Spain. Security Over Receivables: an International Handbook

1. Legal nature of the Spanish pledge over receivables

[X.01]     Under Spanish law, there is a general principle which states that the rights in rem that may serve as security for the obligations of a debtor are those expressly set out in the law, and cannot be created by the parties on a “freedom of contract” basis. The possibility of taking security over a credit right (or receivable) is not expressly set out in the Spanish Civil Code (the “CC”), but on movable goods generally[1].

As a consequence of the above, lengthy discussions have been held in the Spanish legal community over the past years regarding the legal feasibility of a pledge over receivables, its legal nature and its main legal effects (in the sphere of the underlying debtor, the pledgor and the pledgee). As a result of these discussions, both the scholars and the Spanish courts have contributed to create a set of legal principles on this type of security in the absence of specific regulations.

[X.02]     The feasibility of creating a pledge over a credit right (or receivable) -i.e., a right in personam to receive a payment from a debtor- has traditionally been considered subject to compliance with the general requirements applicable to the object of any pledge, in accordance with article 1864 of the CC, which states that “movable goods within commerce which are subject to possession can be pledged”. Therefore, the main legal difficulty in order to accept receivables as an eligible object of a pledge (and the security over receivables itself) has always been the requirement that it be “subject to possession”.

Within this general legal background, several scholars were inclined to construe the pledge over receivables as a “limited assignment of receivables for guarantee purposes”. This would not grant its beneficiary a right in rem over the receivables assigned, but rather a right in personam. Other scholars, however, made a more flexible interpretation of the “subject to possession” requirement mainly based on article 1868 of the CC, whereby if the pledge accrues any interest, the creditor will be entitled to set-off that interest with the interest (or, failing this, the principal) accrued on the secured obligation. This led the scholars to conclude that a credit right or receivable (as a right which may accrue interest) can be pledged. Such a pledge would actually create a right in rem over the credit right or receivable, like any other pledge under article 1864 of the CC.

[X.03]     Although the Spanish courts did not take a very clear position on the feasibility and legal nature of the pledge over receivables in the past[2], the Spanish Supreme Court is now clearly supporting the admissibility of the pledge over receivables as a right in rem. It recently declared that receivables “entail a valid value to be the object of a pledge (...) and, therefore, it should be possible to constitute a pledge over receivables”, and “the question on whether receivables are eligible to be pledged has been studied and solved by the Court in a positive way”[3].

Furthermore, even if article 1864 of the CC has not been amended to clearly accept receivables as eligible to be pledged under Spanish law, article 90.1 of Law 22/2003 of 9 July, on Insolvency (the “Insolvency Act”), expressly refers to credits secured by a pledge over receivables as being especially privileged (créditos con privilegio especial) when regulating the special privileges enjoyed by certain secured creditors in an insolvency situation.

[X.04]     Thus, although it is true that the wording of article 1864 of the CC could give rise to a certain degree of uncertainty as to the eligibility of receivables as an object of a pledge under Spanish law, such uncertainty has been gradually overcome by the Spanish courts. Additionally, the Insolvency Act has recently contributed to dispel the uncertainty, when it implicitly confirmed the in rem nature of the right held by a receivables pledgee. As a matter of fact, the use of pledges over receivables (for instance, arising out of bank accounts or insurance policies) has become common practice in the context of project finance, structured finance and other financing transactions in Spain over the last few years.

However, the lack of specific legal rules on the pledge over receivables makes it necessary to carefully analyse certain aspects in light of the existing court precedents and scholar studies, mainly with respect to its object and secured obligations, the conditions required for its validity, enforceability (either in a pledgor’s “ordinary” or insolvency scenario) and foreclosure, and some specific features regarding the pledge over certain special types of receivables.

