Lending and taking security in Spain: overview

A Q&A guide to finance in Spain. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, negative pledge clauses, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Finance Country Q&A tool. This article is part of the global guide to finance. For a full list of contents visit www.practicallaw.com/finance-guide.

Contents

Overview of the lending market

1. What have been the main trends and important developments in the lending market in your jurisdiction in the last 12 months?

In June 2015, the International Monetary Fund (IMF) forecast that Spain's GDP would grow by 3.1% in 2015 and by 2.5% in 2016, well above the European average. The economic situation has improved, particularly for Spanish blue chips. In addition, Spain recently enacted a law to promote corporate financing, a significant number of companies have been listed on the Spanish stock exchange (especially SOCIMIs, a type of real estate company modelled on the REIT regime) and more are expected to be listed in the coming months. Credit institutions are slowly starting to lend new funds to the private sector and there has been a substantial recovery in corporate bond issuances. These are just some of the signs of the Spanish economy's slow but steady recovery.

 

Forms of security over assets

Real estate

2. What is considered real estate in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)?

Real estate

Under Spanish law, immovable real estate comprises:

  • Land.

  • Buildings constructed on land.

  • Anything that is joined to the land in a fixed manner, such that it cannot be separated without breaking or sustaining damage.

Common forms of security

The most common form of security over immovable real estate is a mortgage.

Formalities

In order to be validly created, a mortgage must be:

  • Executed before a notary public in a public deed.

  • Filed and registered with the land registry where the real estate property is located.

Tangible movable property

3. What is considered tangible movable property in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected?

Tangible movable property

Under Spanish law, tangible movable property includes any property other than immovable property that can be owned.

Common forms of security

The most common forms of security taken are:

  • Chattel mortgage. In a chattel mortgage the debtor mortgages certain types of assets in favour of the mortgagee (the creditor) to secure its own obligations or those of a third party. Chattel mortgages can be created over:

    • business premises and industrial plants;

    • trains, motor vehicles and aircraft;

    • machinery and equipment; and

    • intellectual and industrial property.

    Second ranking chattel mortgages cannot be granted under Spanish law.

  • Ordinary pledge or pledge with transfer of possession. In a pledge, the pledgor (debtor) delivers to the pledgee (creditor) a movable asset (including securities) or a credit right (such as an account receivable, the balance of a bank account, the right to receive insurance payments or rights under a contract) owned or held by the pledgor to secure its own obligations or those of a third party.

    Possession of the assets pledged must be transferred to the pledgor or to a third party until the debt has been repaid or the pledge enforced. In the case of pledges over credit rights, delivery is deemed to take place by the execution of a notarial deed, although it is highly advisable to notify the assigned debtor of the existence of the pledge and instruct it to pay directly to the pledgee if certain circumstances occur. Once notice has been received by the assigned debtor, any payment made by the assigned debtor to the assignor instead of to the assignee, will not release the assigned debtor. It is not necessary to obtain an acknowledgement of receipt from the assigned debtor. Although unregulated, second pledges are widely used (to secure mezzanine debt or obligations under hedging arrangements).

    Pledges that rank at the same level (prendas simultáneas del mismo rango) are often used in the context of different secured financings that were granted to the same debtor.

  • Pledge without transfer of possession. In a pledge without transfer of possession, the debtor pledges certain types of assets in favour of the pledgee to secure its own obligations or those of a third party. Pledges without transfer of possession can be created over:

    • receivables that are not represented by securities and do not qualify as financial instruments (see Question 5);

    • harvests;

    • proceeds of agricultural land and animals on such land;

    • harvesting machinery;

    • raw materials in a warehouse;

    • merchandise in a warehouse (that is, inventories); and

    • art collections.

Formalities

The following formalities must be complied with, depending on the security interest to be granted:

  • Chattel mortgages must be granted and executed in a public deed granted before a notary public and registered with the corresponding movable property registry.

  • Ordinary pledges must be executed in a public deed granted before a notary public to be effective as against third parties. No filing or registration is required.

  • Pledges without transfer of possession must be executed in a public or notarial deed granted before a notary public and registered with the corresponding movable property registry.

Financial instruments

4. What are the most common types of financial instrument over which security is granted in your jurisdiction? What are the most common forms of security granted over those instruments? How are they created and perfected?

Financial instruments

Under Spanish law, the two most common forms of companies are:

  • Public limited liability companies, whose capital is represented by shares.

