Post by Pedro de Rojas on Mar 18, 2010 6:57:52 GMT 4
A lender lending to a Spanish borrower will need to take account of aspects of Spanish law even where the loan documentation is governed by the laws of another jurisdiction. This article explains the issues most commonly encountered on such loans and briefly summarises the Spanish insolvency regime.
Governing law and jurisdiction
Spanish conflicts of law rules recognise both choice of law and jurisdiction clauses, so parties can choose any governing law for a contract and agree which courts will have jurisdiction over disputes arising from it. The jurisdiction clause may be expressed to be exclusive (so that only the court chosen by the parties will have jurisdiction over the contract). The clause may be drafted in favour of the lender only so that the lender has the flexibility to commence proceedings in another jurisdiction.
There is no requirement for financing documentation which is governed by Spanish law and subject to the jurisdiction of the Spanish courts to be in Spanish. However, a translation by a sworn translator would be required by the Spanish courts in order for them to give effect to the agreement.
Notarisation
Under Spanish law, no special formalities are needed for an unsecured financing agreement to be valid and effective. However, notarisation of the agreement has a procedural advantage for lenders, as it provides direct access to summary (or “executive”) enforcement proceedings.
Judicial executive proceedings ("procedimiento ejecutivo") are an easier and faster way of claiming from the borrower or the guarantor any amount owed under an agreement because the judicial claim would only need to be accompanied by the following documents:
* the public deed by which the agreement was notarised;
* documents that justify the amount of due and claimable debt; and
* proof of the notification to the debtor or the guarantors (if applicable).
Furthermore, the debtor may only contest these enforcement proceedings on the grounds that the debt has been paid and/or the amount due has been calculated incorrectly. Any other legal ground (such as invalidity of the agreement and/or unenforceability of the debt) would have to be alleged in an ordinary declarative proceeding which would not suspend the executive proceedings.
In contrast, in order to enforce an agreement that has not been notarised, the lenders have to claim the debt by means of an ordinary declarative proceeding ("procedimiento declarativo ordinario"), which does not effect enforcement of the debt, but leads to a statement of the existence of the right to be repaid.
Executive proceedings typically take between four and six months, while ordinary proceedings may take between one and five years. Because of these advantages, market practice in Spain is for lenders to require notarisation of finance documents.
In addition to notarisation, certain security interests should be registered with the relevant Registry. The requirements for registration of security vary according to the type of asset over which security is given. For example:
* a mortgage over Spanish real estate must be registered with the Spanish Land Registry;
* a mortgage over movable assets (i.e. chattel mortgage) such as motor vehicles and commercial establishments must be filed with the Registry for Movable Goods;
* a pledge without transfer of possession over certain assets limited by law (over assets such as plant and machinery and inventory) must also be filed with the Registry for Movable Goods; and
* a pledge over shares, bank accounts or credit rights does not need to be registered.
Discretion of the parties
Spanish law does not permit the abusive exercise of rights (i.e. against the purpose of the agreement and so as to prejudice third parties) nor arbitrary decisions or determinations by one of the parties. Unfettered unilateral decisions may only be exercised in good faith (which requires them to be based on reasonable grounds). So, for example, a decision to take action following an event of default may not be upheld by the Spanish courts if the underlying circumstances that caused the event of default were not sufficiently material.
Certificates and determinations
General principles of Spanish law prevent the parties agreeing to modify the rules of evidence. The practical result is that a provision stating that a determination, designation, calculation or certificate made or given by a party to a loan agreement is conclusive might, in certain circumstances, be held by a Spanish court not to be final, conclusive and binding, if it could be shown to have an unreasonable or arbitrary basis or in the event of manifest error, despite any overriding provision in the financing agreement to the contrary.
Set-off
Contractual set-off is valid and effective under Spanish law. The parties may therefore determine in the agreement whether and in what circumstances mutual claims are to be set-off. However, in an insolvency, Spanish insolvency rules provide that set-off is only effective if the relevant “conditions are met before the opening of the insolvency proceedings”. This means that the reciprocal claims must have become due before the commencement of the insolvency proceedings. If one or both claims covered by the contractual set-off falls due after proceedings are commenced, the set-off cannot occur. Spanish law provides that the acceleration of claims resulting solely from the insolvency of the debtor is invalid.
Set-off clauses in derivative contracts and contractual set-off clauses governed by non-Spanish law are subject to a special and more favourable regime.
Spanish Royal Decree 5/2005, which implemented the Collateral Directive 2002/47/EC, established a more flexible regime for the creation and enforcement of financial collateral over negotiable securities and other financial instruments and/or over cash accounts, provided that one of the contracting parties is a regulated entity (such as a credit institution or investment firm) and the other is a legal entity (as opposed to an individual).
This regime permits enforcement by means of sale, appropriation or set-off subject to the fulfilment of certain conditions. Moreover, the financial collateral agreement is not limited, restricted or affected by the opening of insolvency proceedings. The financial collateral agreement may be immediately and separately enforced in accordance with its terms.
