The Judgment of the Civil Chamber of the Supreme Court of May 7, 2019 (Rapporteur Sancho Gargallo) addresses heterogeneous issues around bankruptcy proceedings: (i) international competition, (ii) foreign effects of the national bankruptcy proceedings, (iii) thing deemed international material, (iv) real rights, and (v) effects of the agreement, issues whose concurrence and conjugation singles out the judicial resolution and make it worthy of these modest lines.
(1) Summary of the facts
The summary of facts is as follows: a shipyard Vigués, Factorías Vulcano S.A. – as a result of an arbitration award for a dispute in the construction of a ship – owed to an English company, Arrow Seismic II LTD, a loan backed by an approximate amount of 40 million euros. The guarantor, Banco Popular, honored said guarantee, thereby reducing the amount of the loan to approximately 10 million euros. Later Arrow urged before the Norwegian courts – Norway does not belong to the European Union – the execution of the award, and obtained from these courts precautionary measures named under Norwegian law “utlegg” consisting of the seizure of the credit rights that Vulcano held against a Norwegian company called Armada Seismic for the outstanding amounts.
Subsequently, Factorías Vulcano was declared in voluntary bankruptcy by the Commercial Court No. 3 of Pontevedra, recognizing in favor of Arrow approximately 8 million euros as ordinary credit and approximately 1.5 million euros as subordinated credit. For its part, the approved agreement reduced the ordinary credit to approximately 1.6 million euros and the subordinate to approximately three hundred thousand euros.
After the approval of the agreement, Vulcano requested, both in Spain and in Norway, the lifting of the “utlegg” embargoes made. The Spanish Commercial Court referred to the Norwegian legislation on embargoes, affirming – however – that Arrow’s credit rating did not enjoy any privilege. For its part, the Norwegian Court (Office of Coercive Executions of Bergen) denied the cancellation of seizures on the grounds that foreign bankruptcy proceedings cannot lay the groundwork for voiding seizures.
Vulcano reacted to such denial by filing a lawsuit before the ordinary Courts of Vigo requesting substantially a sentence with (a) a declaratory pronouncement on the amount owed by Vulcano after the bankruptcy take-off, and (b) a pronouncement of sentence to Arrow to leave without effect the execution and to raise the embargoes locked on the credit rights of Vulcano against Armada.
The Court estimated points (a) and (b), and the sentence was appealed by Arrow, a resource that was dismissed in its entirety by the Provincial Court of Pontevedra. In the face of said judgment, Arrow filed an extraordinary appeal for procedural infraction on the basis of (i) incorrect assignment of international jurisdiction to the bankruptcy court and (ii) thing deemed international, and an appeal based on what is of interest, on the wrong assignment to Spanish legislation as applicable.
(2) On international competition to hear about actions directly related to insolvency proceedings.
In relation to the international jurisdiction of the Court of Vigo, the Supreme Court is obliged to assess it ex officio – given its character of procedural public order – since the Pontevedra Hearing had erroneously substantiated that on the basis of article 5.1.a) of the Regulation 44/2001, when considering the agreement of creditors as “contractual matter”.
And we say wrong because the aforementioned regulation excludes from its scope “bankruptcy, agreements between bankrupt and creditors and other similar procedures” and therefore cannot be invoked to sustain the international jurisdiction of the Spanish courts. On the contrary, the interpretation conferred by the CJEU (Judgment of February 12, 2009, C-339/2007) to Article 1.3 of Regulation 1346/2000, which was applicable for temporary reasons, is that such provision must be interpreted in the sense that it also attributes international competence to the Member State in whose territory the insolvency procedure has been opened to hear about the actions that emanate directly from this procedure and that are closely related to it, even if the defendant is domiciled in another member state of the EU, corresponding to the Courts of that State the attribution of the internal competence according to its national law, competence that may fall on a different jurisdictional body from the one that dictated the opening of the proceedings.
The Supreme Court, in turn, interprets – as it seemed logical – that the declaratory and conviction actions exercised by Vulcano are directly related to the open competition in Spain; Therefore, the international competence to hear declaratory actions and compliance with the agreement is attributed to the Court of First Instance of Vigo. It should be noted that this doctrine of the CJEU has been transferred to Article 6.1 of the current European Insolvency Regulation 848/2015.
