The Supreme Court clarified the insolvency categorisation for interest rate swap contracts, classifying them as insolvency credits, as they fail to meet the functional synallagma requirement, which establishes functional reciprocal obligations.
The two rulings are the outcome of Banco Santander’s appeals against the Barcelona Provincial Court (Section 15) decisions, which found that (i) the swap transaction did not fall within the scope of Royal Decree Law 5/20053 (“RDL 5/2005”), because under that regulation, a number of financial transactions must be included in or affected by the contractual set-off agreement, which did not occur in the cases at issue, as they involved a single financial transaction, and (ii) it was not a matter of reciprocal obligations pending performance.4 As a result, the Provincial Court found that both the credits corresponding to the settlement for the quarter ending after the insolvency and those generated under settlements for future quarters are insolvency credits.5
The Supreme Court pointed out that case law has established what are to be understood as reciprocal obligations, as neither the Insolvency Act nor the Civil Code defines them. Referring to several Supreme Court rulings, it differentiates between “genetic synallagma,” in which the obligation to be performed by each party is the cause of the other party’s obligation (consideration), and “functional synallagma,” in which the two obligations are linked so closely they must be performed simultaneously. The court concluded that the disputed contracts did not involve functional reciprocity, as obligations arose for only one of the parties, stating that “the exchange of flows forms part of a mechanism for calculating a single obligation for one of the parties” and “the obligations pending performance for one of the parties do not involve a causal relationship with those that may arise in future for the other party.”
On those grounds, the Supreme Court rejected the appeals and confirmed the provincial court’s categorisation as an insolvency credit.