SUPREME COURT RULING NO. 44/2103, OF FEBRUARY 19, 2013: INSOLVENCY CLASSIFICATION OF FINANCE LEASE INSTALMENTS DEPENDS ON SPECIFIC PROVISIONS OF THE LEASE AGREEMENT

Supreme Court finds that where a finance lease agreement releases the lessor from liability for defects, credits resulting from payments due before the declaration of insolvency and for those falling due after it are insolvency credits  

The Supreme Court examined the insolvency classification of payments to be made under finance lease agreements, depending on whether there are unfulfilled obligations in the agreement to be carried out by both parties, in which case the payments falling due after the declaration of insolvency will be considered credits against the insolvency estate, or whether there are obligations that only the lessee needs to carry out, which will be considered privileged insolvency credits.  

If we consider finance lease transactions in the abstract, the Supreme Court recognises that both parties have obligations under the agreement: the lessee is obliged to pay the rental and the lessor is obliged to supply the use of the leased item, beyond mere delivery, for the full term of the agreement.

To classify the credit in this case, the specific clauses agreed by the parties must be examined. It was agreed that the lessor was released from liability for undisputed possession and mechanical defects, and its rights against the supplier would be transferred to the lessee. The court recognised that the finance company was obliged not to act in any way that might obstruct the insolvent party’s possession of the item, although, in the court’s view, this obligation is just a general duty implicit in the agreement, which had been performed when the item was delivered, and the obligation was not enough to merit the credit being classified as a credit against the insolvency estate. In the end, the court confirmed the classification of these credits as privileged insolvency credits.

BARCELONA PROVINCIAL COURT (SEC. 15) RULING NO. 376/2012, OF NOVEMBER 16, 2012: RESCISSION OF INTERIM DIVIDEND REJECTED2

Distribution of dividends is an act of disposal for valuable consideration. To determine whether dividends distributed in a specific period may be reversed if the company becomes insolvent, its financial and equity situation must be assessed, along with its compliance with the corporate requirements for passing the resolution to distribute and pay dividends

The Barcelona Provincial Court overruled the rescission of an interim dividend paid to the three partners of a private limited company that had been approved unanimously at a general meeting, based on the following arguments:

  1. The distribution of dividends is an act of disposal for valuable consideration (and not for no consideration). The distribution of dividends fulfils the legal and financial reason for the corporate contract, through which partners aim to obtain a profit. It is not a mandatory act, but it is an act of disposal for valuable consideration, in keeping with the reason for the corporate contract that satisfies a legally recognised right held by the partner.
  2. Although it involves reducing the company’s assets, with no return for the company (earnings are transferred to the shareholders rather than becoming part of the company’s funds as reserves), this does not mean that rescission will make it ineffective. Circumstances in which the resolution to pay the dividend in a normal financial and equity context must be examined. The company’s economic, financial and equity circumstances must be assessed to determine whether the resolution and payment was not, at that time, an unjustified sacrifice for the company’s equity. Also, the frequency of resolutions to distribute dividends must be weighed in keeping with corporate law. If the breach of any of the requisites of the Spanish Companies Act for distributing dividends reduces the company’s equity, the distribution of dividends would be illegal and unjustified.

The Barcelona Provincial Court found that the distribution did not entail an unjustified sacrifice: (i) the situation of insolvency had not arisen and could not have been foreseen; (ii) there were no creditors with due credits whose rights were defrauded for the shareholders’ benefit; and (iii) a year and a half had passed between the date the interim dividend was paid and the date of the application for declaration of insolvency.  

