Extract taken from 'The Lending and Secured Finance Review' – edition 5
Credit support and subordination
Financing transactions governed by Spanish law are frequently secured by security interests and guaranteed by personal guarantees that will generally only be enforced by the security agent (to avoid partial foreclosures by any creditor). As the legal concept of the security trust does not exist under Spanish law, the agent will need to prove that it has been duly and expressly empowered to carry out this enforcement.i SecurityPledges
Pledges are created over movable assets, and possession of the collateral must be transferred to the pledgee.
Standard pledges include pledges over shares and pledges over credit rights (e.g., those arising from the balances in bank accounts, operational agreements, insurance policies or hedging agreements).Real estate mortgages
Real estate mortgages are created over any real estate, and must be executed in a public deed before a notary public and registered with the land registry where the asset is located. Real estate mortgages generate significant costs and taxes.
Spanish law provides for the possibility of creating a floating mortgage, which is a security interest created over a specific real estate asset to secure an amount of liabilities up to a maximum cap. Floating mortgages can only be granted in favour of financial institutions and public authorities (and in the latter case, exclusively to guarantee tax or social security receivables). The floating mortgage deed must include a description of the actual or potential secured liabilities, the maximum mortgage liability (which will cover all the obligations without allocating mortgage liability to each of them), the term of the mortgage, and the method of calculating the final secured amount and balance payable.Chattel mortgages and pledges without displacement
Chattel mortgages can only be created over:
- business premises;
- cars, trains and other motor vehicles;
- machinery and equipment; and
- intellectual and industrial property.
There is a specific type of mortgage for ships (naval mortgage). The chattel mortgage must be executed in a public deed before a notary public and registered with the Movable Assets Registry.
Pledges without displacement can only be created over:
- animals on plots;
- harvesting machinery;
- raw materials in warehouses;
- merchandise in warehouses;
- art collections; and
- credit rights held by the beneficiaries of administrative contracts, licences, awards or subsidies, provided that this is permitted by law or the corresponding granting title, and over receivables (including future receivables) not represented by securities or qualified as financial instruments.
Pledges without displacement must be executed in a public deed before a notary public, and registered with the Movable Assets Registry.
Except for pledges without displacement over credit rights and inventories, these security interests are seldom used in Spain, mainly because:
- the pledgor or the mortgagor would not be able to sell the relevant assets without the pledgees' or the mortgagees' consent, respectively;
- most of the assets that can be mortgaged with a chattel mortgage (mainly those that are not movable) can be covered by a real estate mortgage if expressly agreed to by the parties in the real estate mortgage deed; and
- in most cases, the assets that cannot be covered by a real estate mortgage are not valuable enough to warrant the cost of creating the chattel mortgage.
Financial collateral secures the fulfilment of principal financial obligations. Although the meaning of this expression has been subject to debate among academics, the most common construction is that obligations pursuant to almost any financing document can be secured by financial collateral. Financial collateral can consist of cash or securities and other financial instruments, and certain types of credit rights held by credit institutions. Therefore, financial collateral could comprise shares issued by public limited liability companies – although some academics doubt whether shares in non-listed companies can constitute financial collateral – and credit rights arising from the balances in bank accounts.
This type of security interest (1) may benefit from a separate enforcement if the debtor becomes insolvent, and (2) as regards pledges over shares, can be foreclosed by a private sale (instead of in a public auction, as is the general rule under Spanish law) conducted by the depository of the shares or by the pledgee's direct appropriation of the shares. This is in contrast to the general Spanish law principle that prohibits any form of foreclosure of a security agreement that enables the holder of the security interest to directly and immediately acquire the secured asset.ii Personal guarantees
Normally, the borrower's shareholders and each of its subsidiaries provide, to the extent permitted by law (specifically, the financial assistance prohibition and conflict of interest restrictions), first demand guarantees or other types of personal guarantees in respect of the fulfilment of the obligations assumed by the borrower under the financing documents.
A personal guarantee may be created by agreement between the creditor and the guarantor, or by operation of law. To facilitate the enforcement of a personal guarantee against a Spanish company, a settlement clause establishing the method of calculating the outstanding debt is usually included.
In the absence of an agreement to the contrary, a guarantor cannot be obliged to pay the beneficiary of the guarantee until all the debtor's assets have been realised. However, this restriction does not apply as follows:
- if the guarantor has waived the restriction;
- if the guarantee is joint and several;
- if the debtor is declared insolvent; or
- if the debtor cannot be sued in Spain.
Additionally, all exceptions and defences available to the debtor as against the creditor will also be available to the guarantor.
First-demand guarantees, which are not regulated by law, are separate and independent from the main obligation, create a primary liability on the guarantor and are not subject to the debtor's assets being realised. Lenders usually request that all personal guarantees created under the finance documents be first-demand guarantees.iii Priorities
Security interests are governed by the principle that security created earlier has priority over that created later. With respect to real estate mortgages, chattel mortgages and pledges without displacement, priority is determined by the date (and time) on which they are registered with the public registry, which is deemed to be the date (and time) on which the relevant document was submitted for registration. With regard to pledges, which are not registered in any public registry, priority is determined by the date (and time) on which possession is transferred. However, Spanish law allows creditors to agree on the priority of pledges and real estate mortgages. Therefore, creditors can agree that all the credits have the same priority or different ranking.
Pursuant to the Spanish Insolvency Act, in the context of bankruptcy proceedings, secured credit rights will benefit from priority up to the value of the collateral. The creditor is generally considered an ordinary creditor in respect of the excess.iv Subordination
Notwithstanding this, if a secured credit is classified as a subordinated credit, the benefit of any priority arising from the security is lost. Under Spanish law, subordination can arise ex lege (as a matter of law) or ex contracto (from a contract).
Contractual subordination is recognised in Spain in accordance with international practice. Contractual subordination provisions used in Spain are similar to those used in other jurisdictions.
Spanish insolvency law provides for the subordination of certain claims by operation of law. These subordinated claims include, among others, the following:
- claims that are not notified by the creditors to the insolvency trustee in a timely manner;
- claims that are contractually subordinated to all remaining claims of the debtor;
- claims for interest; and
- most importantly, all rights against the debtor held by legal or natural persons who qualify as 'specially related' to the debtor. This category includes, among others, shareholders with a stake of 10 per cent in the insolvent entity (5 per cent if it is a listed company) when their credit right arose, formal directors or shadow directors, and companies of the insolvent entity's group.
There is also a rebuttable presumption that any person who acquired a credit against the insolvent debtor from any of those related parties in the period of two years prior to the commencement of the bankruptcy proceedings is a related party for insolvency law purposes.