[X.05]     The foregoing notwithstanding, the Law on Chattel Mortgages and Pledges without Displacement of 16 December 1954 has been amended very recently (in December 2007) to expressly recognise the possibility of creating a pledge without displacement (prenda sin desplazamiento) over receivables (including those held against public authorities and future receivables) that are not represented by securities and do not qualify as financial instruments[4]. Due to the recent enactment of the aforesaid legal amendment, there are neither court precedents nor scholar studies specifically addressing the main legal issues that could arise in connection with the creation, enforceability and foreclosure of a pledge without displacement over receivables as yet. Therefore, some of the conclusions contained herein may need to be revisited in light of the principles that the courts and scholars may set in the future.

2. Object of the pledge over receivables

General requirements

[X.06]     In order for a receivable to be considered a valid object for a pledge, it must meet the following general requirements as provided for in the CC:

(i)    The pledgor must be the legal owner of the object of the pledge: when referring to receivables, the pledgor must hold legal title over the receivables.

(ii)  The object of the pledge must be a “movable good”: pursuant to article 335 of the CC, movable goods are those “which can be subject to appropriation (...)”. The concept of appropriation has been interpreted by most scholars as ownership or possibility of trade. It is widely understood that receivables can be considered as movable goods under Spanish law[5].

(iii) The object of the pledge must be a good “within commerce”: under Spanish law, goods are within commerce if they can be assigned. When it comes to receivables, article 1112 of the CC expressly allows the transferability of any right arising from an obligation, unless otherwise agreed by the parties. The transferability requirement is essential taking into account that, pursuant to article 1858 of the CC, should the pledgor (or the debtor if the pledgor is a different person or entity) fail to comply with the secured obligations, the secured creditor would be entitled to transfer the pledged object (through notarial or judicial proceedings) and use the proceeds of the transfer as payment of the secured debt[6].

Thus, all receivables are in principle movable goods within commerce. However, receivables which are non-transferable due to a legal prohibition or arising out of agreements containing restrictions to transfer (e.g., the counterparty’s consent) cannot be pledged unless the specific requirements for the transfer are fulfilled by the pledgor[7].

(iv)         The object of the pledge must be an asset subject to possession: as stated above, compliance with this specific requirement has always been controversial to the extent that receivables, as an intangible right, cannot be materially possessed. However, this requirement has been deemed complied through the transfer of possession of the receivable to the pledgee (thus separating the ownership by the pledgor and the possession by the pledgee) by notifying the existence of the pledge to the underlying debtor[8].

[X.07]     In the case of pledges without displacement, the receivables object of the pledge (which may also be those held against public authorities and future receivables) can neither be represented by securities nor qualify as financial instruments.

Future receivables as object of the pledge and promise of pledge

[X.08]     Security over future receivables has been widely used in project finance transactions as a way of simplifying the transaction structure and documentation as well as in order to reduce execution costs. Particularly, in certain transactions where receivables are expected to arise after the financing is granted, it is essential for the creditors that such future receivables secure the obligations under the financing from the beginning.

[X.09]     Spanish law has only recently recognised the possibility to pledge assets that do not exist at the time when the security is created in the case of pledges without displacement. However, “ordinary” pledges over future receivables have been commonly used in practice in the past, although most scholars agree that the creation of such pledges should be conditional upon an adequate level of determination of their object (e.g., clearly stating the agreements giving rise to the receivables to be pledged), while pointing out the risks of taking security over future receivables. For instance, the pledgee would be in an uncertain position to the extent that the value of the guarantee cannot be determined from the beginning.

[X.10]     It has been discussed whether or not the possibility of taking security over future receivables would make the creation of “floating charges” (as a form of security over all or a pool of assets, present and future, of the pledgor) feasible under Spanish law. However, according to most scholars, the “determination” requirement would not be sufficiently fulfilled and therefore they should not be accepted under Spanish law[9].

[X.11]     The effects of the pledgor’s insolvency after the execution of a pledge over future receivables are not expressly regulated under Spanish law. It is a fairly common view though that receivables arising out of agreements executed before the declaration of insolvency will be automatically pledged as they arise (even if it is after the insolvency declaration), while receivables arising out of agreements executed after the declaration of insolvency will not be deemed pledged. These receivables will therefore be part of the insolvency estate and may be used to satisfy the claims of other creditors[10].

