Versión Online
Montevideo, jueves 23 de setiembre de 2016

Jean Jacques Bragard
Jean Jacques Bragard

Lending and taking security in Uruguay: overview

OVERVIEW OF THE LENDING MARKET
1. What have been the main trends and important developments in the lending market in your jurisdiction in the last 12 months?

On 7 May 2015, the Uruguayan Central Bank communicated to all banks in Uruguay the need to progressively reduce and then eliminate their bank reserves held in foreign currency. The central bank gave all banks between May 2015 and December 2015 to achieve this. In addition, it was directed that bank reserves in Uruguayan pesos (UYU) were to be completely eliminated by 1 January 2016. This has directly affected the banks' liquidity and was expected to generate a significant increase in funds available for lending. It was also expected to impact on currency exchange rates and the rate of inflation.

FORMS OF SECURITY OVER ASSETS
Real estate
2. What is considered real estate in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)?

Real estate
Real estate in Uruguay refers to assets that cannot be transported from one place to another. It includes (Article 463, Civil Code): - Land. - Buildings. - Houses. Common forms of security In Uruguay, the most common form of security over real estate is the mortgage. Formalities To create and perfect a mortgage over real estate, the mortgage agreement must be: - In a written deed. - Notarised by a public notary. - Registered at the real estate public registry. A mortgage over real estate can be terminated when either the: - Debtor has fulfilled its obligations under the loan agreement (paid the debt). - Mortgage is cancelled.
 
Termination must be registered at the real estate public registry.s
Tangible movable property

3. What is considered tangible movable property in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected?

Tangible movable property
Tangible movable property includes:
- Vehicles.
- Pedigree animals.
- Machinery.
- Forests.
- Crops.
- Livestock.
Common forms of security
For the examples of tangible movable property mentioned above, the most common forms of security are either of the following:
- Pledge.
- Guarantee trust.
Formalities
Pledge. The formalities for creating and perfecting a pledge over movable property are that it must be:
- In writing.
- Registered, if it is:
- over a registrable asset;
- without displacement (see below).
A pledge over a registrable asset must be registered at the registry applicable to that particular type of asset.
A pledge without displacement must be registered in the national register of pledges without displacement (Article 4, Law of Pledges Without Displacement, Law 17.228).
A pledge with displacement is perfected when the debtor hands over the pledged asset to the creditor. It terminates when the debtor has fulfilled its obligations under the loan agreement (paid the debt), or when the pledged asset is destroyed.
Guarantee trust. The formalities for creating and perfecting a guarantee trust over movable property are as follows:


- The agreement must be in writing.

- The assets must be at the disposal of the trust.

Once the obligation has been fulfilled, the assets are returned to the original owner. If the obligor breaches its obligations the fiduciary can sell or otherwise dispose of the asset, according to the procedure set out in the trust agreement.


Financial instruments
4. What are the most common types of financial instrument over which security is granted in your jurisdiction? What are the most common forms of security granted over those instruments? How are they created and perfected?

 

Financial instruments

Financial instruments include:

- Shares.

- Bonds.

- Certificates of deposit.

- Debt instruments.

- Warrants.

 

Common forms of security

The most common forms of security over financial instruments include:

- Pledges.

- Guarantee trusts.

- Assignments of credit.

 

Formalities

Pledge. There are no formal requirements for a pledge. A pledge can be granted in a private document that has not been notarised.

However, a pledge with displacement must be registered in the relevant public registry (see Question 3).

Guarantee trust. A guarantee trust agreement must be in writing, and the assets must be at the disposal of the trust. Once the obligation has been fulfilled, the assets are returned to the original owner. If the obligor breaches its obligations, the assets can be sold.

Assignment of credit. There are no formal requirements for an assignment of debt, and the agreement does not need to be in writing. For an assignment of debt to be enforceable by the assignee against a third party debtor, the third party must have been notified of the assignment. This is usually done by the assignee.


Claims and receivables
5. What are the most common types of claims and receivables over which security is granted in your jurisdiction? What are the most common forms of security granted over claims and receivables? How are they created and perfected?

 

Claims and receivables

The most common forms of claims and receivables include:

- Debt.

- Rights under a contract.

