In Spain, various guarantee options exist to secure the fulfilment of obligations arising from loan agreements. These guarantees fall into two main categories:
- Personal guarantees, such as the security and bank guarantee.
- Securities, such as mortgages and pledges.
Choosing the best type of guarantee strengthens the creditor’s position against potential defaults and improves credit recovery when the debtor becomes insolvent.
Types of Guarantees in Spanish Law
Personal Guarantees
- Security: It is the most common form of personal guarantee. It allows the creditor to claim against a third party, the guarantor, if the debtor defaults, providing additional financial security. In the case of joint suretyship, the creditor can directly pursue the guarantor.
- First-demand bank guarantee: It provides immediate payment to the creditor upon default notification without justification or proof. It is a highly effective and efficient method in business transactions.
Securities
Securities grant rights over specific assets, such as:
- Mortgages on real estate. These require registration in the Property Registry, ensuring public notice and priority over other creditors.
- Pledges on movable assets or rights. Often, the delivery of the asset is required to fulfil the guarantee.
Securities give creditors a preferred position, enabling them to enforce the affected asset to recover their credit in case of default.
Enforcement and Priority Order in Insolvency
In Spain, the priority order of credits in insolvency cases determines the hierarchy of creditor payments. The Spanish Insolvency Law 16/2022 outlines this order as follows:
Mass Claims
- These arise after the declaration of insolvency and are necessary for the process and continuation of the debtor’s business.
- They include employees’ salaries for post-insolvency services, judicial and administrative expenses, and obligations from ongoing contracts.
- These claims hold absolute priority and are paid as they become due.
Insolvency Claims
- These refer to debts incurred before the insolvency declaration.
- They are divided into:
- Secured Claims: Backed by guarantees like mortgages or pledges, granting creditors preference over the encumbered asset.
- Ordinary Claims: Lacking specific guarantees or legal priority.
- Subordinated Claims: The last to be paid, including interests, fines, and other items specified by the Insolvency Law.
This priority framework seeks to balance creditors’ rights and ensure an orderly distribution of the debtor’s assets during insolvency.
Conclusion
Proper structuring and selection of guarantees in loan agreements are crucial for protecting creditors’ interests. In insolvency cases, secured guarantees, such as mortgages and pledges, provide creditors with a preferential position, significantly influencing credit recovery outcomes.
Businesses should carefully evaluate the available options and seek expert legal advice to structure guarantees effectively and comply with the prevailing legal framework.
If you need additional information regarding the order of priority of guarantees in insolvency proceedings in Spain,