[X.12]     A similar but different category is the promise of pledge (promesa de prenda) expressly set out in article 1861 of the CC, which entitles the recipient of the promise to require the counterparty to create a pledge in the future. However, unlike the pledge over future receivables, the promise of pledge creates a right in personam which does not grant a privileged position in the context of a pledgor’s (and, if applicable, debtor’s) insolvency.

3. Creation of a pledge over receivables and notice to the underlying debtor

[X.13]     Under Spanish law, a pledge over receivables may be validly created upon the agreement between the pledgor and the pledgee for purposes of securing the fulfilment by the pledgor or a third party of certain obligations assumed vis-à-vis the pledgee. Usually, the pledgor is also the debtor of the pledgee under the obligation secured with the pledge, but the debtor may be a third party (e.g., when the holding company of a group receives bank financing, the creditor usually seeks to obtain security from different entities within the group).

[X.14]     The CC does not require any specific form of execution or registration of “ordinary” pledges, except for certain formalities required for purposes of enforceability vis-à-vis third parties[11]. However, according to the CC, the pledgor must have legal title over the pledged receivables and the capacity to transfer the receivables (or otherwise have powers to do so)[12]. Additionally, article 1863 of the CC sets out that possession of the pledged asset must be delivered to the pledgee or a third party. The ratio under such rule is to remove the goods from the scope of action of the pledgor, in order to prevent the goods from being damaged or sold and therefore to preserve the value of the object of the guarantee.

[X.15]     In the particular case of “ordinary” pledges over receivables, it has been discussed how the requirement set forth in article 1863 of the CC can be fulfilled. It is generally agreed that delivery is deemed to take place by notifying the underlying debtor of the existence of the pledge and instructing such debtor to pay directly to the pledgee under certain circumstances. The aim of such notification is to render the pledge public and thus binding on the debtor, who, once the notice is received, shall not be released by paying the pledgor if payment is to be made to the pledgee pursuant to the notice[13].

[X.16]     As opposed to the foregoing, pledges without displacement over receivables must be executed in a public deed or document (escritura pública or póliza intervenida) before a Spanish notary public and must be registered with the Registry of Movable Goods (Registro de Bienes Muebles).

[X.17]     Notwithstanding the creation of the pledge and its effects as a way of especially securing the obligations of the pledgor or a third party vis-à-vis the pledgee, the pledgor or such third party’s personal unlimited liability is not deemed to be limited by the pledge in any form.

4. Capacity to create a pledge over receivables

[X.18]     Pursuant to the CC, there is no obstacle for any person or entity to create security over receivables provided always that such person or entity has legal title over them and has sufficient capacity to do so. Spanish legal entities would be entitled to grant a pledge over their receivables provided that such practice is considered to be within their corporate purpose and in their corporate interest (interés social).

Spanish scholars and court precedents would generally consider such acts to be comprised within the corporate purpose (in a broad sense), even in cases of cross-guarantees securing the obligations of related companies[14].

With regard to the corporate interest, it is true that the mere creation of a pledge does not involve any direct benefit to a company, but it can be essential within the context of a financing transaction that can help the company accomplish its objectives. Whether or not a financing transaction is in the corporate interest of a company is a factual test to be carried out by the relevant company’s directors. It is always advisable that the company’s directors expressly approve the transaction or even have their approval endorsed by a shareholders’ resolution (especially for high volume transactions or when the benefit for the company is not evident)[15].

5. Secured obligations

[X.19]     It has been largely discussed whether or not an asset or specific groups of assets (either receivables or other movable assets) can be pledged under Spanish law to secure the fulfilment of different obligations (in terms of counterparties to the pledgor, object and/or other circumstances), and if so, what would be the most appropriate form of implementation.

