Debt finance

Some of the key areas affecting the giving of guarantees and security are as follows.

Capacity

It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. The safe approach is often to have the directors of the company approve the giving of the guarantee or security by resolution. Likewise, if the guarantee or the security is going to encumber an asset which is considered as ‘essential’ for the relevant company (an asset shall be considered as essential if its value exceeds 25% of the total value of the assets of the company according to the latest approved balance sheet), the approval of the shareholders' must be also obtained by resolution.

Fiduciary duties

Although Spanish law does not recognize a legal concept of ‘corporate benefit’, there might be a breach of fiduciary duties by the directors of a Spanish company giving a guarantee or security to the extent that the transaction pursuant to which the guarantee or security is given is not found to result in the ultimate corporate benefit of the company (the referenced directors must act diligently and loyally in the best interest of the company (i.e., judgement business rule and risk/benefit approach) and, in any case, in accordance with any applicable laws and the company's by-laws).

Insolvency

Pursuant to the Spanish Insolvency Law, any agreement entered into by a Spanish company within the two-year period preceding the adjudication of bankruptcy may be set aside by the relevant insolvency court if the insolvency officials can prove that it was detrimental to the insolvent estate

Upstream restrictions

Spanish private limited liability companies (sociedades de responsabilidad limitada) cannot grant loans, issue guarantees or provide financial assistance in favor of shareholders or directors, unless such transactions have been authorized on a case-by-case basis at the shareholders' meeting.

Financial assistance

Under Spanish law, the scope of the financial assistance prohibition varies depending on the corporate nature of the relevant company:

• a public limited liability company (sociedad anónima) may not advance funds, grant loans, grant guarantees/security or provide any kind of financial assistance whatsoever for the acquisition of its shares or of the shares of its parent companies (sociedades dominantes).
• a private limited liability company (sociedades de responsabilidad limitada) may not advance funds, grant loans, grant guarantees/security or provide any kind of financial assistance whatsoever for the acquisition of its shares or of the shares of any of its group companies.

Breach of financial assistance regulations may result in fines for the directors of the company granting the guarantee or security, and may also result in the guarantee or security or the relevant underlying transaction being deemed void. Any objection to the financial assistance must be invoked by the shareholders (usually minority shareholders) or the company’s creditors.

Common forms of guarantees

There are two common forms of guarantees used in Spain.

Guarantee (fianza)

A guarantor undertakes to pay the guarantee obligation if the borrower fails to pay. The guarantor's liability with respect to the borrower can be either:

• subsidiary (subsidiaria) – the guarantor is only required to pay if the borrower fails to do so; or
• joint and several (solidaria) – the creditor may claim against the debtor or the guarantor at the same time.

As to each guarantor's liability with respect to other guarantors, it can be can be either:

• several (mancomunada) – each guarantor would only be required to pay up to the obligations expressly guaranteed by such guarantor); or
• joint and several (solidaria) – each guarantor would be liable for the total amount of the guaranteed obligations.

Usually, the guarantor's liability is joint and several (both with respect to the borrower and the remaining guarantors).

First demand guarantee (garantía a primer requerimiento)

A guarantor undertakes to pay the guarantee obligation at any time, upon first demand from the relevant creditor, if the relevant conditions set out in the guarantee clause or agreement are met, without any further requirements or exceptions (other than willful misconduct of the creditor). The guarantee is autonomous and independent from the guaranteed obligation.

First demand guarantees are the most common form of guarantee used in Spanish wholesale financing transactions.

Common forms of security

There are two main types of security in rem available for creditors: mortgages (hipotecas) and pledges (prendas).

Mortgage

A mortgage may be sub-categorized as:

• a mortgage over real estate assets (hipoteca inmobiliaria); and
• a mortgage over movable assets (hipoteca mobiliaria).

Pledge

A pledge may be sub-categorized as:

• a pledge without delivery of possession (prenda sin desplazamiento); and
• a pledge with delivery of possession (prenda con desplazamiento).

The nature of the security taken will depend on the asset expressed to be subject to such security.

