Security Instruments And Promissory Notes: Enforceability Under Paraguayan Law

This update addresses various issues regarding the legal status and enforceability of security documents and promissory notes when provided by a Paraguayan borrower in favour of foreign lenders.

How effective a given type of security instrument is and what are the legal actions available to the creditor to enforce a given security instrument or promissory note are the two major issues a foreign lender must address when financing projects or operations in Paraguay.

Guarantees are classified in two major groups: real guarantees (on property) and personal guarantees.

A. Real Guarantees

Real guarantees, mainly mortgages and chattel mortgages, are considered the most reliable and secure guarantees, for they create a privileged security interest over the mortgaged or pledged property in favour of the creditor. Furthermore, procedural law prescribes an expedited enforcement procedure for this type of guarantees, not available with respect to personal guarantees.

1. Mortgages

Mortgages are placed on a real property and are extensive to all accessories as long as they are united to the Property, to all improvements, to buildings erected in vacant land, to rents and results from insurance coverage. It is not divisible and properties mortgaged to secure debt are bound for the whole amount and the creditor may proceed against any or all of them. Only the owner may mortgage his property. A joint owner may mortgage his share, but in case of partition, the mortgage is applied to his share alone.

Mortgages shall be made by notarial act (public deed) or public instrument which may be executed in a foreign country, but should be legalized and protocolized by order of a civil court. They can be opposed to third parties as from the date in recording in the public registry of properties.

The credit guaranteed by a mortgage may be divided up in installments and documented in endorsable...