Maritime transactions very frequently involve international elements. The majority of ship finance contracts are executed between parties of different nationalities and are secured by assets situated in States other than that corresponding to the debtor’s nationality.
The Spanish insolvency act 22/2003 of 9 of July (the “IA”) adopts the universality principle in connection with cross-border insolvencies. The departure point for international cases is the observation that the lex fori concursus shall apply, i.e. the Spanish IA will apply if the insolvency proceedings are opened in Spain (article 200 of the IA). The Spanish IA (lex fori concursus) shall determine the conditions for opening insolvency proceedings in Spain, the effects of those proceedings (e.g., on contracts, creditors, on-going proceedings, etc.) and their closure, whether through a composition agreement or, in the absence of such agreement, by liquidating the company.
This paper focuses on the exception of the applicability of Spanish law to foreign rights in rem over assets situated in a State other than Spain. Consider, for example, a pledge over credit rights (or assignment by way of security of credit rights) held by a Spanish yard towards a non-Spanish ship-owner or a mortgage over a vessel registered outside Spain granted by a Spanish ship-owner in favour of its financiers.
International private law concerning rights in rem over assets situated in a State other than Spain
Article 201 of the Spanish IA establishes that, if the circumstances of the article are present, the effects of the Spanish insolvency proceedings over the credit rights will not be governed by the Spanish IA (lex concursus) but rather by the law of the State in which the credits are situated (lex rei sitae). This rule is similar, but not identical, to the solution adopted in article 5 of the Council Regulation (EC) No 1346/2000 of 29 May 2000 (“EU Regulations”). Although such rights are isolated (not affected) under the EU Regulations by the insolvency proceeding, the Spanish IA refers the matter to the law of the State in which the assets are situated.
Article 201 of the IA states that:
The effects of the insolvency proceedings on a creditor’s or a third party’s right in rem on assets or rights of any kind pertaining to the debtor, including groups of assets which composition may vary in time, and that at the moment of the declaration of insolvency are located in the territory of another State, shall be governed solely by the laws of that State.
A right in rem: applicable law to determine whether a specific right is in rem in nature
Unlike the EU Regulations, the Spanish IA does not contain a list of rights considered rights in rem and consequently fall under the scope of article 201 of the IA.
Thus, the application of this rule requires answering an initial question: what is the applicable law to determine whether a specific right is in rem in nature. Most renowned Spanish legal scholars agree that the applicable law is the law of the State in which the assets or rights are located (lex rei sitae). However, for the sake of the uniform application of article 201 (and taking into account that rights in rem differ from State-to-State) a restrictive approach should be taken and a second test applied to the particular right in rem analyzed. In order to satisfy the second test, the following requirements must be met:
- a direct and immediate connection with the asset encumbered with such right, regardless of that specific asset forming part of the net worth of a specific person or of the relationship of its owner with another person (ius in rem); and
- the absolute nature of the assignment of the right to its owner; meaning that the owner of that right is able to enforce it against everyone (erga omnes).
Location of the asset: in a State other than Spain at the time insolvency proceedings are opened
In contrast to the EU Regulations (article 2.g), the Spanish IA does not establish any rules for locating an asset or right. Therefore, a case-by-case analysis should be carried out for the particular credit or asset affected by the right in rem. For our purposes, the following two examples are useful:
Right in rem over credit rights held by the yard vis-à-vis a ship-owner under a shipbuilding contract
According to most renowned legal scholars, the solution under Spanish law is that the credit right will be considered as situated in the State of the nationality of the debtor (that is, under a shipbuilding contract, in the State of the nationality of the ship-owner -who shall make the payments under the shipbuilding contract-).
Right in rem over a vessel registered in a State other than Spain
Under Spanish law, a registered vessel is deemed to be located in the State where it is registered.
Timing issue: pre-insolvency rights in rem
Article 201 only refers to rights in rem that have been created before insolvency proceedings are opened in Spain.
Consequences: the lex rei sitae determines the effects of the Spanish insolvency proceedings
Article 201 was designed as an exception to the general application of Spanish law as the lex fori concursus. Thus, the effects of the Spanish insolvency proceedings on rights in rem over assets and rights situated in another State are determined solely by the law of that State (lex rei sitae).
The lex rei sitae would be the law that only determines, for example, whether the credit associated with the right in rem is a secured or unsecured credit, how and when the title-holder may enforce it once insolvency proceedings have been opened in Spain, how a composition agreement affects the corresponding right in rem, etc.
It is important to take into consideration that the exception under article 201 does not include claw-back actions, which are expressly excluded under paragraph 3 of article 201. That is, the law applicable to claw-back actions is not solely the law of the State where the asset is situated. Mirroring the solution provided by article 13 of the EU Regulations, the Spanish IA establishes an accumulated criteria approach for determining whether a particular act can be rescinded: the lex fori concursus applies unless the beneficiary evidences that the lex causae does not allow any means of challenging the specific act.
For example, consider a Danish law mortgage over a vessel owned by the insolvent debtor. The mortgage was granted within the two years preceding the opening of insolvency proceedings in Spain (i.e. the debtor is declared insolvent one year after the mortgage was granted and registered with the corresponding chattel registry in Denmark) and it secures pre-existing obligations of the mortgagor.
Should that be a purely domestic case, that mortgage would very likely be rescinded under article 71 of the Spanish IA (unless it is evidenced that the act –the creation of the mortgage- is not detrimental to the insolvency estate). For international cases, however, the following tests should be applied:
Firstly, it must be determined whether or not the mortgage can be rescinded under Spanish law (i.e. if the circumstances set out in the domestic framework under article 71 of the IA exist). Secondly, and only if the mortgage is rescindable under Spanish law, the second test is whether or not the mortgage can be challenged under Danish law as the lex causae. Under the second test, Danish law would bar the application of the Spanish law and the mortgage would not be rescinded. The reverse is not true. According to the Spanish IA, if the mortgage is rescindable under Danish law but is not rescindable under Spanish law, it cannot be rescinded.