  • Private limited liability companies, whose capital is represented by quotas.

Shares and quotas are the most common types of financial instruments over which security is granted in Spain.

Common forms of security

The most common form of security over financial instruments is an ordinary pledge. In the case of pledged shares or quotas, the exercise of rights attached to the shares or quotas corresponds to the shareholder or quota holder, unless the company's articles of association provide otherwise.

In addition, cash deposits, negotiable securities (valores negociables) and financial instruments can be given as collateral in financial collateral arrangements regulated by Royal Decree-Law 5/2005 of 11 March (RDL 5/2005) by means of a title transfer collateral arrangement (acuerdo de garantía financiera con cambio de titularidad) or a security financial collateral arrangement (acuerdo de garantía pignoraticia) (that is, a pledge over cash deposits or securities). Only certain parties (for example, credit institutions) can benefit from these arrangements:

  • Allowing them to appropriate the collateral in case of default.

  • Making them immune from clawback actions and enforcement outside the scope of insolvency proceedings.

Formalities

For a pledge over shares to be fully effective as against the company it must be:

  • Executed in a notarial deed granted before a notary public.

  • Notified to the company whose shares are pledged.

  • Recorded in the registry book of registered shares.

In addition, in the case of shares represented by certificates, the pledge must also be annotated in the corresponding share certificate.

However, for dematerialised securities (represented by book entry accounts), registration of the pledge with the entity in charge of the book entry accounts is equivalent to the transfer of possession and there is no need to notify the creation of the pledge to the company whose shares are pledged.

For a pledge over quotas to be effective, the pledge must be:

  • Executed in a notarial deed granted before a notary public.

  • Notified to the company whose quotas are pledged.

  • Recorded in the registry book of quota holders, since quotas do not exist in the form of a certificate.

Financial collateral arrangements are only required to be in written form, although execution in a notarial deed granted before a notary public is advisable in order to be able to evidence that the arrangement has been properly executed.

Claims and receivables

5. What are the most common types of claims and receivables over which security is granted in your jurisdiction? What are the most common forms of security granted over claims and receivables? How are they created and perfected?

Claims and receivables

Claims and receivables may include, for instance, credit rights under contracts (for security granted over cash deposits, see Question 6).

Common forms of security

Security is usually attached to credit rights by virtue of an ordinary pledge.

The legal feasibility of a pledge over receivables under Spanish law was once the subject of lengthy debate. Today, the Spanish Supreme Court clearly supports the admissibility of the pledge over receivables as a right in rem.

In addition, Spanish law now allows for the grant of a pledge without transfer of possession over receivables that are not represented by securities and do not qualify as financial instruments.

Formalities

To be effective against third parties, an ordinary pledge must be executed in a notarial deed granted before a notary public. No filing or registration is required.

A pledge without transfer of possession must be executed in a public or notarial deed granted before a notary public and registered with the corresponding movable property registry.

If the pledge is granted over future credit rights, the pledge agreement must identify those rights or contain elements that enable their identification. A pledge over credit rights only becomes effective when they actually come into existence.

Cash

6. What are the most common forms of security over cash deposits? How are they created and perfected?

Common forms of security

Security is usually attached to cash deposits by a pledge over the credit rights arising from a bank account agreement. If applicable, the pledge would be granted over the credit rights of the pledgor against the depository bank represented by the balance of the funds held in the bank account, but not over the cash itself.

In addition, if the pledge is granted in favour of credit institutions, they may benefit from the enforcement proceedings regulated under RDL 5/2005, which would allow them to appropriate the collateral in case of default, be immune from clawback actions and enforcement of the pledge outside of insolvency proceedings.

Formalities

The pledge must be executed in a notarial deed granted by a notary public, to be enforceable against third parties.

It is highly advisable to notify the assigned debtor (that is, the depository bank) of the existence of the pledge and instruct it to pay the pledgee directly under certain circumstances.

No filing or registration is required.

Intellectual property

7. What are the most common types of intellectual property over which security is granted in your jurisdiction? What are the most common forms of security granted over intellectual property? How are they created and perfected?

Intellectual property

The common law term "intellectual property" includes two different concepts under Spanish law:

  • Industrial property (patents, utility models, industrial designs, trade marks or commercial names).

  • Intellectual property (copyrights or inventions).

Common forms of security

Security is commonly attached to intellectual property by a chattel mortgage (see Question 3).

