In this article we shall analyse the interesting pronouncement of the General Directorate of Notaries and Registries (the GDNR) in its resolution dated 2nd December 2019 regarding the possibility of establishing a mortgage loan during the liquidation phase of insolvency proceedings.
First of all, we must briefly summarise the stages of Spanish insolvency proceedings. The proceedings have two different stages, namely, the common phase and the subsequent agreement or liquidation phase. During the common phase, the insolvent debtor may be faced with two different situations, depending upon the court decision: (i) having management powers and their assets at their disposition, but requiring authorisation or consent from the insolvency administrators; or (ii) having these powers suspended in such a way that they are substituted by the insolvency administrators (article 40 of the Insolvency Act). In principle, the powers during this stage include those required for formalising mortgage credits.
The problems arise in the liquidation phase, since it is the most restrictive phase, in that it is solely intended for carrying out those operations necessary for disposing of the assets of the insolvent debtor, so that it is possible to pay creditors. In this way, in principle, during this stage, it is not necessary to carry out operations reaching beyond those that are purely winding-up operations. This argument is used by the registrar of the land registry when refusing the registration of a mortgage granted by way of a public deed during the liquidation phase of the insolvency proceedings of a natural person.
At this point, the difference between the treatment of legal entities and natural persons must be discerned.
Insofar as legal entities are concerned, the commencement of the liquidation phase means the dissolution of the company, and thus the liquidation functions set forth in article 383 and thereinafter of the Spanish Companies Act (recovery of credits, etc.) fall into the hands of the insolvency administration, so that actions of disposal such as the acquisition of property or the constitution of liens (mortgages, etc.) are not permitted.
Instead, with natural persons, the treatment must be different, inasmuch as the insolvency liquidation phase is not aimed at the extinction of the company and its disappearance from legal transactions; in this case the natural person survives. In fact, effort has been made by lawmakers (through laws such as act 25/2015 of 28th July, on the second chance mechanism, debt reduction and other measures on the social agenda) in order to allow for a departure of the natural person debtor from the insolvency situation through mechanisms such as the exemption from unpaid liabilities, etc.
Having clarified these points, the de facto situation resolved by the GDNR consists of a public deed of constitution of a mortgage loan granted during the liquidation phase of the voluntary insolvency proceedings of a natural person, formalised by the insolvency administrators, with the purpose of paying all the debts in order to get out of the insolvency situation. Furthermore, in this case, the bank in whose favour the mortgage is established is one of the creditors of the insolvency proceedings.
Upon applying for this credit, the natural person was able to leave behind the insolvency situation, and accomplish the conclusion of the insolvency proceedings, as the judge considered that the requirements of article 176.1.4º of the Insolvency Act had been complied with, which allows the conclusion of the insolvency at any stage of the proceedings, when it is verified that all of the recognised claims have been paid or have been fully satisfied by any other means or that the situation of insolvency no longer exists.
Thus, the General Directorate of Notaries and Registries deems that the mortgage public deed is registrable because: (i) it is beneficial to the debtor and allows departure from the situation of insolvency, (ii) it benefits the financial entity in whose favour the mortgage is established, since the debt is satisfied, (iii) there is no damage to the other creditors and (iv) the fact that the filing of the public deed takes place once the full management powers and disposition of assets have been recuperated by the debtor.
Jaime Madero
Vilá Abogados
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28th February 2020