BARCELONA COMMERCIAL COURT NO. 2 ORDER OF APRIL 10, 2013: EFFECTS OF COURT-SANCTIONED REFINANCING AGREEMENT EXTENDED TO DISSENTING CREDITORS WITH IN REM GUARANTEES  

The order extends the effects of court-sanctioned refinancing agreement to dissenting creditors with in rem guarantees and the moratorium on enforcement against the refinanced party during the agreed grace period

Once it was proved that the refinancing agreement complied with the formal and substantive requirements of the Insolvency Act, the court specified its effects for the dissenting finance entities. It found that, although the Act’s wording3 might give the impression that the moratorium in the agreement cannot extend to dissenting creditors whose credits are covered by in rem guarantees or affect them if they have already started mortgage foreclosure, the specific circumstances of the case led the court to rule in favour of extending the grace period to creditors with in rem guarantees. It based its decision on the following facts: (i) the weight of the percentage of mortgage debt in the refinancing agreement, which was nearly 80%, (ii) the short duration of the proposed moratorium (the maturity date would be postponed until October 1, 2013); (iii) the expert’s opinion that the agreed postponement was necessary and that future agreements would likely be more successful if a portion of the debtor’s assets was free of liens, as they could be used for financial negotiations; and (iv) failure to extend the waiting period and moratorium on foreclosures would endanger the company’s continued existence.  

The court ruled to extend the effects of the agreed grace period to the dissenting finance entities and to the moratorium on foreclosures that had been or might be started up to the end of that grace period.  

MADRID COMMERCIAL COURT NO. 4 RULING NO. 6/2013, OF FEBRUARY 7, 2013: CREDITORS OF INSOLVENT COMPANIES CANNOT OPPOSE MERGER PROVIDED FOR IN COMPOSITION AGREEMENT WITH CREDITORS  

Where a composition agreement with creditors provides for a merger, the right of the creditors of the insolvent company involved in the merger to oppose the merger is subsumed in the right to oppose the composition  

This ruling approves the early composition plan by two companies (parent company and wholly owned subsidiary) calling for a merger between the parent company and its subsidiary.  

In keeping with the application submitted by the insolvent companies, the court ruled that the right of the creditors of the insolvent companies to oppose the merger provided in section 44 of the Structural Changes Act did not apply, because recognising an individual right to oppose would (i) change the par conditio creditorum principle; (ii) contradict the majority principle to which creditors must be subject in an insolvency; and (iii) grant the creditors exercising their right to oppose an atypical privilege of the sort prohibited under section 89.2 of the Insolvency Act.  

In other insolvency proceedings where Cuatrecasas, Gonçalves Pereira advised the insolvent companies (Envases del Vallès and Expofinques), the commercial courts applied the same criterion and approved compositions that called for the merger of two companies (parent-subsidiary) with ordinary and subordinated creditors having no right to oppose.4

CENTRAL ECONOMIC-ADMINISTRATIVE COURT RULING OF MAY 16, 2013: LOANS AND CREDITS CONSIDERED EQUIVALENT FOR EXEMPTION FROM STAMP DUTY IN AMENDMENTS OF AGREEMENTS UNDER ACT 2/1994

The Central Economic-Administrative Court found that exemption from stamp duty in Act 2/19945 applies not only to amendments of mortgage loans, but also to amendments of mortgage credits  

This ruling by the Central Financial-Administrative Court amends the criterion the Directorate General for Taxation (“DGT”) followed in the past regarding the possibility of applying the exemption from stamp duty under Act 2/1994 to deeds amending mortgage credits.6  

The DGT had repeatedly denied this possibility based on the literal wording of the law and the different legal nature of loans and credits. The Central Financial-Administrative Court found that the criteria do not justify the discrimination resulting from that distinction and ruled that “The exemption provided in section 9 of Act 2/1994 must apply, in the cases specified in that provision of law, to mortgage financing in general, regardless of the type of instrument (credit or loan) used.”  

The court believes that this position is more in keeping with both the aim of Act 2/1994 set out in its Statement of Motives (“to stimulate and streamline the financial market, making it competitive, reducing indirect costs, and encouraging lending entities to adapt the financial conditions for financing to the market”) and the current credit market, in which the instruments offered by lending institutions now combine features of both types of agreement, as sometimes it is too difficult to classify the specific legal relationship as one or the other of the two categories.