Formalities

A chattel mortgage over intellectual property rights must be executed in a public deed granted before a notary public and registered with the Movable Property Registry of Madrid.

Problem assets

8. Are there types of assets over which security cannot be granted or can only be granted with difficulty? Which assets are difficult or problematic when security is granted over them?

Future assets

Security may be granted over future assets, subject to fulfilling certain conditions, such as these being sufficiently determinable. Such future assets include:

  • Additions to immovable property (for example, new buildings built on mortgaged land). The mortgage would reflect its extension to additions to the mortgaged immovable property.

  • Future claims. The pledge would reflect its extension to future claims.

A reform of the Spanish Insolvency Law, enacted in 2011, has introduced a highly controversial change to the list of secured claims. It provides that pledges created to secure future claims only grant priority to:

  • Claims arising or created before the declaration of insolvency.

  • Claims created after the declaration of insolvency when the claims arise from a reinstated facility agreement or when the pledge was recorded in a public registry before the declaration of insolvency.

It is not clear whether this provision addresses pledges over future claims or pledges created to secure future claims. Some case law has interpreted the provision as referring to pledges created to secure future claims rather than pledges granted over future claims. Under this view, an ordinary pledge (that is not recorded) granted over future claims derived from a contractual relationship existing at the time the pledge was created, will be effective in the context of a pledgor's insolvency. However, if the future claim value is significant, there is an incentive to grant a pledge without transfer of possession (that is recorded) over the claim, rather than an ordinary pledge, given the lack of clarity and possible consequences. This is unless the pledge is created over a bank account balance and can therefore benefit from the special framework in RDL 5/2005 (see Question 6).

Fungible assets

A pledge can be granted over fungible assets. Fungible assets do not have to be restored in themselves but in the same type, quality and quantity.

Other assets

Floating charges as such are not regulated by Spanish law. The substitution of collateral (for example, securities, cash or receivables) will be considered under Spanish law as a new security and lead to the cancellation of the previous security. Consequently, the new security must comply with the same requirements as those required for the original pledge. The only exception to this rule is found in Catalonian law, which allows the parties to agree to the substitution of all or part of the asset provided as collateral, as long as the asset is fungible (the application of this provision is limited to assets located within the territory of the Autonomous Region of Catalonia).

However, several security interests have some elements that are similar to those of a floating charge, such as:

  • Chattel mortgages over industrial or business premises.

  • Pledges without transfer of possession over merchandise or raw materials stored in a warehouse.

 

Release of security over assets

9. How are common forms of security released? Are any formalities required?

Security is usually released through the satisfaction of the obligations secured by it, or by a deed of release granted by the secured party.

Additional formalities may be required if the security interest is registered or has been recorded:

  • Mortgages would need to be cancelled from the land registry.

  • Chattel mortgages would need to be cancelled from the movable property registry.

  • The cancellation of pledges over shares must be notified to the company whose shares are pledged and the release must be recorded in the registry book of registered shares for it to be fully effective as against the company.

However, for dematerialised securities, there is no need to notify the release of the pledge to the company whose shares are pledged. Registration of the release with the entity in charge of the book entry accounts will suffice.

The cancellation of pledges over quotas must be notified to the company whose quotas are pledged and the release must be recorded in the registry book of quota holders.

 

Special purpose vehicles (SPVs) in secured lending

10. Is it common in your jurisdiction to take security over the shares of an SPV set up to hold certain of the borrower's assets, rather than to take direct security over those assets?

It is not common to take security over the shares of an SPV set up to hold some of the borrower's assets. Lenders usually prefer to take security directly over the SPV's assets in order to avoid insolvency subordination risks, provided that company benefit and financial assistance rules are complied with. This is why taking security over the shares of an SPV is more usual in leveraged buyout (LBO) transactions, since taking a security interest over the target's assets may be prohibited under financial assistance rules.

However, recently enacted Law 5/2015 of 27 April on promoting corporate financing now allows securitisation funds (that is, separate estates that lack legal personality to which credit rights may be assigned) to grant security interests securing third party obligations. Therefore, in the future we may see financing structures in which an originator's credit rights in relation to third parties are ring-fenced in a securitisation fund, which will in turn secure financing granted to that originator.

 

Quasi-security

11. What types of quasi-security structures are common in your jurisdiction? Is there a risk of such structures being recharacterised as a security interest?

