SECURITY INTERESTS IN VENEZUELA

General aspects.

Venezuela is a Civil Law jurisdiction; its core legislation is inspired in the Napoleonic Civil Code. The law is contained in codes and statutes, which are applied and interpreted by the courts. Courts are not bound by precedents, since the law is contained only in written statutes approved by Congress. There are also administrative regulations contained in Presidential Decrees, Regulations and Ministerial Resolutions, all of which have to conform to existing statutes.

The law related to security interest is contained in the Civil Code and other statutes such as the Law of Chattel Mortgages and the Law of Maritime Mortgages.

Movable Goods vs. Non-movables (real estate).

A main distinction made in all Civil Law countries is that of goods, which may be classified in two broad categories: movable (by their own means or by an external force) or non-movable, that is, real estate.

Automobiles, aircraft, boats, inventory, trademarks, shares, machinery and equipment are considered to be movable goods.

Real estate properties, buildings, constructions and fixtures permanently attached to the constructions are considered to be non-movables.

Personal Security Interest vs. Real Security Interest.

A Personal Security Interest is that such as a surety bond ("fianza"), where the creditor is secured with all the assets of another individual or entity, but where the creditor has no specific lien or priority over any of the specific goods of the party giving the surety bond.

A Real Security Interest is that where the secured creditor has a lien attached to specific goods of the debtor or a third party, having the right to request a judicial foreclosure of the goods given in security in the event of non-performance by the debtor. The secured creditor has a right to such goods and has priority over other creditors to collect his debt upon judicial foreclosure thereof.

The most common real security interests are the pledge and the mortgage. Traditionally, according to the provisions of the Civil Code, pledges could only be created over movable goods and mortgages only over non-movables.

Pledge ("Prenda")

An ordinary pledge, as provided in the Civil Code, requires that the debtor delivers the pledged goods (movables) to the creditor who must keep the goods in deposit while the security interest is in effect. During that time neither the creditor nor the debtor may use the goods given in pledge. If the creditor is unpaid, he will have to proceed with judicial foreclosure. The creditor may not acquire ownership of the goods in the event of non payment by the debtor.

Ordinary Mortgage ("Hipoteca").

On the other hand, an ordinary mortgage, as provided in the Civil Code, allows the debtor to keep possession and use of the mortgaged goods (non-movables). Title of the mortgaged goods may even be transferred to third parties; in that case the real rights granted to the secured creditor will not be disturbed by such transfer, being able to foreclose the mortgage over the goods regardless of who is the actual owner.

The rules contained in the Civil Code, written in the XIX century, were not adapted to the necessities of modern financing, since, for example, if a security interest had to be created over machinery or an aircraft, the only available means was a pledge, which necessarily implied that the possession of the good had to be transferred to the creditor and none of the parties could use it while the security interest was in effect.

Chattel Mortgages ("Hipoteca mobiliaria").

To solve this inconvenience, the Law on Chattel Mortgages (" Ley de Hipoteca Mobiliaria y Prenda sin Desplazamiento de la Posesión") has allowed the creation of mortgages over automobiles, aircraft, industrial machinery, copyrights, industrial property rights and over businesses as a whole ("fondos de comercio") since 1973. In addition, this law allows the creation of pledges with no transfer of possession ("prenda sin desplazamiento de la posesión") over animals, crops, forestry products, equipment, inventory, raw materials and art or other collections.

Additionally, the Law of Maritime Mortgages ("Ley de Hipoteca Naval") allows the creation of mortgages over boats, ships, barges and any other vessel.

Of particular interest is the chattel mortgage over businesses as a whole ("fondo de comercio"), which gives the creditor a security interest over all fixtures, tradenames, trademarks, patents, machinery, equipment and over raw materials and inventory. With respect to raw materials and inventory, the law prescribes that the debtor may be required to maintain certain quantities and qualities of such goods as determined in the agreement, having the right to sell and use the raw materials and sell the inventory to conduct his business.

A fundamental principle in all mortgages is that the security interest has to attach over a specific good, which has to be identified and described with all details in the security agreement. A general or vague description of the goods given in mortgage will render the security interest ineffective.

Therefore, the law does not allow a floating lien as such; hence, if the secured creditor desires to have a security interest over all after acquired goods and properties, the security agreement will have to be amended from time to time to include such goods, unless it is raw materials and inventory, where only volume and quality specification is required.

Dominion reserve sale.

A different manner to obtain a security interest for the payrnent of the price in sales of movables goods, such as automobiles, machinery and appliances, is by means of a dominion reserve sale. This type of sale is regulated by the Law on Dominion Reserve Sales of 1955 ("Ley de Venta con Reserva de Dominio")

In that case, the seller retains title over the goods up to five years only as a means to guarantee the payment of the price. The purchaser retains the possession of the goods and all risks and liabilities associated thereto.

The benefits of this sale is that in the event of non payment, the creditor does not have to proceed with judicial foreclosure; instead he has only to claim repossession of the good, since he has retained ownership of it.

Means to perfect security interests.

Surety bonds.

No special means to perfect the security interest is required. Even a verbal agreement is enforceable; however, it may be faced with serious evidentiary difficulties if no written agreement is in existence.

Pledges.

A written agreement of certain date is required to perfect the security interest; in addition the debtor must transfer possession of the goods to the creditor. The security interest will be considered non- existent until the goods are delivered to the creditor. (Certain date is acquired when the document is submitted to a public official for authentication of the signatures, such as a notary public).

Mortgages.

All mortgages (over non-movables and over movables) require a written agreement that has to be registered in a public registry office. The mortgage is considered non-existent until the document is properly registered.

The document must specify, among other data, the specific description of the mortgaged goods and the value of the mortgage; that is, the amount over which the creditor will have a privilege upon judicial foreclosure. Normally the amount is calculated to include the debt, plus judicial costs and attomeys fees.

Upon filing there is a registration fee to be paid of 0.25 Bolivars per each 1,000 Bolivars of the value given to the mortgage.

In the case of chattel mortgages (i.e. over aircraft, automobiles, machinery, etc.), excluding maritime mortgages, certain creditors, such as foreign banks, business corporations (foreign or national) and individuals require a prior authorization from governmental authorities. This authorization has proven to be a burdensome requirement due to the time and volume of paperwork it involves, which significantly delay the perfection of the security interest.

Dominion Reserve Sale.

A document with a certain date is required, which has to contain a specific description of the goods and other conditions of the sale.

This surnmary was prepared by Gonzalo Rodriguez-Matos, partner at Anzola Boveda Raffalli y Rodriguez, Caracas, Venezuela.

grmabrr@ven.net

tel. (58-2) 952-8706

fax (58-2) 952-4415

E-mail