Giving and taking guarantees and security around the world - DLA Piper Investment Rules of the World

This tool offers you the chance to see how jurisdictions compare for finance and investment around the world. Please select your country and legal topic area(s) of interest using the drop down menu on the left hand side of the page.

Giving and taking guarantees and security

Are there any other notable risks or issues around giving and taking guarantees and security?

Angola

In circumstances where only a small benefit to the guaranteeing/securing company can be shown, it is likely that there is no legitimate interest to the company in providing the guarantee/security.

Consequently, unless the company is part of a group or it is in a control relationship with the entity whose obligations it guarantees/secures, the granting of the guarantee/security may be declared null and void.

The Civil Procedure Code, article 1175, determines that the declaration of bankruptcy may be filed within two years of the occurrence of the facts established by law, even if the trader has ceased trading or died.

Australia

Guarantees

In most Australian States and Territories, a guarantee must be in writing and be signed by the guarantor.

Parties should be careful not to inadvertently discharge the guarantor from its liabilities under the guarantee when making variations to the underlying loanfacility agreement. A guarantor may be released from its guarantee if the underlying facility agreement is varied, save if the variation is immaterial or incapable of prejudicing the guarantor. This is the case even if the guarantor (a) agrees in the guarantee to variations being made to the underlying facility agreement without its consent and (b) is aware of the variations being made. The guarantor should acknowledge the variations to the loan agreement at the time they are made and affirm that its liabilities under the guarantee remain in full force.

Security

Mortgages of real property

Mortgages of real property must be registered with the land titles office of the State or Territory in which the land is situated. Failure to register may result in the mortgagee losing priority to prior registered interests. Priority between registered interests is generally determined in order of registration. Accordingly, mortgagees should not delay in registering.

SECURITY OVER PERSONAL PROPERTY

Where the PPSA applies, security interests in personal property should be 'perfected'. Security interests may be perfected by registration or, in some circumstances, by control (e.g. for certain financial assets) or possession (e.g. for goods and some intangible rights) of the collateral. Registration on the Personal Property Securities Register is the most common method of perfection.

It is not mandatory to perfect a security interest under the PPSA. However, if a security interest is not registered or not registered within an applicable timeframe (and not otherwise perfected), then (a) it may vest in the grantor immediately upon the grantor being wound up or entering into voluntary administration, a deed of company arrangement or bankruptcy or (b) a third party may acquire an interest in the collateral free from the security interest.

Registration is also relevant to the priority of security interests. A security interest that is not registered (or otherwise perfected) will lose priority to a security interest that is perfected. Generally, priority between security interests perfected by registration (that are otherwise equal in priority) is determined by the order of registration. Therefore it is important for secured parties to register as soon as, if not before, the security agreement is executed. Certain types of security interests are given 'super priority'. An example is a supplier's security interest in goods that it has delivered to a customer (the grantor) on a retention of title basis. This is called a 'purchase money security interest' (PMSI) and, if perfected, has priority over non-PMSIs. This applies also to the interests of lessors or bailors. A PMSI must be specifically registered as a PMSI to be effective in this manner.

The registration requirements under the PPSA are very prescriptive. Failure to register correctly orand errors in a registration, (for example, in a grantor's details,) canmay render a registration ineffective.

The broad definition of 'security interest' under the PPSA means that the rules regarding registration and perfection apply to many arrangements that, prior to the PPSA, were not considered security interests. Failure to recognizerecognise the existence of, and in-turnto perfect, security interests can have significant consequences for the transacting parties.

A secured creditor has better rights on enforcement if it has a charge over the whole or substantially the whole of the grantor's property. During an administration period, subject to certain exceptions, the Corporations Act 2001 (Cth) imposes a statutory moratorium that prevents security from being enforced against the company's assets, save with the administrator's written consent or with the court's leave. The main exception to the moratorium is that a secured creditor with a charge over the whole, or substantially the whole, of the company's property may enforce it during the 'decision period' (being 13 business days from the time notice of the administrator's appointment is given to the charge, or from the time the administration starts). It is therefore common practice for a lender to obtain security over all or substantially all of the company's assets so as to avoid the risk of moratorium on enforcement of security during an administration. A featherweight charge also addresses administration risk.

‘Ipso facto’ stays

The recent ‘ipso facto’ reforms in Australia may impact on the ability of a lender to enforce upon certain insolvency events occurring in respect of the borrower. From 1 July 2018, new provisions in the Corporations Act 2001 (Cth) have imposed a stay on the enforcement of ‘ipso facto’ clauses against a company if it becomes subject to certain insolvency procedures, namely a substantial receivership or controllership, a voluntary administration or a scheme of arrangement.

An ‘ipso facto’ clause enables a party to terminate a contract or exercise other rights by virtue of the fact the other party becomes insolvent or subject to an insolvency process. An example in a typical facility agreement would be an event of default triggered by the appointment of a receiver to all of the borrower’s assets. The new stay on the enforcement of ipso facto clauses is intended to give companies the space to recover from insolvency without the threat of major contracts being terminated. A party will not be able to enforce an ipso facto clause if the reason for doing so is because (a) the company has entered into the relevant insolvency procedure (b) the company’s financial procedure during the procedure (c) a reason prescribed by regulations or (d) a reason that, in substance, is contrary to the stay (this being an anti-avoidance measure). The stay also extends to rights that arise automatically without a party taking action (known as ‘self-executing’ rights).

There are a number of exceptions and carve-outs. Most relevantly, it does not apply to (a) syndicated loans or bonds, (b) variations to contracts made prior to 1 July 2018, (c) enforcement by a secured creditor holding security over the whole or substantially the whole of the company’s assets (d) enforcement against guarantors and third party security providers (e) drawstops under a facility agreement, meaning that the lender is not obliged to advance new monies (f) arrangements entered into during the relevant procedure and (g) a right exercised with the consent of the court or the administrator, scheme administrator, liquidator or other relevant officer.

Belgium

All sums security interests

A security interest on conditional or future debts is valid under Belgian law as long as the future debt is sufficiently determined or determinable which is the case if the agreement creating the security interest allows to define and identify the debt, and it results from the elements of the cause that the (future) debt was part of what the parties intended to secure.

Mortgages

Mortgage requires registration of the mortgage with the appropriate local mortgage register for it to be effective vis-à-vis third parties.

Other

Other security interests may require specific perfection requirements.

Brazil

Upstream and cross-stream guarantees

Upstream and cross-stream guarantees are not prohibited by Brazilian law. Where a guarantee is given in respect of the obligations of a non-Brazilian holding company, certain foreign exchange restrictions may apply.

Financial assistance

Financial assistance (which under Brazilian law includes assistance by way of loans, guarantees, security or reduction of liability) is not specifically regulated by Brazilian law. However, depending on the legal status of the company (regulated entity, financial institution, publicly or privately held corporation, limited liability etc), and the relationship between the grantor and the beneficiary of the financial assistance, restrictions may apply.

For example, financial institutions are prohibited to carry out credit operations with related parties (as defined in specific regulation), except in some limited circumstances.

Additionally, if financial assistance involves a company located outside Brazil, certain foreign exchange rules will have to be observed.

It will be necessary to take advice on a case-by-case basis as to whether restrictions apply to a particular scenario.

Notarization and apostillation or consularization

If security agreements are signed by a party outside Brazil, it must be duly apostilled (apostilado) by the competent authority of the place the foreign judgement was issued or, in case the country in which the place the foreign judgement was issued is not a party to the 1961 Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents of 5 October 1961, be legalized by a consular official of Brazil having jurisdiction over the place of issuance.

Translation into Portuguese

Only Portuguese language documents may be registered with Brazilian public registries. If the security agreements are not drafted in Portuguese, they must be translated into Portuguese by a certified translator and registered with the competent Brazilian Registry of Deeds and Documents or Real Estate Registry, as the case may be.

Registration

In other to be valid against third parties (and to ensure priority in a bankruptcy proceeding), the security agreements must be registered with the appropriate Brazilian public registries. The relevant register depends on the nature of the asset secured. For example, security over moveable assets other than planes, trains and ships is registrable at the appropriate Registry of Deeds and Documents in Brazil. Security over real estate should be registered at the appropriate Real Estate Registry. Other registrations may be required according to the type of asset that is secured. For example, security over shares in a Brazilian company would need to be registered in that company’s share registry book.

Fees

The registries in Brazil will charge a fee to perform the registration of the security agreements or any amendments to them. The amount to be charged by the registries will depend on the:

location in which the security agreement must be registered in (for instance, mortgages must be registered in the place where the real estate asset is located); and
amount being secured.

There will also be the cost related to the translation of the security agreements into Portuguese, which will be charged by the certified translator based on the number of pages to be translated, as well as the cost related to the apostillation or consularization of the signatures.

Canada

Giving or taking guarantees

To be valid, a guarantee needs to be in writing, signed by the guarantor and provided for good consideration.

Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. Also, it can be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender. Guarantees can be executed as deeds to avoid any argument about whether good consideration was provided. Deeds have particular execution requirements which need to be observed.

In Alberta, personal guarantees require compliance with the Guarantees Acknowledgment Act (Alberta). In Saskatchewan, personal guarantees require compliance with The Saskatchewan Farm Security Act (Saskatchewan). Generally, the guarantor needs to appear before a lawyer in Alberta or a lawyer or notary public in Saskatchewan and:

acknowledge that he or she executed the guarantee; and
execute the prescribed guarantee certificate in the presence of the lawyer or notary public.

The lawyer or notary public, as applicable, then must complete the prescribed guarantee certificate. Failure to comply with the applicable Act will result in the personal guarantee being unenforceable. In Québec, guarantees or suretyships must comply with the Civil Code of Québec.

In most Canadian jurisdictions, corporate legislation permits a corporation to give financial assistance by way of guarantee or otherwise to any person for any purpose, provided it discloses material financial assistance to its shareholders. In some provinces and territories, the corporation must meet the prescribed insolvency test in order to provide financial assistance to an intercorporate group. Under certain circumstances, creditors and minority shareholders may challenge the granting of a guarantee under the oppression provisions of the applicable corporate legislation.

Giving or taking security

Once granted, security needs to be properly “perfected” before it is valid against third parties. Perfection formalities depend on the location and nature of property subject to the security and can range from having the secured asset delivered to the secured party, registering the security agreement or notice thereof in the applicable provincial registry system, providing notice of the security interest to third parties, or a combination thereof. The registry system and the requirements for registration vary among the provinces and territories. All of the common law provinces have enacted Personal Property Security Acts which have a great deal of similarity in purpose and content. The PPSAs are modelled on the U.S. UCC-9 provisions. Quebec has a comparable regime under the Civil Code of Quebec.

Additionally, the priority of a secured party’s security interest may be governed by various provincial and federal laws which deal with the taking, perfecting and enforcing of security interests. The determination of priorities among interests created under the various Acts can be a cumbersome process. Generally, a creditor will conduct searches to ascertain whether there are any secured parties who will have priority over its interests in all provinces and territories in which a debtor carries on business or has assets.

There may also be unregistered interests which may take priority over a secured party, including statutory liens. Statutory liens commonly arise from a debtor’s obligation to remit amounts collected or withheld on behalf of the government (eg employee deductions for income taxes, pension plan contributions, goods and services taxes, provincial sales taxes and property taxes). These liens are deemed trusts and are usually not registered in any registry system. As such, they may not be identified through conventional searches. Issues regarding statutory liens typically arise when a debtor becomes insolvent or commences a restructuring under the Bankruptcy and Insolvency Act (Canada) or the Companies’ Creditors Arrangement Act (Canada).

For security interests granted by individual debtors, creditors should consider the application of various provincial and territorial legislation which protects the rights of spouses. Such legislation may affect a secured party’s ability to enforce its security against a home or homestead. Generally, this risk can be mitigated by receiving the written consent of the spouse of the debtor at the time the debtor executes the security agreement.

Chile

Giving or taking guarantees

Consideration for guarantees is subject to general contractual principles.

Giving or taking security

In the case of some securities, such as pledges, there is a requirement for such securities to be executed by way of a public deed before a Chilean notary public and to be registered in different registries, for example:

Pledge Over Money and Permitted Investments in the Registration in the Registry of Pledges Without Conveyance (Registro de Prendas sin Desplazamiento) kept by the Civil Registry and Identification Service (Servicio de Registro Civil e Identificación); and
Pledge over Equipment Registration in the Registry of Pledges Without Conveyance (Registro de Prendas sin Desplazamiento) kept by the Civil Registry and Identification Service (Servicio de Registro Civil e Identificación); and to the extent applicable, registration in the Registro de Vehículos Motorizados (Vehicle Registrar) kept by the Civil Registry and Identification Service (Servicio de Registro Civil e Identificación).

In the case of mortgage agreements, they must be executed by means of a public deed between the owner of the asset and the mortgagee. Later, an abstract of such public deed needs to be registered in the relevant Mortgage Lien Registry and in the Prohibition Registry of the correspondent Real Estate Registry.

Colombia

Giving or taking guarantees

In general terms, a guarantee can take the form of policies issued by authorized insurance companies domiciled in Colombia or abroad; or bonds issued by authorized commercial banks domiciled in Colombia or abroad.

If the policy or bond is issued by an insurance company or commercial bank domiciled abroad, the policy and the bond, as the case may be, must be confirmed by a local insurance company or local commercial bank. For more information, see Giving and taking guarantees and security – types.

Giving or taking security

Under applicable law, the options to secure loans are limited to mortgages, pledges, trusts over certain tangible and in existence assets, liens over other intangible, future assets and other movable assets and movable guarantees, including rights and actions.

Movable guarantees may be granted by means of an agreement executed by and between the guarantor and the creditor identifying the secured obligation, the amount and description of the assets subject to the guarantee. For this agreement to be opposable to third parties it must be registered in the public registry of movable guarantees. Notwithstanding the above, a movable guarantee will also be opposable by means of the tenancy of the asset by the creditor or the execution of an account control agreement for moneys deposited with financial institutions.

Czech Republic

Giving or taking guarantees

To be valid, a guarantee (including a financial guarantee) must be in writing and signed by the guarantor. In the event there is more than one guarantor securing the identical obligations, each one of them is liable for fulfillment of the whole obligations. After the guarantee obligation has been fulfilled by one guarantor then that guarantor has a right of recourse towards the other co-guarantors.

Giving or taking security

Depending on the type of security, a security may have to be granted in writing.

Once granted, the security must be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the security and giving notice of the security to third parties.

Finland

Giving or taking guarantees

The most notable risks are related to guarantees given by natural persons.

If a guarantee is given by a Finnish limited liability company for liabilities of a third party then the guarantee is subject to the condition that sufficient corporate benefit, as such concept is applicable under the Limited Liability Companies Act, is given to the guarantor or pledgor, and the requirement set out in Section 13:2 of the Companies Act that no distribution of funds should lead to insolvency will apply. The existence of corporate benefit and the fulfilment of the requirement in Section 13:2 are ultimately questions of fact. Should the above referenced requirements not be fulfilled, any guarantee or other security provided for obligations owed by other parties, may be limited and funds or proceeds received may have to be returned to the guarantor.

Giving or taking security

A pledge is only valid and binding if it meets certain prerequisites (for more information, see Giving and taking guarantees and security – restrictions). Of these prerequisites, particular consideration should be had to perfection measures, as if these are not undertaken in accordance with the applicable law, the pledge might not be binding to third parties and it is also more likely to be subject to proceedings to have the pledge set aside. The perfection measures differ depending on the nature of the pledged assets (for example, with real estate mortgages the pledge has to be notified to the register at the Finnish land registry and with shares the pledge has to be written in the share and shareholder’s register and relevant share certificates must be given to the beneficiary).

In addition, we would recommend that pledge and guarantee agreements are made in written form signed by both parties. While this is not a mandatory requirement under Finnish law it is recommended for good order.

In addition, any security or guarantee may be subject to measures to have such guarantee or security set-aside under the Recovery Act.

France

Giving or taking guarantees

The main points that should be checked are as follows.

Specific rules applicable to guarantees granted by companies

The French Commercial Code provides for rules applicable to certain guarantees granted by companies. For instance, it is not possible for some companies to guarantee the obligations of managers and shareholders and/or directors. Specific advice should be sought depending on the form of company.

Handwritten wording to be inserted in a corporate guarantee (cautionnement)

In a guarantee granted by a private deed, it is required that the guarantor write by hand the amount of the secured obligations in words and figures.

Specific rules applicable to corporate guarantee (cautionnement) granted by individuals

The French Consumer Code (Code de la consommation) provides for specific rules applicable to corporate guarantees granted by individuals. In particular, The guarantors' undertaking shall be proportionate to its revenues and assets at the time when the guarantee is granted, except if the guarantor's assets are sufficient to satisfy its obligations when the guarantee is called.

Giving or taking security

Restrictions as to the secured creditors and obligations

Security may only be granted in favor of the person to whom the secured debt is owed.

Certain kind of security interests may only be granted in favor of certain creditors to secure certain claims. For instance, a Dailly assignment may only be granted in favor of a credit institution or a financing company to secure a loan that it has granted to the assignor in the course of its business.

Private deed or notarial deed

There are no notarization requirements for security documents under French law, except for:

mortgage over real estate – the mortgage deed (acte d'affectation hypothécaire) has to be drawn up by a notary;
pledge over business (nantissement de fonds de commerce), which can be either drawn up by a notary or entered into as a private deed provided that it is registered (ie stamped and filed at nominal costs) with the tax authorities; and
pledge over shares issues by a société civile, which has to be notarized and accepted by the company or notified by bailiff (huissier) to the company whose share are being pledged.