Sale and leaseback

Sale and leaseback is the arrangement where one party sells assets (usually real estate) to another party, who immediately leases them back to the seller. This structure allows the seller to obtain liquidity quickly while maintaining the possession and use of the assets.

There is no indication in Spanish case law that sale and leaseback would be treated as a security interest.

Factoring

Under a factoring agreement, a creditor assigns its credit rights as against certain debtors to a factor in return for payment of a price and the provision of debt collection and accounting services.

There is no indication in Spanish case law that factoring would be treated as a security interest.

Hire purchase, leasing and retention of title

Hire purchase is the arrangement where one party transfers the possession of an asset to a buyer (in principle retaining title to it) while the buyer has the possession and use of the asset and is obliged to pay the price on the date or in the instalments agreed.

The Spanish Law on Hire Purchase includes an all-encompassing provision which has raised a number of questions on, in particular, whether parties to a transaction which meets the patterns of the deferred purchases, or facilities which are the object of the law, are free to decide that the law does not apply to the transaction or that the transaction be governed by other Spanish or foreign provisions. Today, the case law and scholars agree almost unanimously that parties may do so.

Leasing is the arrangement where a financial company transfers to a lessee certain assets acquired meeting the specifications mentioned by the lessee while the lessee is obliged to pay timely the instalments agreed and has an option to purchase the relevant asset at the end of the leasing term.

Title passes to the buyer on full repayment of the loan (hire purchase) or exercise of the purchase option (leasing). In order for the retention of title to be effective against third parties, it must be registered with the movable property registry.

There is no indication in Spanish case law that hire purchase or leasing would be treated as a security interest. However, the retention of title provision usually included in these agreements could be regarded as such due to certain provisions in the Spanish Insolvency Law. In this regard, if insolvency is declared, the seller's retention of title over the relevant assets will be stayed. If, at the conclusion of the insolvency proceedings, those assets have not been transferred, they must be transferred immediately to the seller if its credit has not been fully satisfied.

Other structures

Certain claims arising from the construction or reparation of real estate or tangible movable property (for example, those of employees), are secured by the relevant property. These would rank as secured or privileged claims in insolvency proceedings (see Question 24).

There are no other quasi-security structures generally used in Spain.

 

Guarantees

12. Are guarantees commonly used in your jurisdiction? How are they created?

Two types of guarantees are commonly used in Spain:

  • Guarantee.

  • First demand guarantee or autonomous guarantee.

The difference between a guarantee and a first demand guarantee lies in the wording of the guarantee and the terms on which it can be enforced, namely whether the undertaking is independent from the secured obligation.

Under a guarantee a guarantor undertakes to pay a creditor the secured loan if the borrower fails to do so. The guarantor's liability under a guarantee may be construed as either:

  • Several (that is, the guarantor would only be required to pay on the debtor's default).

  • Joint and several (that is, the creditor could opt to enforce its claim against the debtor or the guarantor).

The guarantor's liability under a guarantee is commonly construed as joint and several.

Under a first demand guarantee, in principle the secured party can require the guarantor to pay at any time and the terms and conditions of the loan agreement would not influence the first demand guarantee.

 

Risk areas for lenders

13. Do any laws affect the validity of a loan, security or guarantee (or the terms on which they are made or agreed)?

Financial assistance

Generally, Spanish law prohibits funds being provided (whether by way of loans, guarantees or any other kind of financial support provided before or after the acquisition) by a target company to a third party so that the third party is able to acquire shares or quotas issued by the target company, or by any other company in the group to which the target company belongs. Exceptions are provided for banks and employees.

In addition, the Spanish Law on Structural Changes of Companies provides that, in the event of a merger after an LBO transaction, the expert's report on the merger project must determine whether there was financial assistance.

If financial assistance is deemed to have been provided, any such financial assistance will be null and void. In addition, directors of the company committing the infraction or, if applicable, those of its controlling company, will be held liable and fines up to the nominal value of the shares or quotas acquired would apply.

Given that the effects of any financial assistance will extend to any subsequent refinancing of the acquisition finance provided, it is crucial to assess how the funding of any acquisition was provided and trace appropriately the flow of funds involved.

Corporate benefit

Directors of a Spanish company have a duty of care towards the company and must act faithfully and loyally towards it.

In private limited liability companies, quota holder approval, in which the company's corporate benefit is specifically stated, must be obtained before carrying out certain transactions, such as up-stream guarantees.

In public limited liability companies, shareholder approval, in which the company's corporate benefit is specifically stated, is usually obtained before carrying out those transactions, despite not being mandatory.