 

Common forms of security

The most common forms of security over claims and receivables are:

Factoring. Under a factoring agreement a supplier of goods sells the right to collect its invoiced commercial credits to a third party, called a factor, in return for payment. The factor charges a fee for assuming responsibility for collecting the debt and the risk of non-payment by the debtor.


- Guarantee trusts.
- Assignment of rights.
Formalities
Factoring. To create and perfect a factoring agreement, the:
- Agreement must be in writing.
- Seller must hand over the receivables to the buyer.
It is usual in factoring arrangements for the buyer to carry the risk of non-payment by the debtor. Therefore the party selling the receivables will be discharged from this burden.
Guarantee trust. The formalities for creating and perfecting a guarantee trust as a form of security over claims and receivables require that the:
- Agreement must be in writing.
- Assets must be at the disposal of the trust.
Once the original obligation is fulfilled, the assets are returned to the original owner. In case, the obligor incurs in breach of its obligations, the assets shall be executed.
Assignment of rights. For an assignment of rights to be enforceable against third parties, the debtor must have been notified of the assignment.

Cash deposits
6. What are the most common forms of security over cash deposits? How are they created and perfected?


Common forms of security
The most common form of security over cash deposits is a pledge.
Formalities
Pledge. A pledge over cash deposits must:
- Be in writing. A private (non-notarised) agreement is acceptable.
- State the amount pledged.
- Identify the account(s) in which the cash is held.
If the debtor defaults on its secured obligation pledged funds are assigned to the creditor.

Intellectual property
7. What are the most common types of intellectual property over which security is granted in your jurisdiction? What are the most common forms of security granted over intellectual property? How are they created and perfected?
Intellectual property
The most common types of intellectual property over which security is granted include:
- Patents.
- Trade marks.
- Copyright.
- Designs.


Common forms of security
The most common form of security interests over intellectual property is a pledge.
Formalities
Pledge. A pledge over registrable intellectual property rights must be registered with the relevant intellectual property registry before it is enforceable against third parties.

Problem assets
8. Are there types of assets over which security cannot be granted or can only be granted with difficulty? Which assets are difficult or problematic when security is granted over them?

Future assets
The issue of whether or not a future asset can be secured is the subject of continuing debate and dispute in Uruguay.
The law on pledges without displacement (see Question 3, Formalities) offers the possibility of a pledge over third party assets, and therefore can also offer the possibility of granting security over future assets.
The law on factoring expressly refers to the possibility of granting a global assignment of all receivable credits, including future credits (Law 17. 202).
Fungible assets
Fungible assets can be secured by a pledge.
Other assets
The following debtor assets cannot be frozen (General Procedural Code (Codigo General del Proceso)):
- Wages.
- Pension.
- Personal effects.
- Furniture in a debtor's home.
- Books related to a debtor's work.
- Funerary rights.
- Assets used for private religious worship or practice.

RELEASE OF SECURITY OVER ASSETS
9. How are common forms of security released? Are any formalities required?


The formalities required to release the various forms of security depend on the form of security issued. Security can be released by:
- Recision.
- Expiration.
- Cancellation.
If the security has been registered in a relevant public register it must be de-registered, for example a mortgage over real estate. A notary public must apply for the deregistration.

SPECIAL PURPOSE VEHICLES (SPVS) IN SECURED LENDING
10. Is it common in your jurisdiction to take security over the shares of an SPV set up to hold certain of the
borrower's assets, rather than to take direct security over those assets?
It is common to take security over the shares or certificates of an SPV or trust set up to hold certain assets rather than to take direct security over those assets. This is usually done to speed up the transaction or in preparation for a public offering of shares.
It may be agreed that voting rights attached to a share remain separate from the security that is issued over that share. So it is possible to grant security over a share and retain or assign the attached voting rights and therefore to continue being an active shareholder, despite the security.

QUASI-SECURITY
11. What types of quasi-security structures are common in your jurisdiction? Is there a risk of such structures being recharacterised as a security interest?


Sale and leaseback
Sale and leaseback is possible under the law of leasing (Law of Leasing, Law 16072 (Crédito de Uso)). In this form of arrangement one party sells an asset to another, and at the same time leases it back for use. This is usually done because the seller needs solvency as well as use of the asset. One benefit of this structure is that use of the asset, for example machinery, is not interrupted.