In this regard:

• Movable assets which may be subject to a mortgage include intellectual and industrial property rights, industrial machinery, commercial establishments, motor vehicles, tramways, train carriages and aircrafts.
• Movables assets which may be subject to a pledge without delivery of possession include machinery, stored merchandise, raw materials, agricultural machinery, works of art, credit rights arising from permits, licenses and authorizations, subsidies or from other agreements with governmental authorities, and other credit rights not represented by securities and not qualifying as financial instruments for the purposes of Royal Decree-Law 5/2005 of 11 March 2005, implementing Directive 2002/47/EC of the European Parliament and the Council of 6 June 2002 on financial collateral arrangements.
• Movable assets which may be subject to a pledge with delivery of possession include shares, quotas, credit rights, receivables and bank accounts.

When the creation of security triggers a significant amount of stamp duty tax and the relevant assets are not significant in the context of the transaction, it is standard market practice to grant a promissory security over the such relevant assets.

The promissory security does not grant to the beneficiary any in rem right over the asset expressed to be subject thereto, until:

• the relevant security is effectively granted; and
• each of the actions required for the perfection of the security is fully performed.

Finally, it is relevant to note that Spanish law permits the creation of guarantees and security interests in favor of future obligations (such as, those arising under the hedging agreements if not signed at closing of a transaction), provided that the main features defining the relevant future obligation are duly determined at the date of creation of the guarantee or security interest.

General considerations

In general terms, under Spanish law, any guarantee, pledge or mortgage must guarantee or secure another obligation to which they are ancillary and which must be clearly identified in the relevant guarantee or security agreement. Therefore, the guarantee or security will follow the underlying obligation in such a way that the invalidity of the underlying obligation entails the invalidity of the guarantee or security, and termination of the underlying obligation will entail cancellation of the guarantee or security.

Giving or taking security

Formalities and requirements

As a general rule, pledges with delivery of possession (prendas con desplazamiento) over shares, quotas, credit rights, receivables and/or bank accounts must comply with the following requirements in order to be perfected:

• Notarization (by means of a deed (póliza) or a public deed (escritura pública) is required.
• In relation to share pledges, the pledgor should deliver the share certificates (títulos multiples) to the secured creditor or to a third party acting as custodian (usually, the agent or security agent) and it is particularly advisable to record the creation of the pledge on the share certificates. Those share certificates shall be kept by the secured creditor or the custodian until the cancellation of the pledge, when they shall be returned to the shareholder.
• In relation to quotas' pledges, quotas are not physically represented (there are not quotas certificates) so they cannot physically be delivered to the secured creditor or to a third party custodian so, in order to render the pledge effective, notice to the company shall be given and the pledge recorded in the (physical or electronic) book registry of quota holders (socios), kept by the company, and it is advisable to record the creation of the pledge on the public document evidencing the ownership of the quotas.
• Notification to the relevant company, relevant counterpart and/or depository bank is not required for perfection purposes but advisable in order to ensure that, upon enforcement, payments are made to the account designated by the beneficiary).
• In relation to bank accounts, although the pledgor may be allowed to deal with the account in the course of its business (unless otherwise agreed, usually until a default takes place), it is compulsory to keep a positive balance in the bank account during the life of the pledge and some sort of control over the account (it is usually opened with the secured creditor or such secured creditor is able to control certain actions of the depository bank) to justify the delivery of possession.
• In relation to shares and/or quotas, the pledgor will retain voting rights and the rights to receive payment of dividends until enforcement, unless otherwise agreed in the pledge agreement.

Likewise, as a general rule, mortgages over real estate assets (hipotecas inmobiliaria), mortgages over movable assets (hipotecas mobiliaria) and pledges without delivery of possession (prendas sin desplazamiento) must comply with the following requirements in order to be perfected:

• The mortgages must be documented in a public deed (escritura pública) while the pledges may be documented in a deed (póliza) or a public deed (escritura pública), as the case may be.
• The assets must be adequately described and identified, as necessary, in the security documents.
• There must be due registration within the relevant Land and/or Moveable Assets Registry, as applicable (until the public document is duly registered, the relevant security will not be perfected).
• As regards floating mortgages (i.e., real estate mortgages securing multiple obligations), beneficiaries of such floating mortgages must always be ‘credit entities’ (i.e., those set out in article 2 of Law 2/1981 of 25 March, regulating the mortgage market), regardless of whether they are Spanish of foreign credit entities (such requirement would also apply to any assignee of a loan secured by a floating mortgage).

In relation to all the above, if the security is documented in a public deed (escritura pública), notarial and registration fees (as appropriate), along with stamp duty, shall apply. However, if the security is documented in a deed (póliza), no stamp duty will be levied.