Loans to directors

Private limited liability companies cannot grant loans or credits to directors (or quota holders) unless a resolution is adopted by its general assembly of quota holders. If the director is also a quota holder, it cannot vote on the adoption of this resolution.

Usury

Spanish law has a general prohibition on usury. Consideration of usury depends on the circumstances of the case at hand, such as the interest rate being substantially higher than the usual money rate, or the debtor accepting the interest rate in a situation of distress. Courts have sometimes overruled loan agreements on the grounds of usury, although most case law concerns loans between individuals. If usury is found to have taken place, the loan agreement will be declared null and void, the debtor will only have to repay the principal of the loan and no interest will have to be paid.

Current account overdrafts have a special regime. The Spanish Law on Consumer Credit Agreements provides that current account overdrafts cannot charge in excess of 2.5 times the level of the legal interest rate (currently 3.5%, as of 2015).

Others

There are no other mandatory provisions that significantly affect the validity of loans, security interests or guarantees.

 
14. Can a lender be liable under environmental laws for the actions of a borrower, security provider or guarantor?

Under the Spanish Law on Environmental Liability, a lender may be liable under environmental laws in certain circumstances, but not merely by granting a loan or holding security. For instance, if the lender is (or becomes) the legal owner of the affected land or controls the company that owns it, it may be liable for clean-up costs. If the lender is a shareholder of the company which owns the affected land, the competent authority would only consider the shareholder liable if the authority deems that the SPV legal person is used in an abusive manner or that there is fraud.

 

Structuring the priority of debts

15. What methods of subordination are there?

Contractual subordination

It is possible to stipulate in a loan agreement that the loan agreement is subordinated to all other loans and credits against the debtor. The claim arising from this loan agreement would be classified as subordinated in an insolvency scenario.

However, contractual subordination of debt by virtue of inter-creditor agreements where senior and junior creditors agree on the priority of payment is only enforceable between the parties.

Structural subordination

Structural subordination can be achieved through lending to several companies at different levels in a given group (for example, senior creditors would lend to the company owning the assets and junior creditors would lend to the company owning the shares in the former company).

Inter-creditor arrangements

Inter-creditor arrangements are commonly entered into when different classes of creditors are involved, especially in syndicated finance. Contractual subordination of debt by inter-creditor agreements where senior and junior creditors agree on the priority of payment is only enforceable between the parties (see above, Contractual subordination).

 

Debt trading and transfer mechanisms

16. Is debt traded in your jurisdiction and what transfer mechanisms are used? How do buyers ensure that they obtain the benefit of the security and guarantees associated with the transferred debt?

Debt can be traded in Spain through assignment. Due to the accessory nature of security interests under Spanish law, any assignment of a participation in a secured loan would entail the proportional assignment of the security interests created to secure the full and punctual satisfaction of the loan.

However, in order to be enforceable against third parties, the assignment of registrable security interests (such as mortgages or pledges without transfer of possession) must be notarised and registered with the corresponding registry.

 

Agent and trust concepts

17. Is the agent concept (such as a facility agent under a syndicated loan) recognised in your jurisdiction?

The agent concept does not exist under Spanish law apart from in relation to the general regime on attorneys. Therefore, the security interest must be granted in favour of all the secured parties and be duly accepted by all of them. However, lenders under a syndicated loan usually appoint one lender to be the agent of the syndicate and stipulate its rights and obligations contractually, which often do not include powers to accept, release or enforce security interests on behalf of the secured parties.

If the syndicate's agent is to enforce the security, it will need to prove that it is duly and expressly empowered for this purpose by means of a power of attorney granted in its favour by each of the secured parties. This must be notarised and, if applicable, bear an apostille of the Hague Convention.

 
18. Is the trust concept recognised in your jurisdiction?

The trust concept, in the sense of being the actual holder of the relevant security interests, does not exist under Spanish law. Creditors usually appoint an agent for the Spanish security package, although the agent is not usually empowered to accept, release or enforce security interests on behalf of the creditors.

Security trustees are sometimes used in lending transactions where foreign creditors are involved. In such a case, the lenders would accept the constitution of the relevant security interest in their favour in the corresponding public or notarial deed (or grant a power of attorney to the security trustee to accept them). The security trustee would hold the security interest in the name and on behalf of the lenders if duly and expressly empowered for this purpose by means of a power of attorney granted in its favour by each of the secured parties. This must be notarised and, if applicable, bear an apostille of the Hague Convention.