There is no general provision under Spanish law allowing or prohibiting that a sole asset or group of assets serve as security of several obligations by virtue of one or more pledges (while there are certain legal constraints for other types of in rem security[16]). Although the matter is subject to discussion, there does not seem to be any general legal constraint or obstacle derived from the legal nature of the pledge preventing a movable asset (including receivables) from securing the fulfilment of different obligations, and second pledges are in fact quite usual within the context of mezzanine financing transactions. Article 1866 of the CC states that when the pledgee holding possession of the pledged asset becomes creditor of the pledgor by virtue of a different contractual relationship (unsecured by the initial pledge), the pledgor shall be entitled to retain possession of the pledged asset until the second obligation is fulfilled.

[X.20]     The foregoing notwithstanding, there exist specific rules under Spanish law whereby an “ordinary” pledge cannot be created over an asset (or receivable) being the object of a pledge without displacement, while a pledge without displacement can be created over an asset (or receivable) pledged “ordinarily”.

[X.21]     When it comes to the implementation of a security over receivables guaranteeing different obligations, the formalisation of different deeds of pledge over the same group of receivables (each of such deeds securing each of the obligations, and each of the pledges created ranking equally), seems to be the most appropriate option from a practical perspective (rather than creating a sole pledge securing different obligations). However, the relevant agreements and deeds of pledge should regulate in detail the relationship between the different pledges and secured obligations, as well as the proceedings and effects of the enforcement (including, for instance, cross default clauses or rules governing the distribution of proceeds obtained from the enforcement of the pledges).

A pledge over receivables securing present and future obligations that the pledgor may have vis-à-vis the pledgee is accepted and quite usual in Spain. This type of pledge should not give rise to any determination problem (especially if the secured obligations are between the pledgor and the pledgee), although some scholars consider that a maximum liability amount should be agreed upon.

6. Enforceability and priority of the pledge over receivables

[X.22]     According to article 1865 of the CC, enforceability of an “ordinary” pledge over receivables vis-à-vis third parties is not achieved by any kind of publicity in a registry or similar action, but rather by providing evidence of the date of execution of the pledge pursuant to a public instrument (instrumento público). Therefore, as a general rule and for the purposes of effectiveness vis-à-vis third parties, pledges are executed or formalised in a public deed or document (escritura pública or póliza intervenida) before a Spanish notary public[17].

[X.23]     The foregoing notwithstanding, when it comes to pledges without displacement over receivables, enforceability vis-à-vis third parties is achieved by registering the relevant public deed or document with the Registry of Movable Goods.

[X.24]     The enforceability of a pledge over receivables vis-à-vis third parties is essential in a scenario where the pledgor is facing financial difficulties and payments to more than one of its creditors are pending:

(a)     In a non-insolvency scenario, the pledgee enjoys a right of preference (in relation to the remaining ordinary creditors) with respect and up to the value of the pledged receivables.

(b)     In the event that the pledgor is formally declared insolvent, claims secured by specific rights or assets are especially privileged claims, which will be paid from the proceeds of the sale of those assets and rights. According to the Insolvency Act, the relevant collateral (i.e., receivables) is “segregated” and “reserved” for the benefit of the pledgee, who, while preserving its full claim against the rest of the assets of the debtor, will have a privileged right enforceable against the relevant asset (possibly subject to certain limitations summarised in section 7 below)[18].

[X.25]     In the event two pledges are created over the same receivables, the priority between them is generally determined by a temporal criterion, so that the rights of the beneficiary of the pledge created earlier in time (provided that the execution date is certain pursuant to a public document) rank prior to those of the subsequent pledgees.

7. Foreclosure of the pledge over receivables

[X.26]     In the particular case of pledges over receivables, two scenarios are possible depending on the maturity of the pledged receivables and the secured obligations, as outlined below:

(a)     The secured obligations become due and payable prior to the pledged receivables

1.       If the secured obligations are fully paid upon maturity, the pledge, as an accessory right to the secured obligations, shall be extinguished, although documenting the extinction is generally advisable[19]. Due to the indivisibility of the pledge, all the receivables must secure all the obligations, and the release of part of the object of the pledge if some of the secured obligations are discharged would not be permitted under Spanish law.