Compulsory provisions

Some security documents (such as aircraft mortgages, mortgages over ships and Dailly assignments) must contain compulsory provisions. In the absence of such provisions, the security shall be declared null and void.

Perfection requirements

Once granted, some security interests need to be properly perfected in order to be enforceable against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the security and notice being given to third parties.

In France, there is no general security register in which all security interests granted over assets located in France shall be registered. However, specific security interests have to be registered with the commercial register having territorial jurisdiction or, as the case may be, specific registers.

Depending upon the type of security, there may be applicable time limits for registration. In the case of non-registration within such time limits, the security interest will be unenforceable against third parties. The security interest takes priority according to the date of its registration. The registration shall remain effective for a specific period of time, but may be renewed before expiry of such period of time.

Language

Security documents can be drafted in foreign languages, except when:

drawn up by a French notary;
registered with a French authority; or
mandatory provisions drafted in French are required (eg a ‘Dailly’ assignment).

Germany

Giving or taking guarantees

In order to be valid, a guarantee upon first demand must be granted by a guarantor experienced in international transactions and familiar with guarantees upon first demand. This is because the guarantor of a guarantee upon first demand has only limited defenses. For more information, see Giving and taking guarantees and security – common types.

Giving or taking security

Notarization requirements

The following security interests require notarization under German law:

a pledge over shares in a German limited liability company; and
the creation of a mortgage or land charge.

Registration requirements

A mortgage or land charge must be registered in the relevant land register (Grundbuch) to become valid.

Initial and subsequent over-collateralization

In case of an initial disproportionate relationship between the value of the granted security and the secured claims (initial over-collateralization), the agreement creating such security may be invalid. If, after the conclusion of the agreement (subsequent over-collateralization), the value of the security exceeds 110% of the secured claims, the grantor may have a claim for release of the excess security.

Ghana

Registration of security

A borrower or a person interested in a charge is required to register it with the Collateral Registry within 28 days after the date of its creation. An unregistered charge “is of no effect as security for a borrower’s obligations for repayment of the money secured.”

Charges created by a company over its property must additionally be registered with the Companies Registrar within 45 days of its creation, failing which the charge is void as security over the property. Pledges of goods, documents of title and negotiable instruments are excluded from the requirement for registration.

Interests in land are subject to registration under the Land Title Registration Act, 1986 (PNDCL 152) and the Land Registry Act, 1962 (Act 122). An instrument conveying an interest in land is ineffective until it has been registered.

Ascertainment of ownership

Lenders face the risk of creating an ineffective security where they fail to ascertain or verify the ownership of the assets, especially landed property, before taking security over them.

Insolvency issues

If a company is wound up under the provisions of the Bodies Corporate (Official Liquidations) Act, 1963 (Act 180), the following provisions apply:

Floating charges

A floating charge created during the 12 months before the winding up of the company may – except to the extent of any cash paid in consideration for it – be rendered invalid on the commencement of the winding-up of the company, unless it is established that the company was solvent immediately after the creation of the charge.

Floating charges may also be affected by the operation of the preference provisions of the insolvency laws as outlined below.

The liquidator may call for a restoration of money paid or transfer of property or its value if:

the underlying transaction is entered into by the company before the winding up of the company commences with the "dominant intent" that the particular creditor should benefit at the expense of others; or
a payment was received during the relevant period (beginning 21 days before the presentation of the petition on which a winding-up order is made) other than payments made in respect of secured debts and debts incurred during the relevant period.

The liquidator is also entitled to call upon a person to restore any excess benefit accrued to him from the disposition of property otherwise than for full value or in settlement of any due debt either during the two years ending with the making of a winding-up order, or more than two years, but less than ten years before the making of the order and at a time when the company was insolvent.

Assignments

In relation to two or more assignments in respect of the same debt, later assignees take priority over earlier assignees if the debtor or other person against whom the right is enforceable did not have notice of the earlier assignment at the time of the later assignment.

Hungary

Giving or taking guarantees

To be valid, a guarantee needs to be in writing and signed by the guarantor.

Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. It can also be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender.

Giving or taking security

Once granted, certain forms of security need to be properly perfected before they are valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the security and notice being given to third parties. Most charges created by a Hungarian company must be registered at the public registry within 15 days of its creation.

Like guarantees, for a period after a new security interest has been granted (known as the hardening period), it is at risk of being set aside in certain circumstances under Hungarian insolvency laws. Reviewable transactions include those conducted at an undervalue or preferences.

Ireland

Giving or taking guarantees

To be valid, a guarantee needs to be in writing, signed by the guarantor and be provided for good consideration.

Consideration for a guarantee is subject to general contractual principles. The relevant underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Also, it can be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary (e.g. between a borrower and a lender). As a result, guarantees are usually executed as deeds to avoid any argument that there was a lack of consideration. Deeds have particular execution requirements under Irish law which need to be observed.

A guarantee is a secondary obligation dependent on the existence of the borrower’s liability to the lender. As a result, as mentioned above, guarantees will often also include an indemnity, imposing a primary obligation on the guarantor to repay the relevant debt, as well as also guaranteeing repayment of the debt to the lender.

Irish law takes a protective approach towards guarantors given that the nature of a guarantee involves assuming the obligations of a third party. This means that there are various factors that lead to a guarantee being deemed as discharged, such as a material variation of the underlying agreement or a misrepresentation by the borrower. A guarantee may also be set aside on the basis that it was procured by duress or undue influence (by either a borrower or a lender). A party being provided with a guarantee should be alert to this issue and take steps to avoid such claims by, for example, requiring the guarantor to take independent legal advice.

In terms of regulatory compliance, lenders should note that prescribed warnings must be included in guarantees to which the Central Bank of Ireland’s Consumer Protection Code 2012 and the Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-Sized Enterprises) Regulations 2015 (the SME Regulations) apply.

In addition, the SME Regulations, where applicable, impose certain obligations on lenders in their dealings with guarantors.

A guarantee may also be limited or vitiated on certain statutory grounds, including under the Consumer Credit Act 1995 and the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995.

Giving or taking security

Although only a limited number of assets require a security document to be executed as a deed (e.g. real estate), it is standard practice in Ireland for security documents to be executed as deeds. The formalities for the execution of deeds are set out in legislation (and in the relevant entity’s constitutional documents).

Once granted, security needs to be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the security and notice being given to third parties. Details of mortgages or charges created by a company or an ICAV must be delivered to the Companies Registration Office or the Central Bank of Ireland (as applicable) within 21 days either of the creation of the charge. Failure to register the charge within 21 days has the effect of rendering the charge void against a liquidator of the company/ICAV and any creditor of the company/ICAV. Priority will be determined by the date and time of receipt by the Companies Registration Office or the Central Bank of Ireland of a fully filed charge submission. The date of creation of the deed of charge does not determine its priority. Certain categories of assets, including cash and shares, are carved out from the foregoing registration requirements.

Notarization

There are no notarization requirements for security documents or guarantees under Irish law.

Italy

Giving or taking guarantees

To be valid, a guarantee needs to be in writing and signed by the guarantor. It can be provided also in case the Relevant Debtor is unaware of its issue.

The issue of a guarantee by a company does have some limitations regarding, inter alia the:

preservation of the assets of the guarantor and the preservation of the rights of the creditors and stakeholders;
misuse of corporate assets;
exclusion of liability in case of gross negligence (colpa grave) or willful misconduct (dolo); and
accrual and liquidation of compound interest.

Giving or taking security

A security document may need to be executed through notarial deed should it:

contain a mortgage;
contain a pledge over quotas over a limited liability company;
contain a privilegio speciale (special lien); or
contain an assignment of receivables vis-à-vis public entities.

In all other cases, it may be entered into either in notarial form or via exchange of commercial letters. In particular, this latter form is mainly utilized when the registration of the relevant instrument is not required by law.

Once granted, security needs to be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder or a custodian, registration of the security in a company’s books (as per the pledge of a company's shares) public registries and/or notice being given to (or, alternatively, acceptance being obtained from) third parties. Mortgages must be registered at the Land Registry, the pledges over a company's quotas must be registered in the Companies Registry, while the privilegio speciale (special lien) must be registered in the relevant book held at the competent courts. Failure to register means that the charge will be ineffective (non opponibile) against the liquidator, administrator or any creditor of the company and the money secured by the charge becomes immediately payable.

As for guarantees, for a period after a new security interest has been granted (known as the hardening period), there is a risk that such security is set aside in certain circumstances under insolvency laws.

Ivory Coast

To be valid, a guarantee needs to be in writing and contain some necessary elements:

General contractual principles apply to consideration for a guarantee.

The underlying obligations will usually be the consideration for the guarantee and the execution of the underlying obligations, and the guarantee should be concomitant to avoid a possible qualification of past consideration.

There should generally be no issue as in the majority of cases, the guarantee is provided for in an underlying document as in the case of a loan agreement.

