Interpretation of Article 90.1.6 of the Spanish Insolvency Act: the special privilege of pledges on future credit rights

With the entry into force of the Public Sector Legal System Act, and pursuant to its Final Provision Five, the confusing Article 90.1.6 of the Insolvency Act was re-drafted. Now it is the Supreme Court, through Judgement number 186/2016 of 18 March 2016, which clarifies the interpretation to be followed in relation to the aforementioned Article in its previous wording and the qualification of those credit rights secured by means of a pledge on future credit rights as privileged.

Article 90.1.6 of the Insolvency Act, as amended by Law 38/2011 of 10 October (which entered into force on 1 January 2012), was branded by legal bodies as confusing and inaccurate. The wording of the Article introduced the figure of the pledge as collateral of future credits. It seems clear that the concept refers to the future credit rights as a “secured credit”, which is very different from the interpretation of the future credit as object of the collateral for a secured debt.

The distinction, which is now clear, has led to multiple interpretations, both doctrinal and jurisprudential. From a practical standpoint, it has been standard position among legal professionals to use the non-possessory pledge in order to benefit from the privilege contained in the Insolvency Act in respect of pledges. This is because the literal wording of the Article (under its former wording) mentioned that “the pledge as collateral for future credit will only confer special privileges to credit arising prior to the declaration of insolvency, as well as […] where the pledge was registered in a public registry prior to the declaration of insolvency”. The courts began to interpret that this mention to “pledges as collateral for future credit” should include, to an unjustified extent, pledges over (not as “collateral of”) future credits.

The new wording of Article 90.1.6 of the Insolvency Act passed by the Final Provision Five of the Public Sector Legal System Act clarifies the assessment of a credit (let’s read “claim”) secured by a pledge over future credit rights, giving it the privileged character provided that the conditions set forth in said Article are met. Thus, the express wording of this Article is as follows:

“Claims guaranteed with a a pledge constituted in a public document, on the pledged goods or rights that are in the possession of the creditor or a third party. In case of pledge of credit rights, it will be sufficient to enjoy the special privilege over the pledged credit that the pledge is granted in a document attesting the date in a reliable manner. The claims secured by a pledge over future credit rights will only benefit special privilege when the following requirements are met prior to the declaration of insolvency: a) that the future credits arise from contracts perfected or from legal relations established prior to said declaration; b) the pledge is granted in a public document or, in case of a non-possessory pledge, it has been registered in the competent public register; c) in the case of claims deriving from the resolution of contracts awarded for public works or public service management, that they comply, in addition, the requirements set forth in Article 261.3 of the Revised Text of the Public Sector Contracts Act, passed by Royal Legislative Decree 3/2011 of 14 November.”

The remaining issue then existing was the interpretation of those situations prior to the entry into force of the new wording of Article 90.1.6 of the Insolvency Act. The Supreme Court has been commissioned, for the first time, to give an interpretation of the old wording of this Article, by means of Judgement nº 186/2016 of 18 March 2016, which reaffirmed the position of most case law, that is, that it is essential to distinguish between the pledge over future credit and the pledge as collateral for future credit.

The judgement resolved the case of a company that had granted a pledge over the credit rights arising from a contract for the sale of energy produced by a photovoltaic plant, as security for the fulfilment of all of its obligations under the finance agreement entered into for the construction, installation and operation of the plant. Both the competent Commercial Court at first instance and the Regional Court understood that such credit should not be considered as privileged in its entirety, as the object of the collateral (the credit right for the sale of energy) did not existed prior to the declaration of insolvency.

In this case, it is the Supreme Court itself that is charged with highlighting the distinction between a pledge as collateral for future credit and the pledge over future credit. The High Court understands that the literal wording of the regulation must prevail, and therefore indicates that the particularities of the old wording of Article 90.1.6 must be limited to pledges as collateral for future credit. However, it clarified that the privilege for claim secured by pledges over credit rights shall be governed by the literal wording of the regulation – i.e., the only requisite for a pledge over future credits to benefit from the insolvency privilege is that said pledge is granted in a document attesting the date in reliable manner.

In conclusion, it should be noted that, even though at a late stage, the resolution issued by the Supreme Court to this question coincides completely with the one given by the Legislator in the new wording of Article 90.1.6, so that from the date of the judgement discussed here there should no longer be any case law or law market discussions regarding the aforementioned provision.