2.       If the secured obligations are not fully performed upon maturity, the pledgee shall be entitled to foreclose the pledge. According to Spanish law, a secured party is not entitled to appropriate the collateral affected by the pledge, nor to dispose of the collateral as it deems fit. Because of this prohibition, a creditor must initiate the enforcement of the security interest and use as payment of the debt the proceeds obtained in the sale of the collateral in a public auction or through other proceedings to ensure that the fair value is obtained from the sale of the collateral. When it comes to the foreclosure of pledges over receivables, the alternatives for the pledgor in case of breach of the secured obligations before the pledged receivables are due and payable would be as follows:

(i)      The secured creditor shall be entitled to sell the pledged receivables, (a) before a notary public and pursuant to the proceedings set forth in article 1872 of the CC, or (b) through judicial proceedings (which are more expensive and time-consuming than the former), and use as payment of the debt the proceeds obtained in the sale of the collateral.

(ii)     Another possibility would be to wait until the expiry date of the underlying receivables and demand the underlying debtor payment of the obligation, provided that the existence of the pledge was duly notified^[20]. Should the debtor pay the secured creditor, the amount received shall be used to set-off the amount owed by the pledgor.

(b)     The pledged receivables become due and payable prior to the secured obligations

1.       If the pledged receivables are not fully paid upon maturity, it could be argued whether the pledgor or the secured creditor are entitled to claim payment of the debt. Most scholars consider that, in this situation, the secured creditor would have a right to demand (ius exigendi).

2.       Should the underlying debtor pay the amounts owed, such amounts would substitute the receivables as object of the pledge, and it would become a pledge over cash. If the secured obligations become due and payable, the pledgee shall be entitled to set-off the new object of the pledge (cash) with the amount of the secured obligations.

[X.27]     The commencement of insolvency proceedings affecting the pledgor would have an impact on the enforcement mechanisms described in (a) and (b) above. Without prejudice to the especially privileged nature of the claims secured by a pledge (as per section 6 above), the enforcement of security interests (e.g., pledges over receivables) affecting assets owned by the insolvent and intended for its professional or business activities (presumably most of the debtor’s assets) will be suspended until the first of the following circumstances occurs (with certain exceptions): (i) approval of a creditors’ agreement (unless its content has been approved with the favourable vote of the creditor secured by the pledge, in which case the creditor will be bound to whatever has been agreed in the creditors’ agreement), or (ii) one year has elapsed since the declaration of insolvency without liquidation proceedings having been initiated.

[X.28]     The enforcement of security interests whose subject matter is not part of the insolvent’s professional or business activities is not governed by any specific provisions, and thus should not be suspended. However, in the absence of court precedents (the Insolvency Act became effective in September 2004), it is likely that the insolvency trustees would try to argue that as many assets as possible are part of the insolvent’s professional or business activities, although scholars tend to generally think that receivables (including the right to receive the balance of a bank account) should not be considered as such.

8. Security over certain types of receivables: bank accounts and insurance policies

Pledge over bank accounts

[X.29]     Under Spanish law, a bank account deposit gives rise to a right in personam held by the owner of the account vis-à-vis the financial entity to receive the amount deposited (and the interest that accrues, if any). That right may be the object of a pledge to secure the obligations of the owner of the account vis-à-vis such financial entity or a third party[21].

[X.30]     In those cases where the financial entity opening the account is also the secured creditor (which would normally be the case in Spanish project finance transactions), these pledges are particularly popular as their enforcement by way of set-off becomes relatively simple. The pledgee has direct access to the funds and is in a better position to oppose the foreclosure by a third party. In addition, there is no need to serve notice of the pledge because the pledgee is the underlying debtor itself.

The extension of a mortgage over insured properties

[X.31]     Insurance policies are a useful tool to cover prospective damages affecting the insured assets, and may give rise to a future indemnity which can be used to secure credit rights by taking security over such potential indemnity (and other compensations, such as the proceeds of any claims and premium returns). The pledge over receivables arising out of insurance policies are especially helpful in the context of project finance transactions where the proceeds from real estate assets are the main (and in many cases the only) source applicable to the repayment of the financing[22].

