The rescission was declared of a mortgage the insolvent company  granted over a  warehouse it owned in guarantee of the  loan a credit institution  had  granted to a company of its group. The Supreme Court declared (i) that the contextual guarantee was  for consideration and (ii) the need for proof of the profit (even indirect) of the guarantor  company without merely belonging to the  group sufficing, and  confirmed that the  rescission only affected the guarantee and not the loan.

The insolvency administration brought a rescission action over a mortgage the insolvent company granted over an industrial warehouse it owns in guarantee of the loan granted  by a credit institution to a company of its group1.

The commercial  court’s judgment, confirmed under appeal, upheld the rescission action  over the mortgage. The provincial  court understood that granting the mortgage was an act for consideration  harmful to the insolvency estate, as the mortgage was over the insolvent company’s main asset to secure the debt of a company that was in a dreadful financial state without receiving any consideration whatsoever.

The Supreme Court confirmed that the granting of a mortgage by the insolvent company over the industrial warehouse, within the two years before the declaration of insolvency,  without receiving any consideration whatsoever, either directly or indirectly, constituted  an act of disposal for consideration damaging the estate of the debtor under insolvency  proceedings, which was, therefore, subject to rescission.

In short, the Supreme Court concluded as follows:

  • The fact that granting the contextual guarantee was for consideration.  The insolvent company’s granting of the  contextual  guarantee to a company of its group is  an act for consideration.  The Supreme Court stated that “unless proven  otherwise, granting the simultaneous or contextual guarantee with the creation of  the secured credit will be understood to correspond to the granting of the latter, and  therefore for consideration, as the creditor grants the credit  based on the existence of the guarantee, i.e., it receives jointly correspondent to its credit the  debtor’s promise of payment and the guarantee of the third party.”
  • Analysis of  damage in intragroup contextual  guarantees.  The fact that the guarantee in favour of a third party should be for consideration does not exclude  the  existence of damage.  Moreover, if it is an  act of disposal by way of  consideration carried out in favour of a person particularly related to the guarantor  subsequently declared insolvent,  the damage is presumed,  although it may be  proven otherwise.

In intragroup contextual  guarantees, the existence of damage to assets may be  considered excluded if any asset attribution exists, even if only indirect, in favour of the  guarantor  company,  of an amount  sufficient to justify the provision of the  guarantee. The mere existence of the group does not justify such asset attribution or profit. An abstract  appeal to “group interest” is not enough; it is necessary to  specify and justify the financial benefit obtained by the guarantor.

  • Effects of  insolvency rescission action.  In the case of an  in rem guarantee (the mortgage),  granted to a third party, the effect of the  rescinding judgment is the extinction of the guarantee and  cancellation of the  registration of such mortgage,  without this affecting the validity and efficacy of the loan in relation to which the guarantee was provided. The Supreme Court did not accept the appellant financial  institution’s allegation that the guarantee and secured legal transaction  (the loan)  were indivisible, because the creditor would not have granted the loan without the  guarantee.  For the Supreme Court,  the loan,  in respect of  which the  in rem guarantee had been  granted  by the party later declared insolvent, was a legal transaction between a third party and the creditor benefiting from the guarantee,  which was not affected by the guarantor’s  declaration of insolvency.  The creditor  whose guarantee was rescinded would have to satisfy  its interest outside the  insolvency.  When  the  non-debtor  mortgaging party becomes insolvent,  its insolvency emphasizes the lack of justification of the granting of a guarantee over  a third-party debt,  meaning that, to restore the estate,  the rescission of the  mortgage does not affect the secured credit’s validity.

Two senior judges of Chamber One of the Supreme Court cast dissenting votes:

  • Senior judge Antonio Salas Carceller  agreed with the operative part of the  judgment, but partially disagreed with the grounds, particularly with the  classification of the  contextual  guarantee as  an act for consideration.  In his  opinion,  the granting of the  mortgage in  favour of a debt of another group company is an act free of  charge.  He believes two concepts should be  differentiated: (i)  the cause of the transaction  granting a mortgage to secure a  third-party obligation, with no effective consideration, which should be considered  free of charge for the effects of article 71.2 of the Insolvency Act 2 ; and (ii) the  grounds that could be put forward for encumbering the actual asset of the specific  case, which would not  come under the concept of cause and could not be put  forward to the detriment of the insolvent company’s creditors.
  • Senior judge Sebastián Sastre Papiol disagreed with the fact that the contextual  guarantee should be subject to rescission alone, allowing the main transaction (in  this case, the loan) to subsist. In his opinion, a total presumption of burden exists  when  the guarantee is provided simultaneous to the creation of the  credit.  The  creditor’s sacrifice in granting the credit represents the corresponding element, not  only of the  debtor’s (borrower) obligation,  but also of the  guarantee provided by  the third party.  Therefore, the rescission of a contextual  guarantee,  leaving the loan subsist,  harms the basic elements  of the  transaction,  its cause and  the consent provided in executing the transaction. He therefore declared that, with the  damage of the grant of the guarantee having been proven, the transaction should  be terminated in full with recognition for the creditor of the  restituting credit charged to the insolvency estate.

Other recent decisions by provincial courts of appeal deal with similar cases of insolvency rescission actions against acts granting guarantees over third-party debt of other group  companies.  The judgments of the  courts of  appeal of Asturias 3 and  Badajoz 4 turned to  the theory of  compensatory advantage and, in contrast to the  conclusion of the case judged by the  Supreme Court, concluded that the acts were not subject to rescission. The judgment of the Segovia Provincial Court 5, in a case of a contextual  guarantee  granted by a parent company  to its affiliate, also considered that the group interest justified it and that there was no reason for rescission.