivership (“La Suspensión de Pagos”). Joaquín Torres de Cruells. BOSCH.

Barcelona. 1957. Page 34.

8 Torres de Cruells. Op. Cit. Pag 15.

2
to favour external and internal investment, which are the base of
production and employment9.
We can find a clear example in Venice, that arrived, at early times
of History, to own magnificent richness and welfare thanks to trade,
basing its way of trade in the prosecution of fraud and debtors as the
means of attracting business and investment from all nations. To this
respect, we can remember the words that Shakespeare attributes to
Antonio in “The Merchant of Venice” to justify the accomplishment of
contractual agreements: <<The dux cannot prevent Law from following its
course, due to the commercial guarantees that the foreigners find close to us in
Venice; to suspend Law would be to attempt against the justice of the State, as all
nations depend from the commerce and richness of the city...>> 10

Goods give sense to propriety, however these are born form the
Market. On top, the name “good” results from something that intends the
welfare or “good” of man 11. According to this, the true and prodigal
generation of goods must be preached of those that come from scientific
and technological advances of the last two centuries and these have only
been possible thanks to the prospective of sale that lays in an orderly
Market. Consequently, in the present, the value of personal rights has taken
an indubitable importance due to the nature of the goods that are produced,
as nowadays, with the adequate quantity of money one can have the
same death or own a vehicle that will allow him to travel to the more
distant places. What did it matter to a hunter if his spear was taken away
from him, if he could make another one? This is the reason why in the
laws and regulations of today, the personal actions are more valued, as
they make possible trade and research that create benefit and welfare for
our kind, which is expressed in a Latin saying “Bona intelligutur cuiusque
quae deducto aere alieno supersunt.” 12.

Although real property rights must be subject to a better defence,

as they answer to a present state of things, characteristic of each State and
legal system, due to the importance of human negotiation, as we say,
there are means and instruments to value personal actions. The
mechanisms to demand the accomplishment of personal obligations must
count in all legal system with a group of guarantees to legitimate
intromission in the area of propriety or real possession of a person. Thus,

9 The Economy Theory of John Maynard Keynes. Theory of a Monetary Economy Dudley
Dillard. Spanish Edition by Aguilar Ediciones. S.A. 1973. Madrid. Page 31. “ (employment) …
cannot increase if investment does not increase”.
10 Third Act. Third Scene. Antonio.
11 The English term <<commodity>> also implies this sense of welfare and commodity.
12 “There are not assets or goods but that which exceeds the debt”.

3
in these legal systems, this personal right, in its stage of enforceable
execution turns into a “ius ad rem”, this is a real generic right. “The bond
with a person’s activity is turned into a bond with patrimony”13 as a
“weakening of the propriety right”14 has been produced. In this way, when a
debtor hands a good for the payment of a debt “pro solvendo”, the creditor
cannot make himself the proprietor of it, as the propriety right still exists
for the debtor 15, and, he can only obtain the value which was owed to
him, returning to the debtor the rest of the value of the purchase of that
good 16. It is the same that happens in bankruptcy’s proceedings in which,
although, the debts surpass the net patrimony, up until the moment of
winding-up the company, the only thing that can exist is a dispossession
or a universal attachment of goods but never an appropriation. In this
sense, Professor Garrigues has defined the winding-up of a company as
“the group of operations of the company that tend to fix the company’s assets
which can be divided amongst the shareholders”17 and this is what the
insolvency proceedings are, also, all about, although, in the end, there
will be no assets to divide amongst the shareholders. Equally, in the
Roman Law institution of “cessio bonorum”, it permitted to the creditors
“only” to promote the sale of the goods of the debtor that he, himself,
had handed over to them 18.

All of these statements, make comprehensible the delicateness with

which we must proceed when we transcend the area of Propriety Law,
and it justifies that the institutions that enforce execution are so close to
the Law of the Procedure 19, where they are punctually defined and where

13 Joaquín Torres de Cruells. Op. Cit. Pag. 15.

14 Torres de Cruells. Op. Cit. Pag. 435.
15 The greater importance of Real Property Rights over Personal Rights can be seen in the

Spanish Draft for the Act of Insolvency Proceedings of 1995 which states in section. 66 that the
execution proceedings in which the good has not been allotted to the successful bidder will
accumulate in the insolvency proceedings . In Section 166 of the Spanish Draft for the Act of
Insolvency Proceedings of 1983 it states that if execution had been dispatched over a good and, a
previous bid auction, the good had been handed to the successful bidder, it will not be possible
to reintegrate the thing in the Insolvency proceedings, no matter its convenience for these. The
existence of this real dominium unable the personal rights of the creditors to change this state.
16 Torres de Cruells. Op. Cit. Pag. 498.
17 Course of Mercantile Law (“Curso de Derecho Mercantil”). Joaquín Garrigues. S. Aguirre.