According to article 40 of Law 50/1980 of 8 October on Insurance Agreements (“Law 50/1980”), the rights in rem held by a mortgagor or pledgor extend by operation of law to the indemnification amounts in favour of the insured party arising out of a damages insurance policy covering the mortgaged or pledged asset. Although the matter is subject to discussion, it can be reasonably concluded that there is a subrogation in the object of the mortgage / pledge, with the initial security interest becoming a pledge over receivables[23].

[X.32]     Notwithstanding the above, under Law 50/1980 the insured party must notify the insurer of the creation of the mortgage / pledge. After such notification, the insurer must not pay any compensation to the insured party without the secured creditor’s prior consent. Should the secured creditor fail to answer to the insurer within three months after serving notice, the insurer will be entitled to pay the relevant compensation to the insured party.

CASE STUDY

A large international bank incorporated in another jurisdiction (the “Bank”) wishes to provide facilities to a company incorporated and conducting business in Spain (the “Company”).

The Bank wishes to take a first priority security over:

(1)     the receivables owed from time to time to the Company by its debtors; and

(2)     the proceeds of such receivables held by the Company in its account with the Bank.

(i)      What type of security would you take [pledge/assignment/mortgage/charge]? Outline the nature of the security, including any statutory form;

A pledge could be created over the receivables owed from time to time to the Company by its debtors, whether present or future. However, a certain level of determination in the object of the pledge would be necessary. A floating or universal charge, i.e., a security over all or a pool of assets, present or future, of the Company without any level of determination would not be available under Spanish law.

A pledge over the balance held by the Company from time to time in an account with the Bank would also be feasible from a Spanish legal perspective.

A pledge over those receivables would be considered as a right in rem, and the Bank as pledgee would enjoy a privileged position in the event of the Company’s insolvency with respect to the receivables pledged.

(ii)     What approval process (shareholder/board) would the Company need to carry out to execute and be bound by the security?

The approval process would depend on the structure of the Company’s management body:

(i)      in the event that the Company is managed by a sole director or by one or more joint and several directors, they could individually execute the security agreement on behalf of the Company; and

(ii)      in the event that the Company is managed by a Board of Directors, an attorney generally or specially empowered by the Board could execute the security agreement on behalf of the Company.

It would be advisable that the Company’s directors expressly approve the transaction or even have their approval endorsed by a shareholders’ resolution, especially for high volume transactions or when the benefit for the company is not evident.

(iii)    What additional issues need to be covered where the Company is providing the security to cover the obligations of another company in the same group as the Company?

Under Spanish law, a pledgor may secure its own debts or a third party’s debts. The Company would be entitled to grant a pledge over its receivables to secure the obligations of another company in the Company’s group provided that such action is considered to be within the Company’s corporate purpose and in its corporate benefit (interés social).

While cross-guarantees are deemed comprised within the Spanish companies corporate purpose, it being understood in a broad sense, whether or not such act is in the corporate interest of a company is a factual test to be made by the relevant company’s directors on a case by case basis. Thus, in the event that the benefit for the Company is not evident, the Company’s directors expressly approving the transaction or even having their approval endorsed by a shareholders’ resolution would be advisable.

Spanish scholars and court precedents would generally consider cross-guarantees to be comprised within the corporate purpose (in a broad sense). Whether or not they would be in the corporate interest of the Company is a factual test to be carried out by the Company’s directors (the endorsement by a shareholders’ resolution being advisable in these cases).

(iv)    What are the specific requirements as to direction of the proceeds of the receivables (payment to a blocked account - basis on which withdrawals may be made without affecting the validity of security);

In a standard Spanish financing transaction, notice would be served to the underlying debtors instructing them to (i) refrain from making payments to the Company other than into a specific bank account opened with the Bank (certain restrictions on withdrawals would be usually agreed upon between the Company and the Bank), and (ii) pay any funds resulting from the receivables to the bank account determined by the Bank, upon receipt of a written request for payment from the Bank informing the underlying debtors that the secured obligations have been breached by the Company.