A guarantee may be set aside for different reasons and a beneficiary of a guarantee should take those into account and avoid them.

Japan

Giving or taking guarantees

To be valid, a guarantee must be in writing.

There is a further risk that a guarantee may be set aside if improperly obtained, for instance, by undue influence. It is best practice for a party taking the benefit of a guarantee to take steps to avoid claims of undue influence by, for example, requiring the guarantor to obtain independent legal advice.

Giving or taking security

Once granted, security must be properly perfected. Perfection formalities may include:

'delivery' of the pledged assets to the security holder (e.g. a pledge on a movable property);
registration of the security (e.g. a mortgage on a real property); and
notification to the obligor of the right pledged.

Luxembourg

Giving or taking guarantees

A civil guarantee must be created by an agreement in writing pursuant to the provisions of the Luxembourg Civil Code. Such a guarantee shall contain some handwritten information (eg the amount of the undertaking in letters and figures). Said restrictions do not apply to commercial guarantees.

Giving or taking security and mortgages

Mortgages must be executed as a notarial deed, involving notarial fees, stamp duties and the attendance by each party to the execution of the notarial deed (powers of attorney are permitted).

Once granted, security and mortgages need to be properly perfected before it can be invoked against third parties. Perfection formalities can range from the entry into the agreement, having the pledge registered in the register of shares/shareholders of the company, notices given to third parties or registration in public registers (depending on the asset).

Notarization is not required for pledge agreements under Luxembourg law.

The entry into the guarantee or security must be in the interest of the entity, which is a subjective concept. The corporate interest must be assessed on a case-by-case basis by the board of the entity. The granting of a guarantee or security interest for the obligations of its parent (upstream guarantee) or its sister companies or affiliates (cross stream) may rise some issues. The concept of group of company is not recognized as such and the interest of the group is not sufficient to justify the granting of upstream or cross stream guarantees or security interests.

Therefore, the Luxembourg entity giving the cross stream or upstream guarantee or security interest should:

have some personal interest in granting such assistance (notably through the expected benefits) and act independently from third party considerations;
take a commensurate risk in regard of the benefit deriving from the operation; and
not face a financial exposure exceeding its financial means.

It is standard to include a guarantee limitation to address such an issue, except for security interests which are deemed to be limited per se.

Pledge agreements and, more generally, security interests governed by the Law of 5 August 2005, on financial collateral agreements, as amended from time to time (such as pledges over financial instruments and claims) are bankruptcy remote:

they are valid even if entered into during the hardening period; and
they can be enforced even after the opening of a bankruptcy proceeding.

Mauritius

The main risk is in the event of insolvency where such guarantee/security will have priority only in accordance with a ranking determined by law which may see a secured creditor rank lower than it would initially rank if not for the insolvency.

Mexico

Giving or taking guarantees

A civil guarantee cannot exist without a valid principal obligation. Guarantors are granted certain benefits under Mexican law, known as the benefits of orden, división and excusión. The benefit of orden requires the creditor to proceed against the debtor before proceeding against the guarantor. The benefit of excusión requires the creditor to ensure the assets of the debtor are first exhausted in payment of its obligations before any amounts are claimed from or paid by the guarantor. The benefit of división exists when there are multiple guarantors: it allows one of the guarantors which has been called to trial to have the other guarantors appear at the same trial in order to defend themselves jointly, with each guarantor being liable for its proportionate share of the principal obligation. These benefits may be waived by the guarantor.

Giving or taking security

A mortgage securing a debt above a minimum threshold value (which is determined by local law and varies from state to state) must be in writing and executed before a Mexican notary public. The mortgage instrument, which should precisely describe the property being encumbered and the term of the mortgage, must be registered in the appropriate real property public registry office to be effective against third parties. Other registrations are required depending on the type of property being encumbered. For example, registration in the aircraft registry, the maritime registry and the railroad registry.

Guarantee trusts must be executed in writing. A guarantee trust over immovable property must be executed before a Mexican notary public and the trust instrument must be registered in the appropriate real property public registry office to be effective against third parties. Guarantee trusts over movable property securing a debt above a minimum threshold value must also be executed before a Mexican notary public and the trust instrument should be registered in the federal personal property collateral registry (Registro Único de Garantías Mobiliarias). Other registrations, authorizations and additional actions can also be required depending on the assets being placed in trust.

A traditional pledge must be executed in writing. Special perfection requirements apply depending on the type of asset, such as delivery of bearer instruments to the lender or a third party, delivery and endorsement of registered instruments and registration in the special registry ledger (for example, in the case of shares of a private stock corporation), and delivery of non-negotiable instruments and notices to the underlying debtor, if applicable.

A non-possessory pledge must be executed in writing. A non-possessory pledge securing a debt above a minimum threshold value must be ratified before a Mexican notary public and the resulting instrument registered in the the federal personal property collateral registry (Registro Único de Garantías Mobiliarias) to be effective against third parties.

A securities pledge must be executed in writing and involves a foreclosure agent (ejecutor) and the transfer of the securities to an account at the clearing agency. A Mexican bank or brokerage firm (other than the lender) may be appointed as foreclosure agent and is responsible for selling the securities at market value if a default occurs.

Morocco

The main points that should be checked are as follows.

Risks issued from the reform of security over movable assets and the planned establishment of the national electronic pledge register

Vigilance is needed to the substantive and formal requirements applicable to each guarantee and security to be granted, in particular following the reform of security over movable assets and the planned establishment of the national electronic pledge register.

Some guarantees and securities require, for example, mandatory statements of the validity of the act. This is the case, for example, for the transfer of trade receivables, which requires the insertion of information listed in Moroccan law.

Regarding the pledge without dispossession, a distinction should be made between the scheme before the establishment of the national electronic register and the subsequent scheme. The latter should be launched at the beginning of 2020.

Prior to the establishment of the said register, the pledge must be registered and filed with the clerk's office of the competent commercial court, which will keep an extract from the act making it enforceable against third parties.

Subsequent to the establishment of the register, the pledge must be entered in the said register and notified to the bank holding the debtor's account.

Specific rules applicable to guarantees granted by companies

The Moroccan Law 78-12 provides for rules applicable to certain guarantees granted by companies. For instance, it is not possible for some companies to guarantee the obligations of managers and shareholders and/or directors. Specific advice should be sought depending on the form of company.

Handwritten wording to be inserted in a corporate guarantee (cautionnement)

In a guarantee granted by a private deed, it is required that the guarantor write by hand the amount of the secured obligations in words and figures.

Specific rules applicable to corporate guarantee (cautionnement) granted by individuals

The Moroccan Law 31-08 provides for specific rules applicable to corporate guarantees granted by individuals. In particular, The guarantors' undertaking shall be proportionate to its revenues and assets at the time when the guarantee is granted, except if the guarantor's assets are sufficient to satisfy its obligations when the guarantee is called.

Netherlands

Giving or taking guarantees

The nature of the guarantee has an impact on the extent of your recourse claim (ie with a suretyship the recourse claim relates to the full amount paid under the suretyship arrangement whereas with a joint and several liability the recourse claim is limited to the amount the that concerns the joint and several debtors in their relationship with each other (dat hem in hun onderlinge verhouding aangaat).

Giving or taking security

When receivables are pledged on a non-disclosed basis, the debtor remains entitled to validly discharge the debt by paying the pledgor (as opposed to the pledgee) until the debtor has received notification of the pledge. In addition, perfection requirements need to be observed in order to create valid security (for pledges of receivables on a non-disclosed basis and pledges of moveable assets the perfection requirement is met by offering the pledge deed for registration with the Dutch tax authorities and for disclosed pledges on receivables the perfection requirement is met by notifying the relevant debtors concerned. Mortgages are perfected by registering the mortgage in the public registers).

New Zealand

Giving or taking guarantees

To be valid, a guarantee needs to be in writing, signed by the guarantor and provided for good consideration.

Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. Also it can be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender. As a result, guarantees are often executed as deeds to avoid any argument about whether good consideration was provided. Deeds have particular execution requirements under New Zealand law which need to be observed.

Additionally, there is a risk that a guarantee may be set aside if it was procured by undue influence by a borrower or lender. A party being provided with a guarantee should be alive to this issue and take steps to avoid claims of undue influence by, for example, requiring the guarantor to take separate legal advice.

Lender responsibility principles exist when taking guarantees. Failure to abide by these could result in issues for the guarantor. Every creditor that takes a guarantee of a consumer credit contract has disclosure obligations to the guarantor as part of this obligation.

Giving or taking security

A security document may need to be executed as a deed if it:

contains a mortgage over land;
confers a statutory power of sale and power to appoint a receiver; or
contains a power of attorney.

There are no general notarization requirements for security documents under New Zealand law.

Like guarantees, for a period after a new security interest has been granted (known as the hardening period), it is at risk of being set aside in certain circumstances under insolvency laws. Reviewable transactions include those conducted at an undervalue and preferences and invalid floating charges.

