Portugal
Some of the key areas affecting the giving of guarantees and security are as follows.
Capacity
It is important to check the constitutional documents of a company giving a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under Portuguese law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company. The safe approach is often to have the members of the company approve the giving of the guarantee or security by resolution.
Insolvency
Guarantees and security with a determined term prior to the onset of insolvency may be at risk of being set aside under Portuguese insolvency laws. Guarantees and security might also be challenged on other grounds relating to insolvency.
Purchase of own shares
It is unlawful for a public company to grant loans or issue guarantees or to provide financial assistance for the purchase of its own shares (however the law expressly provides for limited exceptions).
Are there any restrictions on lending and borrowing?
Lending
Under Portuguese law, home mortgage loans and consumer lending are regulated activities. Only credit institutions and financial companies can carry out such credit operations and therefore the lender (credit institution or financial company) will need to be authorized by the Bank of Portugal to conduct such business.
Home mortgage loans are subject to specific rules (eg early repayment rules). Credit institutions have the obligation to inform consumers about the calculation of the effective interest rate (TAE), any promotional conditions and early repayment conditions.
Regulated credit agreements are subject to specific requirements regarding the terms of the agreement. Prior to the execution of a regulated credit agreement, the lender must assess the solvency of the consumer borrower.
Borrowing
While borrowers are generally not regulated, it is advisable for borrowers to consider whether either the mortgage or consumer lending regimes apply to them, as they may benefit from the protections mentioned above.
What are common lending structures?
Lending in Portugal can be structured in several different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties (such as agents and trustees which fulfill certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicates taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific objectives, eg term loans, working capital loans, equity bridge facilities, project facilities and letter of credit facilities.
Loan durations
The duration of a loan also varies between:
- a short-term loan, with a maturity date not exceeding one year;
- a medium-term loan with a maturity date exceeding one year but not exceeding five years; or
- a long-term loan, with a maturity date exceeding five years.
Loan security
A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security.
Loan commitment
A loan can also be:
- committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
A breach of a loan commitment will only create a contractual liability by the breaching party, which gives the innocent party the right to call for a contractual remedy or to be indemnified.
Loan repayment
A loan can also be repayable upon demand, on an amortizing basis (in installments during the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).
What are the differences between lending to institutional / professional or other borrowers?
Lending to institutional/professional borrowers is subject to less regulatory oversight and so less burdensome from a compliance perspective.
By contrast, lending in the context of mortgages and to consumers is a regulated activity. For more information, see Lending and borrowing – restrictions.
Do the laws recognize the principles of agency and trusts?
Portuguese law recognizes the principles under which one person or entity may act on behalf of another as attorney.
The Portuguese legal system does not recognize the concept of a trust.
Are there any other notable risks or issues around lending?
Generally
Loan agreements and other finance documents are subject to general contractual principles. However, it is important to note that interest rates are capped by law and therefore, loans provided to institutional/professional entities are subject to the limit established for commercial interest rates which is updated every six months and is currently set at 7%.
The Legal Regime on Credit Agreements for Consumers establishes a number of requirements on lenders when dealing with consumers, including the need to:
- conduct affordability tests before lending; and
- provide standard information about a mortgage to enable borrowers to compare products.
Standard form documentation
Bilateral finance transactions are more likely to be documented on bank standard form documentation prepared in-house but which usually tend to follow the form of the Loan Market Association (LMA) adapted to Portuguese standards and legal requirements.
Are there any other notable risks or issues around borrowing?
Borrowers should be aware of the potential implications of the Banking Act, which outlines certain measures for dealing with failing financial institutions.
The Banking Act gives the Bank of Portugal the power to ‘bail in’ obligations of failed Portuguese financial institutions. ‘Bail in’ describes a variety of write-down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of Portuguese contracts, such powers override what the parties have agreed at a contractual level.
Nuno Neves
Partner
DLA Piper ABBC
[email protected]
T +21 358 36 27
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