Factoring
Factoring is a method by which a business can guard against non-payment of its receivables by customers. The business sells to a third-party factor the right to collect customer credit. The factor then collects the debts at its own risk but makes funds available to the business.
Hire purchase
There is no concept of hire purchase in Uruguay.
Retention of title
Retention of title is not provided for in any legislation. It can be agreed informally between the parties but is not commonly used.
Other structures
A structure commonly used in Uruguay is a pledge over the rights of a promisor buyer. This type of security requires there to have been an earlier agreement to sell to the buyer. The pledge must be registered for it to be enforceable against third parties.

GUARANTEES
12. Are guarantees commonly used in your jurisdiction? How are they created?

Guarantees are commonly used and specifically in financial transactions. A guarantee is an agreement by which a third party guarantees to pay the debts of an original obligor, if the original obligor does not comply with its obligation. A guarantee agreement must be:
- In writing.
- Signed by the guarantor.


RISK AREAS FOR LENDERS
13. Do any laws affect the validity of a loan, security or guarantee (or the terms on which they are made or agreed)?


Financial assistance
A company cannot (Article 315, Commercial Companies Law, Law 16.060):
- Accept its own shares as security.
- Acquire its own shares, although this is subject to some exceptions.
Corporate benefit
A company must always act in its own best interest. It cannot grant security to an unaffiliated third party, unless it is authorised to do so by the:
- Company bye-laws.
- Shareholders, in which case, it must be proved that the company receives a benefit from the arrangement.
Loans to directors
There is no authority in Uruguyan company legislation to permit a company to grant a loan to a director. It is likely that a loan to a director may be considered invalid or void because it was:
- An activity that is too remote from the company's purpose.
- Beyond the company's powers (ultra vires).
- Contrary to the company's interests.
Directors can enter into agreements with the company if the agreement (Law 16.060):
- Is related to the director's normal activities.
- Has been authorised by other officers of the company.
A loan to a director is unlikely to fall within the remit of a director's normal activities. However, if any such agreement was reached it would have to be declared at the next shareholders meeting.
Companies that are financial intermediaries are prohibited from (Article 18, Financial Intermediation Law, Law 15.322):
- Issuing loans over their share capital.
- Issuing credit or guarantees for officers of the company, external officials and advisers, or senior staff such as a director, liquidator, attorney general, or senior management.
Usury
Lenders' ability to charge default interest under loan agreements is strictly regulated. This applies to all credit operations whether they are companies or individuals. There is a maximum rate for both (Interest Rate and Usury Law, Law 18.212):
- Moratorium interest.
- Compensatory interest.
The applicable interest rates are set by the Bank of Uruguay and vary from time to time, depending in part on the amount of the loan.

14. Can a lender be liable under environmental laws for the actions of a borrower, security provider or guarantor?

A lender does not assume any liability under environmental laws for the conduct of a borrower, security provider or guarantor
STRUCTURING THE PRIORITY OF DEBTS
15. What methods of subordination are there?


Contractual subordination
Contractual subordination can occur through an:
- Agreement between the debtor and the creditor who is willing to accept a subordinated position.
- Act of law. For example, fees or debts due to persons closely connected with the debtor (such as family members or business partners) are subordinated to other creditors (Law of Bankruptcy Procedure, Law 18.387).
Legislation issued by the Central Bank of Uruguay (Banco Central del Uruguay) (BCU), expressly addresses the issue of contractual subordination in relation to financial intermediaries. Financial intermediaries can only agree to contractual subordination with the prior approval of the BCU. Any agreement must:
- Be for at least five years.
- Ensure that assets are effectively integrated.
- Provide that the intermediary cannot be rescued without the prior written consent of the BCU.
- Provide that interest and capital will not be paid if the intermediary does not comply with the minimum capital requirements.
- Not be secured.
- Include provisions to protect creditors in the event of the intermediary's liquidation.
Structural subordination
Structural subordination can be achieved in Uruguay. For example, the creditors of a holding company can in effect be subordinate to the creditors of an operating (cash-producing) subsidiary.
Inter-creditor arrangements
Inter-creditor arrangements can be used in Uruguay to achieve subordination. Typically such arrangements involve multiple loans by multiple creditors, each representing their own interests. The creditors jointly appoint an "agent bank" to represent them as a group and liaise with the debtor. The agent bank co-ordinates matters such as draw-down of funds, issuing security, collecting debts, and distributing payments.

