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The resolution of the General Directorate of Registries and Notaries (Dirección General de Registros y Notariado  – “DGRN”) dated 20th July 2018 clarified the legal requirements for the registry cancellation of a mortgage established on a property before the announcement of insolvency proceedings, wherein said property was adjudicated pursuant to the judicial auction held in accordance with the approved liquidation plan.

The application for the cancellation of the registration of the mortgage was filed with an order from the Justice Administration of the Commercial Court. However, the registrar refused registration for the following reason:

For the cancellation of a mortgage established prior to the announcement of the insolvency proceedings, it is necessary for it to be expressly recorded that the mortgage creditors have been made aware of the liquidation plan and the measures taken regarding the payment of their privileged credit. However, in the Adjudication Order it is considered that the auctioned property is found to be “free of encumbrances according to the report issued by the Insolvency Administrator”, that is to say, it is precisely understood that the asset in question is not mortgaged. As a consequence, the aforementioned requirements do not apply to the matter at hand.

The company filed an appeal against the registrar’s decision, arguing that (i) the auction was carried out pursuant to the judicially approved liquidation plan of the insolvency proceedings, (ii) the auction was published in the Official Spanish State Gazette, and (iii) the mortgage creditor did not present any opposition at any time, therefore, it may be concluded that the creditor was aware of the cancellation of the mortgage.

The DGRN stated the following opinion regarding the requirements for the registry cancellation of the mortgage:

If the extinction of the credit guaranteed by a mortgage on a property occurred before or during the insolvency proceedings, this may explain that the insolvency administrator had presented the mortgaged property for auction stating that it was an unencumbered property. However, the principle of disclosure (via official publication) has  the consequence that, even if in the relationship between creditor and debtor, the mortgage is terminated by the very causes of civil Law, the mortgage remains formally valid before third parties unless it has been cancelled at the Registry.

Regarding the matter at hand, the existence of the security right had not been reflected in the documents compiled by the insolvency administrator. In the Spanish system for insolvency proceedings, the general rule regarding the recognition of credits in insolvency proceedings is based upon the claim by the creditor. However, cases of forced recognition do exist whereby the Law imposes recognition regardless of whether the respective credits had been notified or not. Examples of obligatory recognition, are those credits “secured with a security right registered with a public registry”. On the other hand, the fact that an asset or right forming part of the overall assets has not been encumbered with a pledge or a mortgage in spite of this guarantee existing, does not mean that the right is extinguished.

The consequence of this is, that if in the insolvency proceedings an asset or right is freely auctioned because it does not appear to be affected by any encumbrance, although this may be the case, the auction and the adjudication are null, and the registrar must refuse the cancellation of the charges. The registrar may not decide regarding the source of the adjudication, but he may however, and should verify that the judicial order places on record the fulfillment of the legal requirements which preserve the rights of the mortgage creditor when this order instructs the cancellation of the real guarantee right.

In this case, the order does not state whether the beneficiary of the mortgage has reported in the insolvency proceedings; or whether once the liquidation plan had been manifested in the court offices, this fact had been notified to this creditor in order for them to formulate observations or proposals for modification; whether the creditor had been made aware of the measures taken in relation to the payment of the special privileged credit, or whether the result of the auction had been notified in order for the creditor to exercise its legal rights. Therefore, the DGRN dismissed the appeal.

Mika Otomo

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31st of August 2018

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