(v)     What are the notice requirements to debtors?

Under an “ordinary” pledge, possession of the receivables pledged would be delivered to the Bank by serving notice (ideally by both the Bank and the Company) to each of the Company’s underlying debtors, who, once the notice is received, shall not be released by paying the Company if payment is to be made to the Bank pursuant to the notice.

No specific form of notification is required under Spanish law, although receipt by the underlying debtor should be ensured. It is quite usual that the notary public who grants or intervenes the public deed or document creating the pledge coordinates the serving of notice to the underlying debtors and gives evidence that notice has been served.

(vi)    What formal requirements must be satisfied for the perfection of the security (including any registrations in public or other registries)?

Neither a specific form of execution of the pledge nor the submission of the pledge to a registry or similar action is required under Spanish law for the validity or perfection of an “ordinary” pledge over receivables. However, in order for such a pledge to be enforceable vis-à-vis third parties, evidence of the date of execution of the pledge pursuant to a public instrument (instrumento público) is required. Therefore, for enforceability purposes, pledges must be executed or formalised in a public deed or document (escritura pública or póliza intervenida) before a Spanish notary public.

In the case of a pledge without displacement, it should be executed in a public deed or document (escritura pública or póliza intervenida) before a Spanish notary public and registered with the Registry of Movable Goods (Registro de Bienes Muebles).

(vii)   What are the priority issues which may intervene such as tax or employee claims which would come between the Bank’s security and the receivables?

In an insolvency scenario, the Bank claims secured by the pledge over receivables would be especially privileged claims and would be paid from the proceeds of the sale of the security interest.

Although enforcement of the pledge could be suspended for a specific period of time after the commencement of the insolvency proceedings, no other type of claims could come between the Bank’s security and the receivables.

 (viii) Describe briefly the mechanics of enforcing the security (including any need to appoint an administrator or receiver). Please provide approximate timeframes within which each step could reasonably be expected to occur.

Should the Company fail to comply with the secured obligations, the Bank would be entitled to request payment and, if necessary, to initiate the enforcement of the security interest and get paid from the proceeds obtained in the sale of the collateral in a public auction before a notary public or through judicial proceedings, pursuant to specific rules set out in the law.

Additionally, the Bank could wait until the expiry date of the receivables pledged and demand payment from the underlying debtors, provided that the existence of the pledge was duly notified. Should they pay the Bank, the amounts received could be used to set-off the amounts owed by the Company.

The timeframe for the enforcement of a pledge before a notary public or through judicial proceedings is rather uncertain and depends on certain factors beyond the Bank’s control, such as whether or not the Company opposes the foreclosure, the number of auctions necessary to sale the receivables, or the specific court through which the foreclosure proceedings are taken (if applicable). A minimum of one year for notary public proceedings and two years for judicial proceedings would be a reasonable estimate.

The enforcement of a pledge over an account opened with the Bank would be more straightforward, as the set-off mechanism would operate in a more simple way.

[1]  Reference is made only to the pledge over receivables as regulated under Spanish civil law applicable within the Spanish territory. There are specific legal provisions applicable to the pledge over receivables in Catalonia, contained in Law 5/2006 of 10 May, approving Book 5 of the Catalonian Civil Code on rights in rem, which are generally applicable to pledges over receivables where the underlying debtor is domiciled in Catalonia.

[2]  In several rulings they admitted the pledge over receivables while construing it as an assignment for guarantee purposes.

[3]  In its rulings dated 25 June 2001, 26 September 2002, 10 March 2004 and 20 June 2007, for instance.

[4]  References to pledges herein are made both to “ordinary” pledges and pledges without displacement. Specific remarks are made where the legal regime applicable to the pledge without displacement is different from that applicable to the “ordinary” pledge regulated under the CC.

[5]  O’CALLAGHAN MUÑOZ, Xavier: Código Civil Comentado y con Jurisprudencia, Editorial La Ley, 2004.