DEBT TRADING AND TRANSFER MECHANISMS
16. Is debt traded in your jurisdiction and what transfer mechanisms are used? How do buyers ensure that they obtain the benefit of the security and guarantees associated with the transferred debt?


Debt can be traded in Uruguay. A debtor can fully assign responsibility for paying its debt to a third party. If this occurs then both the original debtor and the assignee must notify the creditor. If they do not notify the creditor then both the original debtor and the third party are obliged to fulfil the debt.

AGENT AND TRUST CONCEPTS
17. Is the agent concept (such as a facility agent under a syndicated loan) recognised in your jurisdiction?

The agent concept is not recognised in Uruguay.


18. Is the trust concept recognised in your jurisdiction?
The concept of trust is recognised in Uruguay. A trust is a legal mechanism for ensuring that a settlor complies with an obligation to a beneficiary. To achieve this, the settlor transfers their property to the trust. It is most commonly used to secure large transactions.
ENFORCEMENT OF SECURITY INTERESTS AND BORROWER INSOLVENCY

19. What are the circumstances in which a lender can enforce its loan, guarantee or security interest? What requirements must the lender comply with?
The most common circumstance in which a lender may wish to enforce its loan, guarantee or security interest is if the borrower defaults on the loan agreement. The procedure necessary for enforcement will depend on the agreement between the parties. Enforcement is usually done through the court, but the parties can agree on extrajudicial enforcement. When it is through the court the sale is usually by public auction
Methods of enforcement
20. How are the main types of security interest usually enforced? What requirements must a lender comply with?

The main types of security interest are usually enforced by way of mandatory public sale. A judge usually determines this. A lender must start court proceedings to enforce the security and a judge must determine its execution. A public sale must be announced in two newspapers. The asset will be sold to the highest bidder
Rescue, reorganisation and insolvency
21. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? How do they affect a lender's rights to enforce its loan, guarantee or security?


Company rescue procedures are available in Uruguay. A shareholders meeting must be held and a majority of the shareholders must vote in favour of the rescue. The rescue is effected by the payment to the shareholders of the value of the shares. The aim is to take the shares out of circulation. There can be a reduction in the company’s capital.

22. How does the start of insolvency procedures affect a lender's rights to enforce its loan, guarantee or security?
Insolvency proceedings determine the order of priority for credit repayment. The start of insolvency proceedings does not prevent a lender's right to enforce its loan, guarantee or security.

23. What transactions involving loans, guarantees, or security interests can be made void if the borrower, guarantor or security provider becomes insolvent?
Security issued by a debtor within six months of its own insolvency and for a pre-existing obligation will be void (Article 81.2, Law of Bankruptcy Procedure, Law 18.387).
24. In what order are creditors paid on the borrower's insolvency?
On a borrower's insolvency creditors are paid in the following order of priority (Law of Bankruptcy Procedure, Law 18. 387):
- Creditors with special privileges. These are creditors secured with a pledge or mortgage.
- Creditors with general privileges. In order of priority these are:
- employee wages unpaid and accrued within the previous two-year period;
- social security payments due to the social security bank (Banco de Prevision Social) for employees' contributions;
- tax and other similar government claims.
- Unsecured creditors.
- Subordinated creditors.
CROSS-BORDER ISSUES ON LOANS
25. Are there restrictions on the making of loans by foreign lenders or granting security (over all forms of property) or guarantees to foreign lenders?
There are generally no restrictions on foreign lenders making loans to local borrowers. Each party must comply with anti-money laundering requirements.
A foreign lender does not have to be registered with or approved by the government or the Central Bank of Uruguay (Banco Central del Uruguay) (BCU) unless the lender is a financial intermediary.
An entity that is classified as a financial intermediary must register with the BCU and be authorised by the government. The BCU then has complete regulatory authority to monitor and control the financial intermediary's activity.
26. Are there exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?
There is no exchange control policy in Uruguay. This has been the case since 1973. Therefore there are no restrictions on foreign currency debt obligations, and parties are free to choose.
However, borrowing from a foreign lender is treated differently for tax purposes (see Question 28).
TAXES AND FEES ON LOANS, GUARANTEES AND SECURITY INTERESTS
27. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security interest?
Documentary taxes
There are no taxes on granting a loan.
Judicial enforcement of a security asset is subject to a 1% execution tax, calculated on the value of the asset.
Registration fees
Certain forms of security require registration and are subject to registration fees.