 

Enforcement of security interests and borrower insolvency

19. What are the circumstances in which a lender can enforce its loan, guarantee or security interest? What requirements must the lender comply with?

The Spanish Insolvency Law imposes an important restriction on lenders facing the potential or real insolvency of its creditors, as it renders unenforceable contractual early termination clauses solely based on a declaration of insolvency, except with regard to financial collateral arrangements regulated by RDL 5/2005.

Assuming the debtor is solvent, an event of default must take place for the lender to enforce its security. In general, the early termination of the loan can be challenged before a court when the alleged event of default was not material from an objective and subjective point of view. A breach of essential obligations under the relevant agreement must take place in this regard. Provisions allowing the creditor to declare the early termination at will or providing it with wide latitude are null and void. Therefore, early termination provisions must refer to objective circumstances.

Methods of enforcement

20. How are the main types of security interest usually enforced? What requirements must a lender comply with?

A secured party is not entitled to appropriate the mortgaged or pledged asset, nor to dispose of the collateral as it deems fit. Appropriation of collateral by the creditor is prohibited as a general rule. The only exceptions to this prohibition are certain financial collateral agreements and pledges over credit rights (where the pledge may be enforced by way of set-off).

Because of this prohibition, a creditor must initiate the enforcement of the security interest and use, as payment of the debt, the proceeds obtained from the sale of the collateral in a public auction or through certain other proceedings aimed at ensuring a fair value is obtained from the sale of the collateral. These proceedings are supervised by either a court or a notary public.

In general, secured parties are entitled to initiate three courses of action:

  • Declaratory proceedings.

  • Executive proceedings.

  • Notarial proceedings.

In declaratory and executive proceedings, the sale is supervised by a court. In notarial proceedings, the sale is supervised by a notary public and, if after two auctions no one is willing to purchase the relevant asset, the secured party can acquire control of the pledged asset, provided it accepts the debtor's full discharge.

If the secured party has a real estate mortgage, it may be foreclosed following a default on the principal obligation. The secured party can choose from several alternative proceedings to obtain satisfaction of a secured debt before a court:

  • Declaratory proceedings.

  • Executive proceedings.

  • Mortgage proceedings.

In addition, if provided in the public deed of mortgage, the secured party can also use notarial proceedings.

Rescue, reorganisation and insolvency

21. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? How do they affect a lender's rights to enforce its loan, guarantee or security?

Apart from insolvency proceedings, certain arrangements under Spanish law facilitate the rescue or reorganisation of a company:

  • Pre-insolvency. Under the Spanish Insolvency Law, a debtor must file for insolvency within two months of being in a situation of actual insolvency in order to avoid directors' liability. A debtor is insolvent when it cannot regularly pay its debts as they fall due. As an exception to this obligation, if a debtor notifies the court that it has commenced negotiations with its creditors to either seek support for a refinancing agreement or an early composition agreement, it will have three additional months to reach the agreement and one more to file for insolvency, provided that it files the notice with the court within the two-month limitation period (known as the "2+3+1 rule"). Applications for insolvency filed by creditors during the three months following the filing of the pre-insolvency notice will not be accepted. In addition, until the refinancing agreement is executed, sufficient support is obtained for an early composition agreement or insolvency is declared, enforcement of security interests over assets owned by the debtor and used for its professional or business activities (presumably most of the debtor's assets) will be stayed, except with regard to financial collateral arrangements regulated by RDL 5/2005.

  • Refinancing agreements. The Spanish Insolvency Law defines refinancing agreements as agreements that significantly increase the funds available to the borrower or amend the terms of an existing financing agreement by extending its maturity date or by establishing new obligations to replace existing ones.

    To be immune from clawback actions, refinancing agreements must be:

    • backed by creditors who hold at least 60% of the claims against the debtor at the time of the execution of the refinancing agreement;

    • consistent with a "viability plan" that evidences the viability of the debtor in the short and medium term (supported by a report issued by an independent expert appointed by the commercial registry (if applicable));

    • certified by the debtor's auditor to confirm that the creditor-majority has been met; and

    • notarised.

  • Cramdown. A refinancing agreement meeting the last two conditions described above which is entered into by creditors representing at least 51% of the debtor's financial liabilities at the time the agreement is entered into may be sanctioned by the court at the debtor's request, provided the court considers that the agreement does not impose a disproportionate sacrifice on the creditors of the same class that have not entered into the refinancing agreement or do not support it.