(3) About the thing deemed international
The appellant Arrow alleges that the court of first instance of Bergen (Norway) has already dismissed Vulcano’s claim to lift the embargoes that weighed on her credit rights against the Navy, by means of a sentence that reached its firmness on April 24, 2013, so prior to the action taken before the Court of First Instance of Vigo, a circumstance that would determine the existence of an international res judicata, within the meaning of article 222 LEC in relation to article 33 of the Lugano Convention.
However, the Supreme Court, even admitting the existence of a previous process in which there is subjective identity, and even that the petitum – lifting of embargoes uttleg – is coincident in both lawsuits, considers that there is a difference in the petendi cause of those ; because while in the first of them the justification was the stoppage of executions as a result of the opening of the contest, in the second the justification is the novatory effect of the bankruptcy agreement, which has reduced the credits to 20%, to which they must remain subject to ordinary and subordinated loans under the principle of the conditio creditorum pair and the loss community, which makes it impossible to maintain seizures destined precisely to the extra-bank satisfaction of the original credits.
Article 222.2 LEC provides that the thing judged reaches the “claims” of the claim – the procedural claim must be identified with the cause petendi – but not so to its plea or “petitum”, which could be replayed if the cause of request or “cause petendi” of the second lawsuit would have varied with respect to the first. In our circumstances, there are differences between the first and second proceedings, both in their legally relevant facts, or “cause petendi”, as in their plea or “petitum”:
In relation to the “cause petendi”, in the first procedure, processed before the Norwegian courts, the “cause petendi” was based on the prohibition of continuing enforcement proceedings against the bankrupt (art. 55.3 LC); while in the second procedure, processed before the Court of First Instance of Vigo, the “cause petendi” is based on the novatory effect of the agreement and on the principle of “par conditio creditorum”.
In relation to the “petitum”, while in the first procedure it was requested that the Norwegian Court order the Bergen Seizure Office to lift the embargo on Vulcano’s credit rights vis-à-vis the Navy, in the second procedure it was requested to the Spanish Court that condemned Arrow to desist in the execution followed in front of Vulcano before the Bergen seizure office and, consequently, raise the seized embargoes.
Although the “petitum” is not identical, the existing difference would not be sufficient to justify the uniqueness of each claim, since in the end its purpose is the same: the lifting of the embargoes made in Bergen. That in the first case the addressee of the court order was the Office of Embargoes, and in the second case the seizure itself does not deprive the “supplicants” of both procedures, since said lifting of embargoes is what, in reality, is pretended by Vulcano, and what was denied by the Norwegian courts.
However, as regards the “petendi cause”, the legally relevant facts of the second process are clearly different from those of the first, and could not have been used in it (art. 400.2 LEC) – since the agreement has not yet It had been approved – it cannot be considered that we are faced with a case of res judicata.
(4) On the applicability of Spanish bankruptcy legislation to real rights over debtor assets located abroad.
Article 201 LC provides that the effects of the insolvency of the creditor’s real rights over assets of the bankrupt that are located abroad, will be determined by the law of the state in which they are located, so the creditor Arrow argues that it would be the Norwegian law – and not Article 136 LC on the novatory effectiveness of the agreement – that would determine whether or not the lifting of embargoes is appropriate.
However, the real nature of the “uttleg” executive embargoes is questioned by the Supreme Court, because, having qualified Arrow’s credit as ordinary bankruptcy, that nature was not discussed or contested by the creditor, and therefore it can be considered or alleged that it is a secured loan with a real right, therefore, subject to Norwegian law.
In other words, our High Court reasons that since the ordinary nature of the credit was not discussed by Arrow, it may be wrong later to argue that it entailed a security right. However, such an interpretation would leave the path ajar of assigning to the executive embargo the character of a real guarantee that privileges the credit, when the embargo – as is known – is not only not part of the list of guarantees that privilege the credit (art. 90 LC) , but it is imperatively cancelable after the declaration of insolvency (art. 55.3 LC), and it must be questioned even if it is a true real right, since even if it enjoys an “erga omnes” character and re-sectoral nature, it is more of a Real effect on an executive process that gives a guarantee given on a credit, and therefore is not subject to registration in the Property Registry, but only for preventive notation (art. 42 LH) subject to the appropriate expiration dates.
Therefore, although the effects of the contest on the real rights must be submitted to the “lex rei sitae”, there is no real right of the creditor in the circumstances on the seized credits.
- Article published in Legal Today on 3rd October 2019