New Trends In Commercial Lending In Latin America

This article first appeared in Financier Worldwide's March Issue 2007.

While commercial and business relations involving Latin America have changed substantially in the past few decades, particularly in light of pervasive cross-border trade and financial activity, the legal systems of many Latin American countries have struggled to keep pace with this evolution. Modern business and finance practices have often clashed with the traditional civil law landscape in Latin American countries.

In recent years, however, a number of jurisdictions in Latin America have provided enhanced support for commercial lending by updating their laws governing creation and perfection of security interests. These innovations include a more frequent use of trusts, express permission to create floating charges, or other mechanisms allowing more effective pledges of accounts receivables. Other changes permit the faster enforcement of security interests by creating out-of-court procedures or other mechanisms that ensure expeditious satisfaction of a credit.

Historically, in Latin America, a lender's recourse to a borrower's assets depended on a traditional pledge that required a precise description of the assets being encumbered, in addition to other formalities set forth in the applicable law. For example, a lender seeking an equipment pledge as collateral to a loan needed to identify such equipment manufacturer, model, make, serial number and any other particular characteristics. A generic description of the equipment would have rendered the pledge invalid. At the same time, a pledge of goods generally required the debtor to physically transfer possession of the goods to the creditor. As this was usually impracticable, pledgor and pledgee often had to agree to return possession of the goods to the pledgor under a bailment agreement.

In most Latin American countries (Argentina being the notable exception), the concepts of floating liens (applied to collateral either in existence or acquired after the loan is put in place) and blanket liens (applied to all the borrower's assets or a category of assets, such as borrower's entire inventory) were not contemplated under traditional civil law. Instead, security interest over accounts receivables required a detailed description of existing credits, which typically included date, name of account debtor and amount, followed by periodic updates to the pledge to add receivables created after execution of the pledge as a...

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