Claw Back Of Intra-group Guarantees: “Group Interest” As a Safe Harbour or rather as Pearl Harbour?

The benefits of belonging to a group of companies are well known. The integration of companies within a group not only improves each of the companies individual competitive position within their respective market but also (and most important) represents an upgrade of their position when dealing with third parties and in particular regarding the access to external finance.  In such cases, among others, the group (itself) works as a financing mechanism for each of the companies by means, for example, of facilitating the granting of guarantees among them.

Apart from the relations that may link each of the companies to the group and the organization and structure of such group, the group will be legally significant to the extent that a common interest of the companies concurs with the individual interest of each of them.

Given the fact that group of companies are a leading player in the Spanish economic chessboard, in very frequent cases, the transaction subject to claw back are intra-group guarantees, i.e. when the debtor grants a guarantee to secure the fulfilment of obligations of its parent or subsidiary/sister company.

From a claw back standpoint and pursuant to Article 71 of the Spanish Insolvency Law (Law 22/2003, of 9 July, Insolvency) transactions executed by the debtor during a two-year period prior to the initiation of insolvency proceedings and that are detrimental to the insolvency estate may be challenged and rescinded, even in the absence of fraud.  In particular and among others, an action, agreement or transaction is presumed to be detrimental to the insolvency estate when, among others, it is made, entered into or carried out for no consideration.

Hence, the following question is triggered: is an appeal to the so called group interest sufficient to hinder a claw back action against a guarantee granted by one of the companies of the group to secure obligations assumed by another company belonging to the same group?

Most courts (and doctrine) have understood that the guarantees granted by a parent company in favour of its subsidiaries (downstream guarantees) have not been granted for no consideration, given the interest of the parent company in the subsistence of its subsidiary, including the increase of the assets and future dividend (among others), all which is backed by the group interest.

However the dispute arises when the guarantee is granted by a subsidiary in favour of its parent company or a sister company (upstream guarantees).  Courts have emphasised that invoking the group interest (and hence the eventual benefit received by the company — guarantor declared in insolvency —) is not sufficient to consider the granting of the guarantee by the subsidiary as an act carried out for consideration and hence falls under the presumption to be detrimental to the insolvency estate.

In recent times, the judgement of the Spanish Supreme Court on 8 November 2012 has come to embrace the group interest argument in upstream guarantees whenever a clearly identifiable economic interest may be recognised.

In sum and as per the judgement referred to, when facing possible claw back scenarios of intra-group upstream guarantees the group interest argument will lack of importance within the insolvency arena if it is not accompanied by a thorough study capable of underlining that the granting of the upstream guarantee subject to claw back resulted likewise beneficial to the guarantor.  Only under such premises will the upstream guarantee be bullet-proof and may be considered to have been undertaken for consideration.

Alberto Álvarez

This article is not considered as legal advice

Advice on Insolvency Proceedings in Spain