Norway

Giving or taking guarantees

In a judgment from 2012 (Rt. 2012 s. 1267), the Norwegian Supreme Court concluded that a payment guarantee was not an on-demand guarantee, but a surety only, under which the guarantor could invoke debtor objections to the payment obligations, despite the fact that the guarantee included language customarily used in on-demand guarantees in the international business arena.

The case considered a guarantee that had been written in English. The dispute centered on the nature of the guarantee; the guarantor claimed it was an on-demand guarantee, whereas the debtor claimed it was meant to be seen as a surety only. The guarantee did not say explicitly what kind of guarantee it was but contained some wording often found in on-demand guarantees, ie ‘irrevocably and unconditionally guarantee’, ‘as their own debt’, ‘immediately due on first demand’, and ‘honored forthwith’. The Supreme Court held that it had to look at the guarantee as a whole and that, on this basis, the guarantee left doubt as to whether it was a surety or an on-demand guarantee, and that such doubt should dis-benefit the party who had drafted it. The effect of this judgment is that, under Norwegian law, there are stricter requirements as to the contents of an on-demand guarantee in order to obtain the intended legal effect of such a guarantee, compared to what seems to have been the general assumption among practitioners and legal authors. It is therefore important to ensure that on-demand guarantees are drafted using language which removes any doubt as to their classification and legal effects, ie by saying explicitly that it is in fact meant to be an on-demand guarantee.

Giving or taking security

Pursuant to section 3-1 of the Partnerships Act of 1985, a limited partnership may not acquire its own shares, and cannot by agreement establish a security in its own shares. A subsidiary may not obtain shares in the parent company or by agreement establish a security in such shares. Any agreement to the contrary will be void. In addition to this, section 3-5 of the Partnership Act of 1985 stipulates that the partnership's right to receive capital cannot be assigned, nor can it be deposited as security for debt or subjected to distrain for the obligations of the partnership.

Peru

Granting or taking guarantees

To be valid, a guarantee needs to be in writing, signed by the guarantor and provided for good consideration.

Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations are usually the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. Also, it can be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender. As a result, guarantees are often executed as deeds to avoid any argument about whether good consideration was provided. Deeds have particular execution requirements under Peruvian law which need to be observed.

Additionally, there is a risk that a guarantee may be set aside if it was procured by undue influence by a borrower or lender. A party being provided with a guarantee should be aware of this issue and take all necessary actions to avoid claims of undue influence by, for example, requiring the guarantor to take separate legal advice.

Granting or taking security

A security instrument may need to be executed as a public deed (escritura pública) if it:

contains a mortgage over land or any other assets specified as fixed assets under the Peruvian Civil Code;
confers a statutory power of sale and power to appoint a receiver; or
contains a power of attorney.

Once granted, security needs to be properly perfected before it is valid against third parties. Perfection formalities can include having the secured asset delivered to the security holder and registration of the security in the Peruvian Public Registry Office, depending on the type of security granted.

Mortgages are required to be notarized and registered in the Peruvian Public Registry Office to be valid and enforceable.

Like guarantees, for a period after a new security interest has been granted (known as the hardening period), it is at risk of being set aside in certain circumstances under insolvency laws.

Poland

Giving or taking security

Some documents creating security interest have to be executed in a special form, for instance:

Statement on granting a mortgage has to be executed in the form of a notarial deed (there are certain statutory exceptions to this rule).
Agreement for the establishment of a civil pledge over shares has to be executed in writing with signatures certified by a notary.
Security assignment agreement and security transfer of assets have to be executed with a certified date.

Once granted, security often needs to be properly perfected before it is valid against third parties. Perfection formalities range from having the secured asset delivered to the security holder, registration of the security, and notice being given to third parties. For instance, registered pledges and mortgages have to be registered in the relevant registers.

Like guarantees, for a certain period after a new security interest has been granted (known as the hardening period), it is at risk of being set aside in certain circumstances under insolvency and restructuring laws.

In the case of a guarantor that is a limited liability company, the shareholders may not receive, under any title, any payments from the company's assets needed to fully finance the share capital.

For more information, see Tax issues – stamp taxes.

Portugal

Giving or taking guarantees

Depending on the type of guarantee provided, specific requirements may apply. For instance, personal guarantees (fiança) need to be in writing and signed by the guarantor and the obligation guaranteed must be determined or determinable.

Giving or taking security

A security document may need to be executed as a deed if it contains a mortgage over land or other assets subject to registration (eg cars, airplanes and boats).

There are no notarization requirements for security documents under Portuguese law.

Like guarantees, security granted during a period of time prior to the onset of insolvency may be at risk of being set aside under Portuguese insolvency laws and may also be challenged on other grounds relating to insolvency.

Puerto Rico

Giving or taking guarantees

A guarantee is a secondary obligation. In order to be valid, the primary obligation must be valid and enforceable. The guarantee itself is also subject to general contractual principles. Therefore, it must have a cause, an object and the consent of the parties.

Giving or taking security

A security document will need to be executed as a deed if it contains a mortgage over land.

Once granted, security needs to be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, filing of a Uniform Commercial Code-1 (UCC-1) financing statement and notice being given to third parties. Please note, however, that perfection of a mortgage right must be made by filing a deed with the relevant Registry of Property.

Assignment of contracts, rents and leases require notarization in order to be valid against third parties under Puerto Rican law.

Romania

Giving or taking personal guarantees

Suretyship is fairly common in lending transactions in Romania. It is an agreement whereby the guarantor undertakes to the creditor to fulfil the obligations of the debtor (either on a free-of-charge basis or against a consideration) in case the latter fails to comply with such obligations. The suretyship cannot be presumed, it must be specifically undertaken by way of a written agreement concluded either as an authentic deed (in front of a notary public) or as a private deed or, in certain cases, even included in the facility agreements. There are specific legal conditions that need to be observed by the guarantor (eg to have and maintain sufficient assets in Romania to cover the secured liabilities, to be domiciled in Romania), however, these rules do not apply in case a certain provider of the suretyship was specifically requested by the creditor.

There are no registration formalities provided by the law for suretyships.

Giving or taking in rem security

Immovable mortgages are subject to certain formal requirements which render them valid and enforceable against third parties. Specifically, immovable mortgages can only be created through an agreement authenticated by a notary public, subject to payment of notarial fees. Immovable mortgages must be registered with the land book where the mortgaged real estate is registered, subject to payment of registration fees.

As concerns movable mortgages, they are validly created through movable mortgage agreements concluded either as private deeds or as authenticated deeds. The ranking of a movable mortgage is generally given by the registration with the so-called Electronic Archive for Movable Security (Arhiva Electronica de Garantii Reale Mobiliare). Such registration is valid for a five-year period and may be renewed before its expiry. Depending on the specific type of mortgaged assets, other registration formalities may apply (eg registration with the shareholders' registry in case of mortgages over shares, the creation of ‘control’ over the mortgaged bank accounts etc).

As a general requirement, a mortgage agreement (either movable or immovable) is not valid unless the amount for which the mortgage is created can reasonably be determined on the basis of the mortgage agreement. Also, under the sanction of nullity, the mortgage agreement must include a sufficiently precise description of the mortgaged asset, reasonably allowing its identification. The mortgaged assets may be described by drafting a list of the mortgaged movable assets, by determining the category to which they belong, by indicating their quantity, by providing a formula for their determination or by any other method which reasonably allows their identification. In the particular case of mortgages over bank accounts, for validity purposes the respective bank accounts must be expressly set out under the movable mortgage agreement.

Russia

To be valid, security shall comply with the following form requirements:

An agreement on a penalty must be in writing regardless the form of the primary obligation.
A pledge can be created by a written agreement or by operation of law (in this case the parties may conclude a written agreement regulating their relationship). The pledge of participation interest must also be notarized.
A surety agreement must be in writing (in some cases it can be created by operation of law).
An independent guarantee must be granted in a written form that allows for the identification of the terms of a guarantee and to ascertain its authenticity.

The law also states compulsory registration requirements for certain types of pledge that are not created until such registration is made:

A pledge of participation interest must be registered in the official single register of the legal entities.
A mortgage (pledge of immovable property) as an encumbrance over the real estate must be registered in the unified state register of real estate.
For a share pledge, a transfer record must be made on the account on which the rights of the shares owner are recorded.

There is also a register of notifications on the pledge of movable property which is maintained by the notary public. Registration of the pledge is not compulsory but the pledgee is only entitled to refer to the pledge in its relations with the third parties if registration is made. Moreover, regardless of the time the pledge was created, priority will be given to the claim under a pledge which has been registered first.

Senegal

To be valid, a guarantee needs to be in writing and contain some mandatory elements:

General contractual principles apply to consideration for a guarantee.

There should generally be no issue as in the majority of cases. The guarantee is provided for in an underlying document as in the case of a loan agreement.

A guarantee may be set aside for different reasons and a beneficiary of a guarantee should take those into account and avoid them.

Singapore

Giving or taking guarantees

To be valid, a guarantee needs to be in writing, signed by the guarantor and provided for good consideration.

Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. Also it can be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender. As a result guarantees are sometimes executed as deeds to avoid any argument about whether good consideration was provided. Deeds have particular execution requirements namely under seal under Singapore law which need to be observed.

Giving or taking security

A security document may need to be executed as a deed if it:

contains a mortgage over land;
confers a statutory power of sale and power to appoint a receiver; or
contains a power of attorney.

There are no notarization requirements for security documents under Singapore law.

Like guarantees, for a period after a new security interest has been granted, it is at risk of being set aside in certain circumstances under insolvency laws. Reviewable transactions include those conducted at an undervalue, unfair preferences and invalid floating charges.

Slovak Republic

Giving or taking guarantees

To be valid, a guarantee has to be granted in writing. A guarantee may be provided with or without consideration.

If several guarantors secure the same obligation, each of them is liable for the entire obligation. In case one of the guarantors fulfils the obligation, it has the right to recourse towards the other guarantors.

The guarantee does not expire if:

the obligation expired due to the debtor’s inability to fulfil it and the obligation may be fulfilled by the guarantor; or
due to the dissolution of the legal entity that is the debtor.

Giving or taking security

Depending on the type of security, security may have to be granted in writing and notarization may be required.

Once granted, security in the form of a pledge needs to be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the pledge in the notarial register of pledges or in the Commercial register and notice being given to third parties.

Like guarantees, a pledge may be at risk of being contested in bankruptcy proceedings, if the security was granted by a company without adequate consideration, caused the debtor's bankruptcy or was made during the debtor's bankruptcy and was granted during the one year period prior to the initiation of bankruptcy proceedings.

South Africa

Giving or taking guarantees

Guarantees must explicitly state that the guarantee creates a primary obligation and not a suretyship and that the guarantor's obligations thereunder will not be affected by the enforceability, legality of validity of the underlying obligations. A suretyship under South African law creates an ancillary obligation and a defect in the underlying obligation will similarly impact the suretyship. By way of example, if a company is placed under business rescue, the business rescue practitioner is entitled to cancel certain contracts in order to improve the financial position of the company. If the main contract is cancelled, then the suretyship will too be cancelled as it is merely ancillary to the principal obligations.

If the financial assistance provisions of the Companies Act have not been complied with the provision by a company of that financial assistance will be void. Directors may, however, face personal liability, in certain instances, for failing to comply with the financial assistance provisions of the Companies Act.

Giving or taking security

Under, and in terms of, the Insolvency Act, a mortgage bond passed for the purposes of securing a debt that was not previously secured must be registered in the applicable South African Deeds Office within two months from the date on which the debt it is securing is incurred. If registration has not occurred within the aforementioned time period and the security provider is liquidated within six months from the date on which the mortgage bond was registered, the mortgage bond will not secure that debt.

It is also important for the board of directors to have confirmed that the security provider is able to comply with the provisions of the Companies Act relating to financial assistance and distributions (see above) as, upon the occurrence of the liquidation in insolvency of the security provider, a liquidator may consider the provision of the security to have been a voidable disposition and require the creditor to return the assets acquired pursuant to the enforcement of such security.

Spain

General considerations

In general terms, under Spanish law, any guarantee, pledge or mortgage must guarantee or secure another obligation to which they are ancillary and which must be clearly identified in the relevant guarantee or security agreement. Therefore, the guarantee or security will follow the underlying obligation in such a way that the invalidity of the underlying obligation entails the invalidity of the guarantee or security, and termination of the underlying obligation will entail cancellation of the guarantee or security.

Giving or taking security

Formalities and requirements

As a general rule, pledges with delivery of possession (prendas con desplazamiento) over shares, quotas, credit rights, receivables and/or bank accounts must comply with the following requirements in order to be perfected:

Notarization (by means of a deed (póliza) or a public deed (escritura pública) is required.
In relation to share pledges, the pledgor should deliver the share certificates (títulos multiples) to the secured creditor or to a third party acting as custodian (usually, the agent or security agent) and it is particularly advisable to record the creation of the pledge on the share certificates. Those share certificates shall be kept by the secured creditor or the custodian until the cancellation of the pledge, when they shall be returned to the shareholder.
In relation to quotas' pledges, quotas are not physically represented (there are not quotas certificates) so they cannot physically be delivered to the secured creditor or to a third party custodian so, in order to render the pledge effective, notice to the company shall be given and the pledge recorded in the (physical or electronic) book registry of quota holders (socios), kept by the company, and it is advisable to record the creation of the pledge on the public document evidencing the ownership of the quotas.
Notification to the relevant company, relevant counterpart and/or depository bank is not required for perfection purposes but advisable in order to ensure that, upon enforcement, payments are made to the account designated by the beneficiary).
In relation to bank accounts, although the pledgor may be allowed to deal with the account in the course of its business (unless otherwise agreed, usually until a default takes place), it is compulsory to keep a positive balance in the bank account during the life of the pledge and some sort of control over the account (it is usually opened with the secured creditor or such secured creditor is able to control certain actions of the depository bank) to justify the delivery of possession.
In relation to shares and/or quotas, the pledgor will retain voting rights and the rights to receive payment of dividends until enforcement, unless otherwise agreed in the pledge agreement.

Likewise, as a general rule, mortgages over real estate assets (hipotecas inmobiliaria), mortgages over movable assets (hipotecas mobiliaria) and pledges without delivery of possession (prendas sin desplazamiento) must comply with the following requirements in order to be perfected:

The mortgages must be documented in a public deed (escritura pública) while the pledges may be documented in a deed (póliza) or a public deed (escritura pública), as the case may be.
The assets must be adequately described and identified, as necessary, in the security documents.
There must be due registration within the relevant Land and/or Moveable Assets Registry, as applicable (until the public document is duly registered, the relevant security will not be perfected).
As regards floating mortgages (i.e., real estate mortgages securing multiple obligations), beneficiaries of such floating mortgages must always be ‘credit entities’ (i.e., those set out in article 2 of Law 2/1981 of 25 March, regulating the mortgage market), regardless of whether they are Spanish of foreign credit entities (such requirement would also apply to any assignee of a loan secured by a floating mortgage).

In relation to all the above, if the security is documented in a public deed (escritura pública), notarial and registration fees (as appropriate), along with stamp duty, shall apply. However, if the security is documented in a deed (póliza), no stamp duty will be levied.

With regard to registrar and notary fees, these are set by the government and are based on a sliding scale, although notary's fees can be negotiated down if the value of the transaction exceeds €6 million.

With regard to stamp duty rates, this will depend on the region where the asset is located (rates vary from 0.5% to 1.5%). The stamp duty rate is calculated over the relevant secured amount.

Enforcement

Spanish law provides for specific enforcement proceedings in respect of each type of security referred to in sub-question above. However, as a general rule, enforcement proceedings will usually be based on a sale at public auction of the relevant asset, conducted either by a Court or by a Spanish Notary (or, in certain cases, a specialized entity), while the proceeds obtained out of the auction process shall be used to repay the secured liabilities.

In this regard, in order to be able to proceed to the enforcement of any security governed by Spanish law through summary enforcement proceedings, a so called ‘liquidity clause’, which complies with the formal requirements set out in Spanish Procedural Law, shall be included in the relevant secured financing agreement (whether it is governed by Spanish law or otherwise). Additionally, notarization of the underlying financing agreement (and sworn translation into Spanish if drafted in a different language) is also a pre-requisite in order to benefit from summary enforcement proceedings.

Insolvency considerations

Upon declaration of insolvency of a Spanish company, no security interests over assets of such insolvent company which are ‘necessary for the continuity of its business or professional activity’ can be enforced (this will also apply to enforcement proceedings commenced before the declaration of the bankruptcy will also be held up) until the earlier of:

the date on which an agreement (convenio) which does not prevent the enforcement of the relevant security interest has been reached between the insolvent company and its creditors; and
the date on which one year has elapsed after the declaration of insolvency.

Although the Spanish Insolvency Law does not include a definition of assets which are ‘necessary for the continuity of its business or professional activity’, shares or quotas of project finance SPVs will not fall into that category. There are no clear rules followed by the Spanish Courts in relation to the assessment of when an asset shall fall into such category, so an analysis on a case by case basis will be required.

Receivers of the insolvent company may prevent any security interest being enforced after the end of the above referred ‘stay period’ by immediately paying the relevant secured amounts, including an undertaking to pay amounts which become due in the future under the relevant agreement as ‘claims against the insolvency estate’ (créditos contra la masa) (provided that, should a receiver fail to pay future claims as they become due, the secured creditor will be entitled to enforce the relevant security interest).

