The insolvency administrators (hereinafter, “the Plaintiff”) of the company Santa Teresa Materiales de Construcción S.L. (hereinafter “the Company”) sought the declaration of invalidity of the transaction undertaken by the Banco Santander S.A. (hereinafter, “the Bank”) classified by the Plaintiff as debt offset.
The events occurred as follows: on January 25, 2007, the Bank and the Company executed a credit policy in an amount of one hundred thousand euros (€100,000) maturing on January 25, 2008. On April 26, 2007, such policy was increased by three hundred thousand euros (€300,000). Likewise on that day, the Bank and the Company arranged a policy for the pledge of two thousand nine hundred forty-eight (2,948) equity shares of the Company in mutual funds.
The voluntary bankruptcy of the Company was declared by order dated November 5, 2007, date on which the account created in support of the credit policy showed a debit balance in favor of the Bank in the amount of four hundred six thousand ninety-six euros and fifty-four cents (€406,096.54).
Following the declaration of bankruptcy, on November 21, 2007 the Bank notified the Company that it had undertaken a refund transaction dated November 14, 2007, for the entirety of the two thousand nine hundred fortyeight equity shares in the mutual fund and for a net amount of three hundred seven thousand three hundred eighty-five euros and seventythree cents (€307,385.73), which was transferred to the credit account on November 17, 2007 and applied by the Bank towards the reduction of the debit balance.
The Plaintiff considered that since this was performed on November 17, 2007, date on which bankruptcy had already been declared, that the described offset transaction was in violation of Article 58 of Bankruptcy Act 22/2003, July 9, which establishes that “without prejudice to the provisions of Article 205, following the declaration of bankruptcy, any offset of credits and debts of the insolvent party will not take place, but any offset whose requirements shall have existed prior to the declaration will take effect”.
The judicial bodies of the first two instances (Court of First Instance 2 of Segovia and the Segovia Provincial Appellate Court) found in favor of the Plaintiff, since they understood that the offset or, where appropriate, enforcement of the pledge, had in fact taken place after the declaration of bankruptcy whereby they convicted the Bank to reimburse the assets of the Company in the quantity of three hundred seven thousand three hundred eighty-five euros and seventy-three cents (€307,385.73).
They likewise added that the offset requirements of Article 1196 of the Civil Code did not occur prior to the declaration of bankruptcy, among other reasons because the maturity of the credit policy giving rise to the debt, set for January 25, 2008, had not taken place upon the declaration of bankruptcy.
The Bank filed an appeal for cassation before the Supreme Court against the ruling of the Provincial Appellate Court, alleging that the transaction challenged in the claim was not an offset, but rather the enforcement of a pledge on the equity shares in mutual funds property of the debtor and pledger, and that such enforcement was governed as agreed by both parties, specifically by the contents of Clause Six of the pledge agreement in which, under the heading “enforcement” the following is stipulated:
“(…) for the purpose of the enforcement of the pledge, the pledger hereby expressly and irrevocably grants the Bank the right that corresponds to it to request the refund of the equity shares of the pledged Mutual Funds from the Management Company insofar as necessary for the payment of any quantities owed, providing that these are due, and hereby grants an irrevocable order to the Management Company to accept and execute such request and place the resulting balance at the disposal of the Bank, which may apply this on its own toward settling any obligations deriving from this agreement (…)”
The Bank likewise alleged that such enforcement should not be affected by the declaration of bankruptcy of the debtor Company and holder of the pledged instruments, by virtue of the provisions of Article 15.4 of Royal Decree 5/2005 whose literal meaning is as follows “Financial collateral agreements will not be limited, restricted or in any way affected by the opening of a bankruptcy or administrative winding-up proceedings, and may be immediately and separately enforced as stipulated between the parties and set forth in this section.”
The Supreme Court ultimately ruled in favor of the Bank, declaring that the prior instances had not considered the provisions of Royal Decree Act 5/2005, which constitutes a special rule applicable to credit institutions – pursuant to section 3 of additional provision two of Act 22/2003 – and which transposed Directive 2002/47/EC, of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements. And, in particular, Article 15.4 thereof, which establishes that the right of separate enforcement of the collateral, exercised as appropriate by the creditor now appellant, is not limited, restricted or in any way affected by the opening of a bankruptcy proceeding of the pledged debtor.
In conclusion, the Supreme Court declared that the collateral had been enforced as agreed and by virtue of the aforementioned precept, proceeding to uphold the appeal for cassation, act accordingly with the remedy of appeal and dismiss the complaint