With regard to registrar and notary fees, these are set by the government and are based on a sliding scale, although notary's fees can be negotiated down if the value of the transaction exceeds €6 million.

With regard to stamp duty rates, this will depend on the region where the asset is located (rates vary from 0.5% to 1.5%). The stamp duty rate is calculated over the relevant secured amount.

Enforcement

Spanish law provides for specific enforcement proceedings in respect of each type of security referred to in sub-question above. However, as a general rule, enforcement proceedings will usually be based on a sale at public auction of the relevant asset, conducted either by a Court or by a Spanish Notary (or, in certain cases, a specialized entity), while the proceeds obtained out of the auction process shall be used to repay the secured liabilities.

In this regard, in order to be able to proceed to the enforcement of any security governed by Spanish law through summary enforcement proceedings, a so called ‘liquidity clause’, which complies with the formal requirements set out in Spanish Procedural Law, shall be included in the relevant secured financing agreement (whether it is governed by Spanish law or otherwise). Additionally, notarization of the underlying financing agreement (and sworn translation into Spanish if drafted in a different language) is also a pre-requisite in order to benefit from summary enforcement proceedings.

Insolvency considerations

Upon declaration of insolvency of a Spanish company, no security interests over assets of such insolvent company which are ‘necessary for the continuity of its business or professional activity’ can be enforced (this will also apply to enforcement proceedings commenced before the declaration of the bankruptcy will also be held up) until the earlier of:

• the date on which an agreement (convenio) which does not prevent the enforcement of the relevant security interest has been reached between the insolvent company and its creditors; and
• the date on which one year has elapsed after the declaration of insolvency.

Although the Spanish Insolvency Law does not include a definition of assets which are ‘necessary for the continuity of its business or professional activity’, shares or quotas of project finance SPVs will not fall into that category. There are no clear rules followed by the Spanish Courts in relation to the assessment of when an asset shall fall into such category, so an analysis on a case by case basis will be required.

Receivers of the insolvent company may prevent any security interest being enforced after the end of the above referred ‘stay period’ by immediately paying the relevant secured amounts, including an undertaking to pay amounts which become due in the future under the relevant agreement as ‘claims against the insolvency estate’ (créditos contra la masa) (provided that, should a receiver fail to pay future claims as they become due, the secured creditor will be entitled to enforce the relevant security interest).

Any claims owed by an insolvent company to a ‘related party’ will be regarded as subordinated claims. Moreover, any security interest granted by the insolvent in favor of the ‘related party’ will be set aside by the court.

Any transaction entered into by the insolvent company within the two years immediately preceding the declaration of insolvency which are deemed as ‘detrimental to the insolvency estate of the debtor’ may be set aside by a receiver.

The Spanish Insolvency Law does not provide for a definition of ‘detrimental to the insolvency estate of the debtor’, however, it presumes that the following transactions will be detrimental:

• transactions involving donations or prepayments in respect of obligations which otherwise would be due after the adjudication of bankruptcy (this presumption does not permit the submission of evidence to the contrary);
• transactions between the insolvent and related parties (this presumption allows for the submission of evidence to the contrary); and
• granting by the insolvent of in rem security in relation to pre-existing non-secured obligations (this presumption allows for the submission of evidence to the contrary).

In any other case, the burden of proof will be on the person or entity arguing that the transaction is detrimental to the insolvency estate of the debtor.

Notwithstanding the above, new security granted in the context of a refinancing process shall not be subject to rescission (save in the case of fraud), so long as the refinancing process/agreement complies with the following requirements:

• the refinancing agreement creates a ‘significant increase’ of the funds available to the borrower, or a modification of the terms by extending the maturity date or by entering into new obligations that replace existing obligations;
• the refinancing agreement must have been reached as a result of a viability plan ensuring the solvency of the debtor in the short and medium term;
• the refinancing agreement is approved by creditors representing at least the 60% of the total value of the liabilities (certified by the company´s auditor) at the time the refinancing agreement is executed; and
• the refinancing agreement and any other ancillary documents must be set out in a public document.

These rules apply to the validity of the refinancing agreement itself, as well as to any other obligation and/or payment deriving from or connected with such refinancing. It is also worth mentioning that the exception to the general rule of rescission shall also apply to other transactions where the above-mentioned requirements have been fulfilled prior to the application for insolvency proceedings.