    Once the court has given initial consideration to the application for sanction of the refinancing agreement, it will accept the application for processing and order a stay of enforcements until it decides to sanction the refinancing agreement. Once sanctioned by the court:

    • the refinancing agreement will be immune from clawback actions (even if the 60% threshold referred to above has not been met);

    • certain effects stipulated in the refinancing agreement (for example, debt-for-equity swaps and payment in kind) may be binding on the dissenting financial creditors, depending on the percentage of total financial claims or the total collateral held by creditors which have signed the refinancing agreement, or both.

 
22. How does the start of insolvency procedures affect a lender's rights to enforce its loan, guarantee or security?

Once the debtor is declared insolvent, the enforcement of security interests over assets owned by the debtor and used for its professional or business activities (presumably most of the debtor's assets) will be stayed until either:

  • The approval of a composition agreement (in as far as its content does not affect the exercise of that right).

  • One year has elapsed from the declaration of insolvency without liquidation proceedings being initiated.

Enforcement will be stayed even if at the time of the declaration of insolvency the notices announcing the public auction have been published.

The declaration of insolvency does not affect agreements entered into by the debtor and these remain in force. Bilateral contracts (for example, loans) with outstanding reciprocal obligations will survive. Any contractual arrangements establishing the termination of a contract in the event of insolvency will be unenforceable, unless the debtor or the insolvency trustee, with the court's approval, considers termination to be in the interests of the insolvency estate.

 
23. What transactions involving loans, guarantees, or security interests can be made void if the borrower, guarantor or security provider becomes insolvent?

Any action carried out or agreement entered into by a person in the two years preceding the declaration of insolvency (known as the "suspect" period) may be set aside (rescinded) by the court if the insolvency trustee is able to prove that the action or agreement was detrimental to the insolvency estate. This may arise even in the absence of fraudulent intent. The analysis of whether an action, agreement or transaction is detrimental to the insolvency estate must be made on a case-by-case basis. In general, the creditor will be able to exercise the clawback action if the insolvency trustee does not seek rescission within two months of the date of the creditor's written request.

The Insolvency Law contains some examples of detrimental actions. An action, agreement or transaction is presumed to be detrimental to the insolvency estate when:

  • It is made, entered into or carried out for no consideration.

  • It constitutes a prepayment of debt maturing after the declaration date of the insolvency (which is especially relevant for refinancing transactions).

  • There is a disposal for valuable consideration to a specially related party.

  • It includes the creation of new security to guarantee existing debt or new debt that substitutes any existing debt.

 
24. In what order are creditors paid on the borrower's insolvency?

Before the insolvency creditors are paid, certain creditors will have claims against the insolvency estate (the creditors of the insolvency estate). In general, these claims must be paid as they fall due and will therefore be deducted from the insolvency estate before the distribution to the insolvency creditors. There is an exception for assets that are subject to a security interest as these cannot be affected by the claims of the creditors of the insolvency estate.

The Insolvency Law contains a closed list of claims against the insolvency estate, which has been construed restrictively by Spanish courts. The list includes:

  • Receivers' fees and debts incurred during the insolvency proceedings in the ordinary course of business.

  • Any other obligations approved by the insolvency trustee.

  • 50% of the new money granted to the debtor under a refinancing agreement (see Question 21).

Claims are ranked in the following order:

  • Secured or privileged claims. These are claims secured by a specific asset or right (mainly claims secured by a real estate mortgage, chattel mortgage, pledge, and pledge without transfer of possession).

  • General preference claims. These are claims paid from the debtor's assets rather than from an entitlement to any particular asset and are therefore paid after secured creditors. They include, among others:

    • claims for salaries and severance payments, up to a certain amount;

    • tax and social security liabilities (for some claims up to 50% of the amount owed);

    • 50% of the amount of the claim of the creditor if it filed for the declaration to commence the insolvency proceedings;

    • the remaining 50% of the new money granted to the debtor under a refinancing agreement (see Question 21).

  • Ordinary claims. These are claims that are neither expressly privileged (either special or general), nor subordinated. Ordinary claims rank pari passu and are paid pro rata.