Other forms of security do not require registration and therefore are not subject to registration fees.
Notaries' fees
The payment of notary fees will depend on the type of security being granted. If the security must be created by public deed then notary fees must be paid on the deed, for example, a mortgage created by public deed.
Each time a notary is required notary fees must be paid.
In some circumstances, although it may not be compulsory, the parties may decide to appoint a notary to witness their signatures to establish a "true date" for the document. In these circumstances additional notary fees are payable. This applies to all public documents.
28. Are there strategies to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security interest?
One strategical consideration is that loans from foreign lenders are taxed differently from loans from local lenders.
If the lender is a Uruguayan entity, the borrower can claim 100% of the interest paid as a cost for the purposes of calculating the borrower's income tax liability. If the lender is a foreign entity, the borrower can only claim 48% of the interest as a cost for income tax purposes.

REFORM
29. Are there any proposals for reform?
There are no current proposals for reform.
   
ONLINE RESOURCES

IMPO Official Information Centre

www.impo.com.uy

Description. The IMPO Official Information Centre is the institution responsible for disseminating and publicising the legal regulations in Uruguay.

Banco Central Del Uruguay (Superintendencia de Servicios Financieros)

www.bcu.gub.uy

Description. This is the website of the Central Bank of Uruguay.

Uruguayan Parliament www.parlamento.gub.uy

Description. The website of the Uruguayan Parliament.

Uruguay's presidency

www.presidencia.gub.uy

Description. The website of Uruguay's presidency.

Practical Law Contributor profiles

Jean Jacques Bragard, Partner

Bragard & Duran

T +598 2600 4447

F +598 2600 4447

E jbragard@bda.com.uy

W www.bda.com.uy

Professional qualifications. Uruguay,s Lawyer. Graduated from the

Universidad de la República Oriental del Uruguay (UCDAL) 1994.

Areas of practice. Banking and finance; corporate and M&A.

Recent transactions

- Advised Union Agriculture Group S.A. (UAG Uruguay) in an equity offering

worth up to US$50 million through Bolsa de Valores de Montevideo

(Uruguayan Stock Exchange).

- Assisted chemical and fertiliser producer Industria Sulfúrica Sociedad

Anónima (ISUSA) raise US$S8 million in a new debt securities offering

through Bolsa de Valores de Montevideo.

- Assisted Puente Corredor de Bolsa S.A. and Rospide Corredor de Bolsa

S.A. (major Uruguayan brokers) as underwriters and arrangers of debt

insurance for La Tahona (real estate developers) for US$20 million in a

new debt offering through Bolsa de Valores de Montevideo.

- Advised República Afap (a major Uruguayan pension fund) on the legal

risks arising from investing in several public offerings in the local market.

The work took place throughout 2015 and involved four different long-
term public offerings (financial trusts issuing debt and equity).

- Advised Bearing Agro S.A. on the incorporation of a US$50 million public

offering structure called "Irrigation Financial Trust", for the purpose of

financing agricultural irrigation projects.

- Invited to speak at the Montevideo Stock Exchange. The speech was titled

Legal Aspects Capital Flows in Uruguay.

Languages. Spanish, English, French

Publications

- Reflexiones Sobre el Financiamiento Privado en Los Proyectos de

Participación Público-privada. La utilización del Mercado de Capitales.

Estudios de Derecho Administrativo Número 6. Editorial La Ley.

- El Fideicomiso de Inversión. Revista Portfolio.

- Financiamiento de los Desarrollos Inmobiliarios. ¿Existen Alternativas al

Financiamiento Bancario? Revista En Obra.

- El Sistema Bancario Uruguayo: a Partir de la Crisis. Coauthor.

- Actuación de los Bancos en los Mercados de Valores.

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