Additionally, Royal Decree 5/2005 provides for set-off arrangements to remain effective where one of the parties becomes insolvent, irrespective of whether they are linked to a collateral agreement.
Cancellation of commitments
Under Spanish insolvency rules, the outstanding obligations of the parties to a contract (including a credit agreement) do not automatically terminate upon the insolvency of one of the parties. A contractual clause providing for the cancellation of the contract for that reason is not valid. The obligations of the insolvent party would have to be met by the estate administrator. In the context of a loan agreement, amounts drawn after insolvency are required to be met from the insolvency estate with priority over other creditors.
In the case of agreements with outstanding obligations for both parties, Spanish insolvency rules provide that where the borrower defaulted during the three months prior to the commencement of the insolvency proceedings and the lender has terminated the contract, the liquidator can reinstate the contract, but sums due thereunder would have to be paid from the proceeds of the insolvency estate in priority to the other creditors. Reinstatement is not allowed if the lender has already filed a claim before the courts.
If the default occurred after the commencement of the insolvency proceedings, the lender would have to file legal action before the courts in order to terminate the contract. The court does not have to allow the termination and may instead uphold the contract, in which case the insolvent entity’s obligations would have to be paid by the insolvent estate in priority to the other creditors.
Capitalisation of interest
Spanish law prohibits the accrual of interest on interest. The law, however, allows the parties to agree to capitalise due but unpaid interest. This results in an increase to principal which may accrue new interest. Capitalisation of interest on very short interest periods could, however, be viewed by a Spanish court as contrary to the prohibition outlined above.
Ranking of claims on insolvency
Spanish law classifies claims against an insolvent Spanish company into the following categories and ranks them in the following order for payment:
Insolvency claims
Claims which arise after filing for insolvency proceedings and from the insolvency proceeding itself are met first from proceeds received from the insolvency. As between themselves, claims made after the filing of insolvency proceedings will be paid in the order they fall due.
Privileged claims
The next class of claims to be paid is privileged claims, which consist of:
* “Generally privileged” claims: These include claims for salaries up to a specified amount, tax and social security withholdings and debts owed to public bodies. They are paid according to the order established in the Spanish Insolvency Act and on a pro rata basis within each category; and
* “Specially privileged” claims: These include secured claims (including security given by means of a pledge or mortgage), claims to financial lease instalments and claims guaranteed by securities in book entry form. These claims are paid from the proceeds of the secured or affected assets.
Ordinary unsecured creditor claims
Claims which fall outside the above descriptions of insolvency claims and privileged claims, and which are not subordinated claims (discussed below) are classified as ordinary unsecured claims. These include specially privileged claims to the extent not covered by the relevant security meaning that if the proceeds of sale of the secured assets are insufficient to meet the whole secured claim, the secured creditors will have an ordinary unsecured claim for the shortfall. Ordinary unsecured claims are paid on a pari passu basis once any insolvency claims and privileged claims have been met.
Subordinated creditor claims
These include, among others, claims which are contractually subordinated to all the claims against the insolvent party, claims regarding accrued interest which are not secured or not entirely covered by security, claims for interest and fines and claims held by “specially-related” parties (which are described below). These will be paid once the ordinary unsecured creditor claims have been paid in full in the order established in the Spanish insolvency rules and on a pro rata basis within each category.
Under Spanish insolvency rules, interests related to a claim secured by mortgage or pledge are not subordinated to the extent covered by the security interest. However, any interest claims not covered by such security interest would be considered as subordinated.
Spanish insolvency rules deem “specially related” parties to include, amongst others:
* shareholders holding at least 10 per cent. of the share capital of unlisted companies or 5 per cent. of listed companies;
* directors of the company (whether actual or de facto), liquidators and those holding general powers of attorney, including those who held such posts during the two years prior to a declaration of insolvency; and
* companies that are members of the same group of the insolvent company and their shareholders.
The amendments to the Spanish insolvency rules introduced in 2009 clarified that loans from shareholders will only be subordinated to the extent that the above mentioned shareholding stake existed at the time the loan was granted. The same criteria apply to shareholders of group companies.
Those amendments also established a new class of subordinated creditor claims, made up of claims derived from agreements still in force, if the judge considers that the creditor has repeatedly hindered the performance of such agreement. These creditors would be penalised by the subordination of its position in relation to the other creditors.
Conclusion
Large Spanish corporates have traditionally sought to finance their business and growth through accessing the international loan markets. As a result of the squeeze on liquidity during the economic downturn, a number of Spanish corporates have turned recently (and in some cases for the first time) to debt, equity and equity linked securities in the capital markets to refinance and/or raise new financing. Nonetheless, innovative structures in the loan markets (such as forward start facilities) and improved pricing means that Spanish companies continue to see the loan markets as an important source of financing for their balance sheets.