Paraguay: Security Instruments And Promissory Notes: Enforceability Under Paraguayan Law

This update addresses various issues regarding the legal status and enforceability of security documents and promissory notes when provided by a Paraguayan borrower in favour of foreign lenders.

How effective a given type of security instrument is and what are the legal actions available to the creditor to enforce a given security instrument or promissory note are the two major issues a foreign lender must address when financing projects or operations in Paraguay.

Guarantees are classified in two major groups: real guarantees (on property) and personal guarantees.

Real guarantees, mainly mortgages and chattel mortgages, are considered the most reliable and secure guarantees, for they create a privileged security interest over the mortgaged or pledged property in favour of the creditor. Furthermore, procedural law prescribes an expedited enforcement procedure for this type of guarantees, not available with respect to personal guarantees.

Mortgages are placed on a real property and are extensive to all accessories as long as they are united to the Property, to all improvements, to buildings erected in vacant land, to rents and results from insurance coverage. It is not divisible and properties mortgaged to secure debt are bound for the whole amount and the creditor may proceed against any or all of them. Only the owner may mortgage his property. A joint owner may mortgage his share, but in case of partition, the mortgage is applied to his share alone.

Mortgages shall be made by notarial act (public deed) or public instrument which may be executed in a foreign country, but should be legalized and protocolized by order of a civil court. They can be opposed to third parties as from the date in recording in the public registry of properties.

The credit guaranteed by a mortgage may be divided up in installments and documented in endorsable promissory notes and shall be registered with the public deed in the same registry. Credit may be solely enforced by presenting to the court the registered promissory notes.

Mortgages may also be "open", that is, covering all the present and future credits under a determined amount. This type of mortgages are generally used by banks and other financial institutions, and are granted for a term of 10-20 years.

Mortgages are foreclosed and realized through an expedited enforcement procedure established by the Civil Procedure Code. Very few defenses are allowed.

In bankruptcy proceedings, the creditor has the privilege over the mortgaged property.

Only one type of chattel mortgage is recognized by law, that is recorded or registered pledge over movables instituted by law. It is a contract by which the debtor assigns assets in guaranty of a loan, without losing possession of them. Contract is registered and gives the creditor a privilege over all other creditors over those assets, as from the date of the recording. No subsequent pledge affecting the same property may be executed by the debtor, except with consent of the creditor.

Similar to the mortgages, chattel mortgages may be also open. A Promissory Note must be executed for each credit granted.

Chattel Mortgages may be made by a private instrument or public deed and are foreclosed and realized through an expedited enforcement procedure established by the Civil Procedure Code, and only some few defenses are available to the defendant.

In bankruptcy proceedings, the creditor has a privilege over the mortgaged movable property. Only certain legal privileges such as workers’ salaries and compensations, and legal fees have privilege over one granted by a chattel mortgage.

Through a contract the debtor assigns assets and physically delivers the pledged goods to the creditor in guaranty of a loan, losing possession of them. Pledged goods need to be movable property.

In bankruptcy proceedings, the creditor has a privilege over the pledged goods. Only certain legal privileges such as workers’ salaries and compensations, and legal fees have privilege over one granted by a chattel mortgage.

According to Paraguayan law, the pledgee may not gain appropriation of the goods. Judicial foreclosure and sale of the goods is necessary and only if no bidders concur may the pledgor obtain appropriation for 75% of the value of the debt.

As well as mortgages and chattel mortgages, possessory pledges are also foreclosed and realized through an expedited enforcement procedure established by the Civil Procedure Code and very few defenses are allowed.

Securities may be pledged so that the creditor for whose benefit the pledge is established may demand satisfaction out of the pledged securities.

If the pledged security is non-negotiable through endorsement then the possession of the security shall be transferred to the pledgee, or to a third party in escrow. Securities that are not made in writing or are not assignable may not be pledged.

A pledge over bearer shares shall follow the rules instituted for possessory pledges, while the pledge over registered or other types of securities is created upon delivery of the securities through an endorsement or on the basis of a written pledge contract.

Pledges over securities are foreclosed through an expedited enforcement procedure established by the Civil Procedure Code and very few defenses are allowed.

Personal accessory guarantees are civil contracts by which a natural or legal person undertakes the obligation to honor a debt in case the principal obligor defaults in the payment.

A personal guarantee does not assign or grant any security interest over specific property. The guarantee of the debt are all the assets of the debtor, however, guarantor is not legally precluded from disposing of part or all of the assets.

A guarantee must be enforced through a long full trial procedure that may last for years. Defendant may oppose various civil and procedural defenses. Attachment is usually not granted at the outset in this procedure.

Finally, in bankruptcy proceedings, personal guarantees rank last after mortgages, pledges and other privileged credits.

When it is not possible to obtain a mortgage or chattel mortgage, the execution of a Promissory Note drafted in compliance with the applicable legal formalities is highly recommendable.

A Promissory Note is considered by law as an "enforceable title". Thus creditors may benefit from the expedited enforcement procedure established in the Civil Procedure Code that at the same time permits immediate attachment over the assets of the debtor.

More extensively foreign firms are preconditioning loans and shipments upon the receipt of a short-form Note, in the amount of the financing plus accessory charges.

Notes are seldom subject to challenge in bankruptcy proceedings.

Notes shall be drafted in accordance with Paraguayan civil and commercial law. The Paraguayan Civil Code adopts the continental system with respect to credit instruments. The principles that govern the formalities and validity of notes are: literalness, autonomy and irrevocability of the title.

A note drafted in accordance with Paraguayan law is a very simple draft or unconditional obligation to pay, different from promissory notes utilized in other countries such as the United States.

Notes may be executed by the principal debtor and by other co-debtors which are jointly and severally liable with the principal obligor.

In conclusion, taking into account legal and practical considerations, the following is the order of guarantee devices from more to less reliable and secure: