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Rules Concerning the Enforcement of Security Agreements

I. As a general rule, if the obligation is not voluntarily performed, the creditor has the right to demand judicial compliance and to execute the assets of the debtor, as stated in the Civil Code and in the rules of procedure (Article 817 CC).

The law gives the creditor the right to bring forth two actions in court: first, the creditor is entitled judicially to enforce his rights under the contract and demand performance; second, the creditor may execute the assets of the debtor. In certain circumstances the creditor may initiate an execution proceeding, without precedence of a declarative proceeding, based on an enforcement order, for instance, on a public deed.

The execution of the debtor’s assets, in order to enforce the payment of a sum of money, includes the seizure of debtor’s property (“penhora”), the judicial sale of seized property and the payment to the creditors. If the execution aims at the delivery of goods, those goods are also seized in order to be delivered to the execution creditor.

II. In particular, the enforcement of the mortgage must be exercised with leave of the court.

So, after the registration and upon verification of the event that triggers the guarantee (non-performance of the guaranteed obligation; seizure of the assets covered by the mortgage in an execution proceeding initiated by another creditor[1]; or insolvency of the holder[2]), the creditor is entitled judicially to enforce his priority right by appointing the guaranteed assets to seizure or by claiming for his credits in the context of insolvency.[3]

With the objective of preventing any abuse by the creditor, the Portuguese Civil Code forbids the pactum commissorium (“pacto comissorio”) in the context of a mortgage, i.e., the agreement under which there is an automatic appropriation by the creditor of the mortgage object in case of default of the debtor (Article 694 CC).[4]

III. This rule applies, with the necessary adjustments (mutatis mutandis) to the pledge (Article 678 CC).

However nowadays it is permitted the agreement of the parties pertaining to the extra-judicial enforcement of the pledge (Article 675(1) CC). On the other hand, the interested parties may agree that the pledged object is awarded to the creditor for the value decided by the court (Article 675(2) CC).

The reasons for the prohibition of pactum comissorium are multiple and complex; first, it is necessary to protect the debtor from any extortion by the creditor; secondly, there is a general need of the juridical traffic not to fraud the principle of par conditio creditorum, through an unjustified privilege conferred to one of the creditors.[5]

IV. In recent times, the abovementioned Decreto-Lei 105/2004 (which transposed Directive 2002/47/EC on financial collateral arrangements) appears to admit the pactum comissorium, in the context of financial pledge, in certain circumstances (Article 11, in its original version); it is also stated that the contract of financial pledge may confer to the beneficiary of the financial collateral the right to dispose of the object (Article 9). But only a few years after that, the law was amended and discarded the wording pactum commissorium (“pacto comissorio”) (see Article 11, in its actual version[6]).

Nevertheless, Portuguese authors consider that the prohibition of pactum comissorium does not include the “pacto marciano”, i.e., the agreement under which the beneficiary of the collateral - who may appropriate the object provided as collateral - is obliged to reimburse the guarantor of an amount corresponding to the difference between the value of the object of the collateral and the value of the guaranteed obligations. This is after all the meaning and the objective of the law (Decreto-Lei 105/2004, even in its first version).[7]

V. Regarding the aforesaid, we may ask if some of the remedies admitted in the Convention (Articles 8, 9 and 10) give rise to a conflict with the general rule that in Portuguese law prohibits the pactum comissorium.

The answer to this question must take into account the conditions laid down in the Convention to the use of such remedies: any remedy shall be exercised “in a commercially reasonable manner” (Article 8(3)) and shall be noticed in writing and in advance to the “interested persons” (Article 8(4)).

On the other hand, it is also necessary to consider the effects of the collecting or receiving of any sums by the chargee as a result of the exercise of such remedies: the sum collected or received by the chargee shall be applied towards discharge of the amount of the secured obligations (Article 8(5)) and where the sums collected or received by the chargee exceed the amount secured by the security interest and any reasonable costs incurred in the exercise of any such remedy, then in principle the chargee shall distribute the surplus among holders of subsequently ranking interests, in order of priority, and pay any remaining balance to the chargor (Article 8(6)).

Equivalent conditions are laid down in Articles 9 and 10 in what concerns the remedies available to a conditional seller or a lessor.

Moreover, the Convention qualifies some of these provisions as mandatory (Article 15).

And, definitely, Contracting States are allowed to declare under Article 54(2) of the Convention that any remedy available to the creditor may be exercised only with leave of the court.

It is therefore sure that in such cases the court controls the valuation of the objects, the allocation of those objects to the guaranteed obligation and the distribution of any surplus obtained by the creditor.[8]

  • [1] Even if the credit guaranteed by a mortgage is not yet due (Articles 788(7) and 791(3) of thePortuguese Civil Procedure Code, Codigo de Processo Civil, hereafter CPC).
  • [2] According to the Portuguese Insolvency and Recovery Code (Codigo da Insolvencia e daRecuperagao de Empresas, approved by Decreto-Lei 53/2004, 18.03.2004, as amended, hereafterCIRE), the declaration of insolvency determines the maturity of all the obligations of the debtor,which are not subject to a condition precedent (Article 91(1)).
  • [3] Articles 752(1) and 788(1) CPC and Article 128(1)(c) CIRE.
  • [4] The law also forbids the prohibition of selling the mortgaged objects - Article 695 CC.
  • [5] About pactum comissorium: J. Vieira Gomes, “Sobre o ambito da proibigao do pacto comissorio,o pacto comissorio autonomo e o pacto marciano - Acordao do STJ de 30.1.2003, Rec. 3896/02”,Cadernos de direito privado, No. 8, 2004, p. 57 ff; I. Andrade Matos, O pacto comissorio.Contributo para o estudo do ambito da sua proibigao, Coimbra, 2006, in special, p. 107 ff.
  • [6] Article 11 of Decreto-Lei 105/2004, as amended by Decreto-Lei 85/2011, 29.06.2011, under theepigraph “Enforcement of contacts of financial pledge”: “(1) In the context of financial pledge, thebeneficiary of the collateral may enforce it, by appropriating the object provided as financial collateral, through sale or taking its possession, either setting-off its value or applying it to pay theguaranteed financial obligations: (a) if the parties have so agreed; (b) if the parties have agreed onthe valuation of the financial instruments and of the credits over third parties provided as collateral.(2) The beneficiary of the collateral is obliged to reimburse the guarantor of an amount corresponding to the difference between the value of the object of the collateral and the value of the guaranteed financial obligations. (3) The provision of sub-paragraph (b) of paragraph (1) shall not affectany legal obligation under which the realisation or valuation of financial collateral and the calculation of the relevant financial obligations must be conducted in a commercially reasonable manner[•••].”
  • [7] In this sense, STJ, 16.03.2011.
  • [8] V.P. Neves, A cessao de creditos em garantia, p. 499.
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