  • Subordinated claims. These are paid last and include, among others:

    • claims for which timely notice was not provided to the insolvency trustee;

    • contractually subordinated claims;

    • unsecured interests;

    • fines and claims of individuals and companies related to the debtor (for example, group companies, shareholders with a relevant stake at the time of the creation of the claim (10% for non-listed companies) or directors, including shadow directors, liquidators or relatives), except for the cases in which credits do not come from financing obligations or those with an analogous purpose.

If more than one lender holds the same security interest over the same asset, priority between them is determined either by the registration date of the security interest (for example, a mortgage) or its execution date.

If a security interest has not been validly perfected, the claim will rank as an ordinary claim (that is, as unsecured).

 

Cross-border issues on loans

25. Are there restrictions on the making of loans by foreign lenders or granting security (over all forms of property) or guarantees to foreign lenders?

Generally, there is no distinction between domestic and foreign creditors for these purposes.

 
26. Are there exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

There are no exchange control restrictions on loan payments to foreign lenders. However, loans and other forms of financing between a Spanish resident and a non-Spanish resident must be declared to the Bank of Spain when specific thresholds are exceeded.

 

Taxes and fees on loans, guarantees and security interests

27. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security?

Documentary taxes

Stamp duty is the most significant tax applicable to the granting of security interests:

  • For mortgages, chattel mortgages and pledges without transfer of possession granted or executed in a public deed, stamp duty usually ranging from 0.5% to 1.5% is levied on the secured liability (principal, interest and any related costs) depending on the autonomous region where the asset is located.

  • Stamp duty is not levied on pledges without transfer of possession executed in a notarial deed (which may be executed if a credit institution is a party to the deed, typically as the secured party).

  • Stamp duty is not levied on ordinary pledges.

Registration fees

Registry fees are approximately 0.02% of the secured liability.

Notaries' fees

Notary public fees are fixed amounts that vary according to the secured liability, although fees may be reduced through negotiation with the notary public.

 
28. Are there strategies to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security?

Several strategies may be used to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security, although these are very case dependant.

In general, given that stamp duty is levied on the granting of mortgages (and other security interests), under certain circumstances it may be advisable to obtain from the debtor a promise to mortgage assets if some ratios are not fulfilled instead of a mortgage. However, there are clear insolvency risks behind this strategy, since the subsequent grant of the mortgage could make it more likely to be subject to a clawback action.

 

Reform

29. Are there any proposals for reform?

The Spanish Government has been working for some time on a draft law (not yet made public) regulating registrable security interests with a view to facilitating debtors' access to cheaper financing by means of granting security interests over their movable assets.

 

Online resources

W www.boe.es

Description. Official website of the Official Spanish State Gazette and the Official Gazette of the Spanish Commercial Registry containing up-to-date laws and resolutions of Commercial Registries.

W www.mjusticia.gob.es

Description. Official website of the Spanish Ministry of Justice containing up-to-date Spanish legislative instruments.

W www.bde.es/bde/es

Description. Official website of the Bank of Spain containing specific banking regulations.


Contributor profiles

David García-Ochoa Mayor, Partner

Uría Menéndez Abogados, S.L.P.

T +34915864578
F +34915860777
E david.garcia-ochoa@uria.com
W www.uria.com

Professional qualifications. Law Degree, summa cum laude, Universidad Pontificia Comillas, Madrid, 1991; Business Administration Degree, summa cum laude, Universidad Pontificia Comillas, Madrid, 1992

Areas of practice. Corporate and commercial law; mergers & acquisitions; banking and securitisation.

Languages. English, French

Professional associations/memberships. Madrid Bar Association.

Sebastián Sáenz de Santa María, Partner

Uría Menéndez Abogados, S.L.P.

T +34915860504
F +34915860484
E sebastian.saenzdesantamaria@uria.com
W www.uria.com

Professional qualifications. Law Degree, Universidad Complutense de Madrid, 1994; Master's Degree in Private Law, Universidad San Pablo, 1995

Areas of practice. Financing; project finance and restructuring.

Languages. English

Professional associations/memberships. Madrid Bar Association.

Daniel Pedro Valcarce Fernández, Junior Associate

Uría Menéndez Abogados, S.L.P.

T +34915864578
F +34915860777
E daniel.valcarce@uria.com
W www.uria.com

Professional qualifications. Law Degree, Universidad Carlos III de Madrid, 2011; Economics Degree, Universidad Carlos III de Madrid, 2011

Areas of practice. Corporate and commercial law; mergers & acquisitions and financing.

Languages. English, French

Professional associations/memberships. Madrid Bar Association.


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