Any claims owed by an insolvent company to a ‘related party’ will be regarded as subordinated claims. Moreover, any security interest granted by the insolvent in favor of the ‘related party’ will be set aside by the court.

Any transaction entered into by the insolvent company within the two years immediately preceding the declaration of insolvency which are deemed as ‘detrimental to the insolvency estate of the debtor’ may be set aside by a receiver.

The Spanish Insolvency Law does not provide for a definition of ‘detrimental to the insolvency estate of the debtor’, however, it presumes that the following transactions will be detrimental:

transactions involving donations or prepayments in respect of obligations which otherwise would be due after the adjudication of bankruptcy (this presumption does not permit the submission of evidence to the contrary);
transactions between the insolvent and related parties (this presumption allows for the submission of evidence to the contrary); and
granting by the insolvent of in rem security in relation to pre-existing non-secured obligations (this presumption allows for the submission of evidence to the contrary).

In any other case, the burden of proof will be on the person or entity arguing that the transaction is detrimental to the insolvency estate of the debtor.

Notwithstanding the above, new security granted in the context of a refinancing process shall not be subject to rescission (save in the case of fraud), so long as the refinancing process/agreement complies with the following requirements:

the refinancing agreement creates a ‘significant increase’ of the funds available to the borrower, or a modification of the terms by extending the maturity date or by entering into new obligations that replace existing obligations;
the refinancing agreement must have been reached as a result of a viability plan ensuring the solvency of the debtor in the short and medium term;
the refinancing agreement is approved by creditors representing at least the 60% of the total value of the liabilities (certified by the company´s auditor) at the time the refinancing agreement is executed; and
the refinancing agreement and any other ancillary documents must be set out in a public document.

These rules apply to the validity of the refinancing agreement itself, as well as to any other obligation and/or payment deriving from or connected with such refinancing. It is also worth mentioning that the exception to the general rule of rescission shall also apply to other transactions where the above-mentioned requirements have been fulfilled prior to the application for insolvency proceedings.

Sweden

Giving or taking guarantees

A guarantee made in contravention of the rules on financial assistance, upstream loan restrictions and value transfers may entail criminal liability for the board of directors and the managing director and will render the affected guarantee invalid and unenforceable. The invalid guarantee will in such case be cancelled.

Additionally, there is a risk that a guarantee may be set aside if it was procured by undue influence by a borrower or lender.

Giving or taking security

Once granted, security needs to be properly perfected before it is valid against third parties. Perfection formalities vary depending on the type of security and the type of secured asset, but can either entail: a requirement for the secured asset to be delivered to the security holder (tradition) (the Non-Recourse Principle); registration of the security in a certain registry; or notice being given to a third party.

The Non-Recourse Principle is the main rule and means, inter alia, that any pledged asset (or any instrument representing such asset) must be physically surrendered to the pledgee. In cases where the relevant asset or right is in the possession, or otherwise under the control, of a third party (eg a bank in the case of a bank account), notification must be given to the third party with a stipulation that the pledgor may not dispose of, or be granted access to, the pledged asset or right. As a result, the Non-Recourse Principle may cause difficulties with regards to the perfection of security under Swedish law as removing any assets from the pledgor's control may cause operational disruption to the pledgor's business and its continuation.

As with guarantees, when security is granted in contravention of the rules on financial assistance, upstream loan restrictions and value transfers, the board of directors and the managing director may face criminal liability and the affected security may be rendered invalid and unenforceable.

There are no notarization requirements for security documents under Swedish law.

Thailand

If a guarantor is a company, it must have an express or ancillary power to provide a guarantee or security to secure the debt of another person. A foreign owned company must hold a foreign business license in order to provide a guarantee or security to secure debt of another person.

Giving or taking guarantees

The guaranteed obligation, objectives and type of obligation, maximum amount of guarantee and period of time that such obligation will be incurred must be expressly specified unless the guarantee is in respect of a series of transaction which can be terminated at the sole discretion of the guarantor by informing the creditor.
An agreement results in the guarantor being jointly liable with the debtor or as primary debtors is void unless the guarantor is a legal entity who agrees to such joint liability.
The creditor must notify the debtor's default to the guarantor in writing within 60 days of default, otherwise the guarantor will be released from its obligations in respect of the guaranteed interest, damages and other charges arising from the lapse of such 60 days.
The liability of the guarantor will be discharged once the obligations of the debtor are extinguished.
Advance consent granted by the guarantor for any extension of the guarantor's obligation or the guarantee period is not enforceable under Thai law.

The above-mentioned provisions are mandatory under Thai Law and cannot be agreed otherwise by the parties as such terms will be void or unenforceable. The guarantor is not allowed to provide a mortgage of the guarantor's assets to secure another person's debt with the condition to be liable for the deficit amount after the enforcement of mortgaged property unless (i) such other person is a legal entity, (ii) the mortgagor is a director or a controlling person of such legal entity and (iii) the guarantor separately enters into a guarantee agreement. The purpose of this provision is to limit the liability of the mortgagor to only the mortgaged asset, so that the mortgagor will not have to be liable for the deficit of the outstanding debt of another person. Under Thai law, the mortgagor will not be liable for the deficit amount of money at the time of enforcement, if it is a mortgage to secure another person's debt. Therefore, the exemption will apply if the mortgagor / guarantor is the director or the controlling person of the legal entity who is a primary debtor.

Guarantees can be made either at the time of entering into the underlying obligation or after that.

It should be noted that if a creditor rejects the requests of a guarantors to perform the guaranteed obligations once such obligations are due, the guarantor will be released from its liability.

Giving or taking security

Pledge

Physical possession of pledged property is required to perfect a pledge. As a result, the pledge will be terminated once the pledged property is returned into the possession of pledgor.
Shares in a company can be pledged but it will only be enforceable against third parties once such pledge is recorded in the share register book of the company whose shares are pledged. A pledge of transferable instruments eg notes must be endorsed on the pledged instrument.
Prior to enforcement of a pledge, the pledgee must notify the pledgor in writing within a specified period of time unless the pledged property are notes.
A pledge is enforced by the selling the pledged property at public auction and the pledgee must notify the pledgor of the date and time of such sale.
The pledgor is liable for the deficit amount of money after the enforcement of pledged property.

Mortgage

A mortgage is required to be made in writing and registered with the relevant authority, e.g. the local land office is the registry for land mortgage and the Office for Machinery Registration is the registry for mortgage on machinery, otherwise the mortgage will be void.
The means of enforcement of a mortgage is limited only to selling the mortgaged property at public auction or to foreclose the mortgaged property.
Prior to enforcement of a mortgage, the mortgagee must provide the debtor and the mortgagor at least 60 days' notice in writing to perform the obligation.
The mortgagor will not be liable for any deficit amount of money following enforcement of the mortgage, if the mortgage is granted to secure other person's debt.

Ukraine

Giving or taking guarantees

To be valid, a guarantee needs to be in writing and signed by the guarantor.

Giving or taking security

A security document may need to be executed as a notarial deed if it contains:

a mortgage over land;
a mortgage over immovable property; or
a mortgage over space facilities.

Parties may elect to have any security contract notarized. Generally, notarization gives the lender:

additional comfort in terms of the counterparty's capacity to enter the contract; and
additional enforcement benefits (a notary writ may be an out-of-court remedy available to the lender).

Certain types of assets cannot be pledged or mortgaged. For example, assets which have a cultural heritage cannot be pledged. Agricultural land can only be mortgaged to banks.

Perfection and registration requirements

Encumbrance of immovable property with a mortgage is subject to a mandatory registration with the State Register of Proprietary Rights to Immovable Property.
Encumbrance entries recording ranking and priority against third parties' claims over pledged movable assets, and prohibiting the disposal of pledged (movable) assets, shall be registered at State Register of Pledges over Movable Properties.
An absence of state registration affects the validity of a mortgage.

Failure to comply with perfection and registration requirements means that the ranking or enforceability of the movable pledge can be undermined and the creditor's claims will rank alongside unsecured creditors.

Security is at risk of being set aside in certain circumstances under insolvency laws. For more information, see Giving and taking guarantees and security – restrictions.

UK - England and Wales

Giving or taking guarantees

To be valid, a guarantee needs to be in writing, signed by the guarantor and provided for good consideration.

Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. Also, it can be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender. As a result guarantees are often executed as deeds to avoid any argument about whether good consideration was provided. Deeds have particular execution requirements under English law which need to be observed.

Giving or taking security

A security document may need to be executed as a deed if it:

contains a mortgage over land;
confers a statutory power of sale and power to appoint a receiver; or
contains a power of attorney.

There are no notarization requirements for security documents under English law.

UK - Scotland

Giving or taking guarantees

To be probative (ie admissible in court without further evidence), a guarantee needs to be in writing and signed by the guarantor.

Guarantees and other securities can be signed on a unilateral basis (ie unlike the case of English law, there is no requirement under Scots law that a guarantee should be given for consideration (although see above for other conditions).