Madrid. 1936. Tome I. Page 317.

18 Treatise on Bankruptcy. Antonio Brunetti. Mexican Edition. México, D.F. 1945. Page 16. “The

institution of cessio bonorum, created by the Lex Julia (year 737 of the Roman Calendar),
mitigated the excessively serious effects of the infamy. The debtor, although he was
condemned, or confesus in jure, could avoid such effects only if he declared solemnly he
granted all of his assets to the creditors, but he did not grant them the propriety, but the
possession and custody of these assets and the right to sell them (L.4 C. qui bonis cedere,
VII,71)”
19 Torres de Cruells. Op. Cit. Pag. 38.

4
the guarantees of the executed are well protected at the time when his or
her property is taken.

To retard the declaration to commence these insolvency

proceedings, from the moment that the impossibility to accomplish
obligations by the debtor becomes apparent and his or her financial
situation worsens by the excess of the obligations he or she has become
bounded to, implies to give a greater importance to propriety than to the
institution of the Market, which gives sense to the first (as thanks to the
Market it is produced and innovated), but to anticipate in excess this such
declaration to begin insolvency proceedings would mean a very strong
state interventionism, which would violate not only the free disposition
of propriety, but also the basis of our Liberal Economy System20.
Referring to interventionism, Garrigues states:

“[…] the legal precautions to avoid the decrease the guarantee of the
creditors can only be indirect. The only direct measure could be to oblige the
company to a safe and stable positioning of the contributions of the
shareholders. But this would difficult the free commercial activity of the
company.” 21

Due to this reason, it was neither acceptable, in general terms, a

Necessary Suspension demanded by the creditors as it was proposed by
the Chamber of Commerce and Navigation of Barcelona in a renewed proposal
of the one it made back in 191322, nor, as the present law system forbids,
an imminent insolvency declared by one creditor, as it can only be
demanded by the debtor (Section 2.3 of the Spanish Act of Insolvency
Proceedings) 23, in comparison to the present declaration of insolvency
proceedings that can also be demanded by the creditors.

20 The Reforrm of the Act of Insolvency Proceedings (“La reforma de la Legislación

Concursal”). Editor. Angel Rojo. Marcial Pons, Ediciones Jurídicas y Sociales, S.A. Madrid.
Barcelona. 2003. About the Proceedings Previous to Insolvency and the Prevention of
Insolvency. The Mechanism of Alert previous to Insolvency. (“Sobre la Preconcursalidad y la
prevención de la insolvencia el mecanismo de alerta preconcursal”). Luis Fernández del Pozo.
Page 22. “The lack of a legal specific title, the creditor cannot demand the intervention of the
Court (as)… the constitutional principle of Free Enterprise outstands (art. 38 CE)”. Page 45.
“The problem is the following: Does the mere question of an imminent crisis allow the creditor,
any creditor, to demand a Court management or administration without having to demand first
a declaration of bankruptcy? No, as a general principle… Outside the limits of an express
authorization … the principle of free enterprise must be respected (cfr. art. 38 CE)”
21 Garrigues. Op. Cit. Tome I. Pag. 233
22 Torres de Cruells. Op.Cit. Pag. 88
23 “If the demand for Insolvency Proceedings is to be declared, his or her indebtedness must be

declared and his or her state of insolvency, that can be present or imminent. The debtor will be
in this state if he cannot accomplish punctually and regularly with his or her obligations.”

5
 To enter, in the area of the declaration of insolvency proceedings,
the will of the merchant can make us avoid this spanner in the works by
means of declaration of imminent insolvency. It will be a matter, then, of
creating a use or custom 24, there where the legal system cannot reach, by
means of encouragements when facing prompt declarations and by
means of discouragements when facing late declarations of insolvency
proceedings25 a matter which the present Law / Act does not regulate
with sufficient weight.

24 “For custom (use) almost can change the stamp of Nature. Hamlet. W. Shakespeare. Act. 3.
Scene 28.
25 “The really serious problem is how to stimulate, positive or negatively, these and those, so

that they tend to an early demand for declaration…” Luis Fernandez del Pozo. Op. Cit. Pag. 14.