[6]  The Spanish Supreme Court, in rulings dated 24 June 1941 and 11 December 2002, amongst others, stated that “the pledge does not only give a right to withhold (...) but also to transfer the goods pledged”.

[7]  BERCOVITZ RODRÍGUEZ-CANO, R. and others: Comentarios al Código Civil, Thomson Aranzadi, 2006.

[8]  Please see section 3 below.

[9]  Among them, VEIGA COPO, A.: Prenda de créditos y negocio fiduciario, Revista de Derecho Bancario y Bursátil, número 89, enero-marzo 2003.

[10] PANTALEÓN PRIETO, F.: Prenda de créditos: nueva jurisprudencia y tarea para el legislador concursal, La Ley, Revista jurídica española de doctrina, jurisprudencia y bibliografía, Nº 6, 1997.

[11] Please see section 6 below.

[12] Concerning the capacity of legal entities to create a pledge, please see section 4 below.

[13] In practice, the pledgor and the pledgee usually instruct the underlying debtor by serving notice to (i) refrain from making any payment to the pledgor other than into a specific bank account opened by the pledgor (and normally controlled by the pledgee), and (ii) place any funds resulting from the pledged receivables at the pledgee’s disposal in the bank account determined by the pledgee, upon receipt of a written request for payment from the pledgee informing the underlying debtor that the secured obligations have been breached by the pledgor.

[14] The by-laws of a Spanish company would not generally refer to the granting of pledges to secure obligations as part of the company’s corporate purpose.

[15] However, this endorsement by the shareholders would not preclude the directors’ potential liability if any damages are caused to the company or third parties. Again, for the purposes of creating a pledge in the context of a financing transaction where the debtor / pledgor is a company managed by a board of directors, a special power of attorney would usually be granted by the board in connection with the financing and the guarantees to be granted.

[16] For instance, the general principle is that a mortgage cannot serve as security of various obligations (with certain exceptions).

[17] The execution or formalisation of a pledge in a public deed or document before a notary public gives rise to fees, which generally depend on the value of the secured obligations.

[18] In this regard, the Insolvency Act requires that the pledge over receivables is formalised in a public document (and in case of pledges without displacement, that they be registered with the Registry of Movable Assets). In addition to the preference in the satisfaction of their credit with respect to the relevant assets, especially privileged creditors enjoy other rights in an insolvency scenario, such as, among others, (i) the right to be included in the list of creditors without the need to notify the insolvency trustees, (ii) information rights, (iii) the right to attend and vote in the creditors’ meeting (junta de acreedores), and (iv) the right to remain unbound by the creditors’ agreement (convenio de acreedores) if the especially privileged creditor has not voted in favour of or has not adhered to the creditors’ agreement.

[19] The only exception to that principle would be the provision of article 1866 of the CC, which states that when the pledgee holding possession of the pledged asset becomes creditor of the pledgor by virtue of a different contractual relationship (unsecured by the initial pledge), the pledgor shall be entitled to retain possession of the pledged asset until the second obligation is fulfilled.

[20] DÍEZ-PICAZO, Luis and GULLÓN, Antonio: Instituciones de Derecho Civil, Derechos reales, Tecnos, Madrid, 1998.

[21] Discussions have been held by different scholars as to the legal nature of the pledge over bank accounts (whether a special category of pledge over receivables or a pledge over cash -prenda irregular-). However, according to AVILÉS GARCÍA, J., “nowadays there is no problem in accepting that we are dealing with a special category of pledge, and it is not easy to distinguish an irregular pledge from a security over receivables”. This position has been upheld by the Spanish Supreme Court in recent years (e.g., rulings of 19 April 1997 and 13 November 1999).

[22] Another instrument with a similar effect would be the change of beneficiary under the insurance policy, so that the creditor, instead of being a pledgee, would become entitled to receive the compensation amounts directly under the insurance policy.

[23] The subrogation mechanism would imply that the priority in time of the initial security is inherited by the pledge over receivables created after the insured event occurs.