Valencia Provincial Appeal Court limits commission fees of insolvency auction specialised companies

Section Nine of the Valencia Provincial Appeal Court delivered a decision on April 12, 2022 determining that a mortgage creditor who holds a security interest in an insolvency asset sold in an out-of-court auction does not have to pay the costs of the specialist company where that same secured creditor is the winning bidder.

In the case concerned it was intended to sell the insolvent debtor’s main asset, an entire hotel complex, to pay a creditor, advised by Garrigues, which had been recognized to hold a secured claim.

On May 26, 2020, as a result of the approval of Royal Decree-Law 16/2020, on procedural and organizational measures to confront COVID-19 in the sphere of the Justice Administration, the insolvency court delivered a decision in which it modified the method for asset disposal, by ordering their liquidation in an out-of-court sale. The decision required the insolvency administrator to inform on the specific system to be used for the liquidation, and expressly offered, as possible options, auctions through either a specialist company, a notary or the auctions portal of the National Court Clerks’ Association. It was also determined that the selling costs would be paid out with funds from the insolvency estate and, should those be insufficient, the costs would then be deducted from the proceeds of the sale.

The insolvency administrator informed of its decision to perform an out-of-court auction through a specialist company, provided the name of the selected company, and stated that the sale would take place in line with the decision which ordered the out-of-court sale. This proposal was approved in a decision by the insolvency court delivered on December 21, 2020.

After various procedural twists and turns, the insolvency administrator filed a writ informing of the out-of-court auction of the hotel complex, specifying the dates of the auction and setting out the conditions applicable to it. Despite what was posed in the decisions dated May 26 and December 21, 2020, the conditions applicable to the auction stated that the winning bidder had to pay all costs associated with the out-of-court auction, including the fees of the specialist company, with which the insolvency practitioner had agreed on a 5% commission on the hammer price for the assets.

The insolvency court disclosed the auction terms and conditions in an interlocutory order delivered on May 13, 2021, which was appealed by the secured creditor due to the contradiction between the new conditions applicable to the auction, and the rules that the court had approved earlier, particularly, in relation to the allocation of selling costs.

In the meantime, the auction was held and the secured creditor was the only and winning bidder for the hotel complex at a selling price equal to 50% of its appraised value. The execution of the sale in a public deed, however, was suspended by means of an injunctive relief ordered by the Valencia Provincial Appeal Court until a judgment was issued on the appeal.

In a decision delivered on April 12, 2022, for which the judge Beatriz Ballesteros Palazón was the rapporteur, the Valencia Provincial Appeal Court, acknowledged the procedural infringements committed while handling the liquidation. Among other determinations, it held that the May 26, 2020 decision was an effective amendment of the liquidation plan which should have followed the procedural requirements set out in article 420 of the Recast Insolvency Law (“TRLC”), notably, allowing a fifteen-day period in which the parties to the proceeding could submit their observations. Moreover, an appeal against the decision should have been allowed to be lodged.

Relatedly, the Valencia Provincial Appeal Court admitted that the interlocutory order delivered on May 13, 2021, disclosing new conditions applicable to the auction which were different from those approved earlier in the proceedings, similarly meant an effective amendment of the liquidation plan, and for that reason should have taken the form of a court decision and should have been appealable. For that reason, even though the filed appeal had not been admitted for consideration at first glance, the provincial appeal court later examined it and entered judgment after the secured creditor filed an appeal of complaint against the denial of leave to appeal.

The provincial appeal court concluded that the infringements committed in the handling of the procedural issues, and the contradiction between the liquidation rules approved by the court and the conditions applicable to the auction set out by the insolvency practitioner meant that the appeal was deemed to be upheld.

The appeal court considered the options of either rendering the previous steps in the proceeding null and void, or retaining those steps and determining retroactively the conditions applicable to the auction already held. Although it considered that the first of these decisions would be the most orthodox course of action, by focusing on the petition made in the appeal (in which a decision rendering the auction null and void was requested on a subsidiary basis), and the fact that the dispute was confined mainly to the issue of allocating the costs of the out-of-court sale – which had no impact on the outcome of the auction – and that there were no third party pleadings, the appeal court decided to keep the held auction in place.

In relation to the auction costs, the appeal court held that the auction rules drawn up by the insolvency practitioner were in breach of the May 26, 2020 decision delivered by the insolvency court, according to which the selling costs associated with the out-of-court sale (including the cost relating to the specialised company) had to come out of the insolvency estate, and, should it be insufficient, from a deduction from the proceeds of the sale.

A notable feature of the appeal decision is its determining that if an out-of-court auction for an insolvency asset is held, in case that the winning bidder is the secured creditor itself whose bid does not go over the amount of its secured claim, there is no selling price from which to subtract the commission fees of the specialised company.

The provincial appeal court affirmed that, in the examined case, the mortgage creditor should not be required to pay the millionaire fee agreed by the insolvency administrator and the specialised company, bearing in mind that the best and only bid in the auction had been made by the mortgage creditor. Moreover, the decision explained, the purchase of the asset by the mortgage creditor did not come about as a result of actions and management performed by the specialised company, but rather as a result of the creditor responsibly and diligently exercising its rights. In the appeal court’s words, “the purchasers of assets only have to meet the costs of the specialist company where that transfer is a consequence of their actions and good management”.

The appeal decision also reinforces its decision based on the argument that liquidation rules cannot overlook the mortgage creditor’s rights in the insolvency proceedings, particularly, that the proceeds obtained from the disposal of the insolvency asset, however it be done, must be used to pay the secured claim, including earned and late-payment interest accrued prior to the opening of the proceedings.

The appeal decision is a reminder to be careful in relation to practices that have been occurring in certain liquidation proceedings, in which a few specialised companies have done nothing more than give notice of the assets to be sold on their websites and process the auction on their portals in a passive and automatic way, without providing any added value, yet they intend to receive hefty commission fees paid for by the winning bidder.

The appeal decision also affirms that the insolvency administrator cannot fail to consider (in the interests of the insolvency proceeding), when choosing the liquidation system and the specialised company, the size of the costs that may be imposed on purchasers, since the lower those costs the greater the chances of bids being made and of these bids being higher. In the examined case, the appeal court highlighted that the insolvency administrator could have encouraged other alternative and less costly ways of performing the out-of-court auction than the one that was chosen.

Time will tell whether the principle and guidelines set in the discussed decision are shared by other courts and whether they will spread to other regions of the country.