Background
In recent years there has been a discussion as to whether, in an insolvency scenario, the credits of the swap entered into under a close out netting arrangement should be classified as superprivileged credits (créditos contra la masa) or unsecured claims (créditos ordinarios).
When a transaction qualifies as a close out netting arrangement for the purposes of the Spanish Collateral Act (Real Decreto-ley 5/2005 de reformas urgentes para el impulso a la productividad y para la mejora de la contratación pública), (i) the resulting close-out amount shall be considered as a superprivileged claim when the event of default was caused after the insolvency declaration; and (ii) a counterparty’s ability to terminate and enforce a transaction with a close out netting arrangement cannot be limited, restricted or affected in any way by the start of insolvency proceedings or administration.
The basis of the discussion as to whether swaps qualify for the purposes of the Spanish Collateral Act revolves around the fact that for a netting to have taken place there is a need for more than one transaction under a master agreement. However, in 2011, Law 7/2011 amended the Spanish Collateral Act to confirm that the Collateral Act does apply in circumstances where there is only one financial transaction under the relevant master agreement. Specifically, Article 16 was amended so that it now refers to “transaction or transactions”.
However, it has been argued that the amendment was insufficient as no corresponding amendment was made to Article 5.1 of the Spanish Collateral Act. This provision states the following:
This chapter will apply to financial transactions which are carried out under a contractual netting agreement or in relation to it, provided that the agreement envisages the creation of one single legal obligation which covers all the financial transactions included in such agreement and by virtue of which, where there is an early termination, the parties will only have the right to claim the net amount resulting from the liquidation of such transactions. The net sum will be calculated in accordance with the provisions of the contractual netting agreement or the agreements which are related to such contractual netting agreement.
In this regard, the Supreme Court (Civil Division), in a judgment dated 2 September 2014, allowed an appeal from the Court of Appeals where that court had declared that Article 16 of the Spanish Collateral Act did not apply where the agreement related to a “single financial transaction”. The Supreme Court held that this was wrong. However, the Supreme Court in that case was considering a case where the action arose before the amendment to Article 16, so that the original wording of Article 16 applied in that case. As such, the Supreme Court did not directly apply the new law.
The decision of the Supreme Court was followed by the Madrid Regional Court (which is an appellate court) in a decision of 4 May 2015. The issue in that case was (again) whether “the realisation of a single transaction is enough to invoke the application of the regime foreseen in the [Collateral Act]”. The Madrid Regional Court noted the effect of the amendments to the Spanish Collateral Act and stated that “the intention of the mentioned legal reform is transparent and that the role of the judicial bodies is to adhere to the compliance with the law, whilst the controversy should not be rekindled when the standard has been modified precisely to try to settle it”.
On 18 May 2015 the 28th Section of the Regional Court of Madrid considered the same question in a case with a single interest rate swap transaction under a contractual agreement. The Court again held that the 2011 amendment to the Collateral Act had re-affirmed the pre-existing rule.
It appears then that the consideration of the swaps being considered as superprivileged claims in an insolvency scenario may be clarified by the Spanish Courts.
Supreme Court Judgment dated 18 November 2015
On 18 November 2015, the Plenum of the Civil Chamber of the Supreme Court (all nine magistrates in agreement) issued a judgment in relation to the consideration and ranking to be ascribed to an inflation swap entered into with a party that had been declared insolvent.
It was a single transaction (i.e. no other financial transactions had been entered into under the corresponding master agreement). In the insolvency proceedings, the hedging provider sought recognition that post insolvency settlements under the swap were to be recognised as super-privileged (con cargo a la masa) on the grounds that (i) the Spanish Collateral Act was applicable to the agreement and (ii) the agreement entailed pending reciprocal obligations.
A. Position of the Plenum of the Supreme Court as regards the applicability of the Spanish Collateral Act to hedging agreements
According to the Court’s opinion, only those master agreements which lead to the creation of a single obligation in respect of various transactions that have been entered into within the scope of the master agreement are eligible under the Spanish Collateral Act.
As such, the Supreme Court stipulates, as a pre-requisite for a master agreement to be eligible under the special regimen provided for under the Spanish Collateral Act, that within the scope of the said master agreement more than one financial transaction must have been subscribed.
As a consequence, the Supreme Court also reached the conclusion that, as regards those master agreements where only one financial transaction has been subscribed, the Spanish Collateral Act will not be applicable.
For the sake of clarity, it must be noted that the challenge (incidente concursal) that eventually led to the relevant appeal (recurso de casación) before the Supreme Court was brought in February 2011. As such, and although the Supreme Court makes a reference to the amendment that was introduced to the Spanish Collateral Act in April 2011, it is not crystal clear whether the Supreme Court has taken into account the April 2011 amendment to produce its judgment or not. Consequently, it cannot be ruled out that the Supreme Court could vary its position with regard to challenges brought after April 2011.
B. Position of the Plenum of the Supreme Court as regards the existence of pending reciprocal obligations under a hedging agreement
The view of the Supreme Court is that a swap does not entail any pending reciprocal obligations as, in the end, it only leads to obligations on one of the parties. In this regard, the Court’s opinion is that although the agreement may foresee an exchange of cash flows, this is only a part of the internal mechanisms for settlement of the agreement, and therefore it does not involve the existence of pending reciprocal obligations which are binding upon both parties. In the end, each settlement under the agreement contains an obligation for one of the parties but not for the other.
In this way, the conclusion of the Supreme Court is that a swap cannot be classified as an agreement with reciprocal pending obligations for the purposes of the Spanish Insolvency Act and therefore all settlements (either pre or post insolvency settlements) shall rank as insolvency claims (créditos concursales) and not superprivileged claims (créditos contra la masa).