Giving or taking security

Some funders take the view that rather than intimate the assignation and security of a contract or write themselves up as registered members pursuant to a share pledge, they will maintain an 'unintimated' or 'unregistered' position up until such a time as they require to enforce the relevant security. This is occasionally seen in the Scottish market although DLA Piper advise against taking this approach as, if the 'intimation' occurs only at the time of enforcement, then there is a greater risk that this may be set aside as someone taking security following the onset of insolvency.

There are no notarization requirements for security documents under Scots law.

United Arab Emirates

Giving or taking guarantees

The Civil Code provides that a lender should not be obliged to first prove the bankruptcy of the borrower before claiming against the guarantor and that the borrower and the guarantor shall not be discharged from the balance of the debt if the parties agree a composition in relation to part of the debt. These provisions can be set aside.

There is no concept of a deed under UAE law and accordingly, guarantees should be executed in the same manner as any other contract. There is also no requirement for guarantees to be notarized, although it is quite common for the signature of a personal guarantor to be witnessed.

However, if a guarantee were to be brought before a local court, it would need to be translated into Arabic by a certified translator and the Arabic version would prevail- for this reason, parties sometimes require a guarantee to be translated into an agreed version of Arabic prior to execution although there is no universal practice in this regard.

Giving or taking security

As mentioned above, there is no concept of a deed under UAE law. Depending upon the type of security and where the asset is located (onshore or in a free zone), there may be a prescribed form of security (for example, the Dubai Land Department requires a short form mortgage to be registered, so a practice has developed that both a long form and short form mortgage are signed).

In relation to security taken over moveable property pursuant to the Pledge Law, in order to perfect such security it is necessary to register the security on the register established under the Pledge Law, which is known as the "Emirates Moveable Collateral Registry". The Emirates Moveable Collateral Registry is an online registry, and so in order for a secured party to effect a registration with this registry it is a matter of the secured party creating an online account with the registry and then submitting via an online form the required information about the secured property and the security provider.

The registration requirements in relation to other forms of security should always be checked as there are time periods required by some free zone registries.

United States

Giving or taking guarantees

Guarantees are typically considered secondary, and not primary, obligations.

Many legal defenses are available to guarantors which may invalidate the guarantor’s obligations under the guarantee, including the invalidity of the underlying credit agreement or a change to the corporate structure of the borrower. However, in most cases, the lenders require the guarantor to waive these defenses, and doing so is typically permitted under applicable US law.

US state law typically requires that a guarantee be in furtherance of the guarantor’s purpose and that the guarantor receive a benefit in exchange for providing such guarantee. This may be achieved if the company and borrower are part of the same corporate group.

Giving or taking security

A security interest is created and attaches to the company’s property when the lender extends credit to the borrower and the borrower delivers to the lender a written agreement granting the security interest and describing the property.

Once created, the security interest needs to be properly perfected before it is valid against third parties. Perfection formalities are governed by the Uniform Commercial Code (UCC) as adopted in the borrower’s state of organization and, with respect to real estate, by the real estate law of the state where real property is located. Perfection formalities can range from having the secured asset delivered to the security holder, filing a financing statement or mortgage or entering into a control agreement. Under the UCC, a lender who properly files a financing statement first typically has priority over other lenders, with certain exceptions.

Security documents granting a security interest in personal property collateral generally do not need to be notarized, but notarization may be required for real property in certain states.

There may be negative tax consequences to a US borrower if the loan is secured by all of the assets of its non-US subsidiary that is considered a 'controlled foreign corporation.'

Are there any restrictions on lending and borrowing?

The development of professional lending activity may only be carried out by financial institutions authorized by the BNA.

Foreign investors who develop their projects by using benefits under the Private Investment Law may have recourse to credit in Angolan banks (under the Angolan applicable legislation).

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What are common lending structures?

The common lending structures are Financial Banking institutions.

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What are the differences between lending to institutional / professional or other borrowers?

The law does not mention special differences between lending to institutional and non-institutional debtors.

The only legal regime that is exclusive to individuals is the consumer credit regime.

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Do the laws recognize the principles of agency and trusts?

No.

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Are there any other notable risks or issues around lending?

No.

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Are there any other notable risks or issues around borrowing?

No.

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Are there any restrictions on giving and taking guarantees and security?

A company can grant a security interest aiming to secure its obligations as a borrower on a credit facility and as a guarantor of the obligations of other borrowers and guarantors’ obligations under a credit facility.

For that reason, the general rule set forth under Angolan legal framework is that a company’s corporate power is restricted to rights and duties considered adequate in order to proceed with the exercise of the company’s corporate object.

Hence, it is assumed that the granting of guarantees regarding other entities’ duties is opposed to the purpose of companies, except in situations where the companies’ own interest is legitimate in providing the guarantee or the company being considered is in a group or control relationship with other companies (Article 6(3) Angolan Companies Law).

The company’s own legitimate interest is visible when providing the downstream guarantees. However, it is less visible when providing upstream and cross-stream guarantees, being advisable for the necessary resolutions to be given with the intention to justify the own interest of the company, which in certain circumstances might be an indirect one, when providing the guarantee.

In regard to governmental or other consents or filings (or other formalities) required when granting/taking a guarantee, with exception of when there are state-owned and other public sector companies, the general rule is that no governmental consent or filings is required under the law, in order for a guarantee being provided by an Angolan company to be enforceable.

Notwithstanding, a guarantee provided by an Angolan company becomes enforceable when either a shareholder or border consent is given in accordance with the Angolan Companies Law. Commonly, such consent will detail expressly the benefit expected to be acquired from the provision of the guarantee.

Moreover, a security can be taken over inventory when executing a written agreement. Whenever there is a situation of non-payment or the occurrence of other circumstances presumed to be described in the pledge agreement, the pledgee or security agent can provide an enforcement notice to the pledgor. As an alternative, parties may prefer the provision of ordinary notices containing details of the stock.

Additionally, a company cannot guarantee and/or give a security to support borrowing arising from the financing of direct or indirect acquisition of shares of the company, being expressly forbidden (Article 344 of the Angolan Companies Law). Exceptions are available. Criminal liability of the directors/managers of such company may be considered when violating this prohibition, as well as the declaration of voidance and nullity of the agreement, guarantee or security interest.

Contrary to that, no express prohibition exists when the subject is the direct or indirect financing of shares of any company which directly or indirectly owns shares in the company or shares in a sister subsidiary, even though it is generally understood as applicable. Again, as previously mentioned, the corporate powers of the company may be restricted in respect of granting of guarantees or security.

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What are common types of guarantees and security?

The Angolan Civil Code in Book II, Chapter VI, establishes the following types of secure lending obligations:

I. Provision of Bonds;

II. Bail;

III. Consignation of income;

IV. Pledge;

V. Mortgage, and

VI. Right of Retention.

Angolan law establishes that the possibility to provide general security over the assets of a given entity through a general security agreement is treated as null and void since there is a lack of determination of the specific assets subject to the security.

Thus, a security agreement must identify the assets that are subject to the security created by the agreement. It must have a certain criterion that as a result gives the possibility to identify the secured assets at a given time.

As mortgages and consignation of income must be granted by public deed, whereas pledged may be granted by the celebration of private agreements, the adoption of one single agreement or separate agreements varies in accordance with the type of security being granted.

Moreover, in companies incorporated in Angola, security can be taken over shares by pledges of shares (quotas or shares).

The shares on a Joint Stock limited liability companies (Sociedades Anónimas) are carried out through means of registration in the securities holder's account, with an indication of the number of shares pledged, the guaranteed obligation and identification of the beneficiary. If the voting right is granted to the pledge creditor, the pledge may be constituted by registration in their account. In the other hand, on Private limited liability companies (Sociedades por Quotas), the pledge must be done through means of a public deed.

The said pledges of shares may be either in book-entry form or in a certified form. The procedure to be followed varies according to the type of company in question, since such security can be granted by a document governed by the laws of other jurisdiction (e.g. English law) upon the compliance of the formalities set out by Angolan Law.

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Are there any other notable risks or issues around giving and taking guarantees and security?

In circumstances where only a small benefit to the guaranteeing/securing company can be shown, it is likely that there is no legitimate interest to the company in providing the guarantee/security.

Last modified 23 Jul 2020

Luís Filipe Carvalho

Partner
DLA Piper Africa, Angola (ADCA)
[email protected]
T +244 926 612 525
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Specific rules applicable to guarantees granted by companies

Handwritten wording to be inserted in a corporate guarantee (cautionnement)

Specific rules applicable to corporate guarantee (cautionnement) granted by individuals

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Restrictions as to the secured creditors and obligations

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Risks issued from the reform of security over movable assets and the planned establishment of the national electronic pledge register

Specific rules applicable to guarantees granted by companies

Handwritten wording to be inserted in a corporate guarantee (cautionnement)

Specific rules applicable to corporate guarantee (cautionnement) granted by individuals

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