Insolvency stays on enforcement of security on inventory on the ruling of Commercial Court No. 6 of Madrid dated 30 January 2012

Expedited enforcement and foreclosure is critical to secured creditors seeking recovery of debts, but Spanish insolvency law may impose limitations and restrictions on enforcement proceedings which need to be carefully considered as part of the risk analysis for each transaction. It is however not only the actual legal texts that matter as associated case law is capable of generating uncertainties in apparently clear legal provisions.

This court ruling is a clear example of this.

The case: A creditor is pursuing the enforcement of a mortgage on a real estate asset of the debtor. The corporate purpose of the debtor is the development and construction of houses and the building at stake is the only asset in its balance sheet at that point in time. The debtor had filed for insolvency prior to the completion of the enforcement process.

In order to resume the execution of the mortgage, the secured creditor requests from the commercial court dealing with the insolvency proceedings of the debtor, a declaration that the asset is not attached to the entrepreneurial or economic activity of the debtor and hence not subject to the stays provided for in article 56 of the Spanish Insolvency Act.