All questions

Security and enforcement

In the Portuguese context, financing of new assets usually follows the traditional pattern of credit against a security interest over the asset. Accordingly, security plays a key role in both the negotiation and the execution of the asset financing agreement. The most common security required by finance providers is, unquestionably, a mortgage over the asset, but the security package may also include other instruments such as pledge over shares of ship-owing companies, pledge over bank accounts, assignment of earnings or receivables and retention title instruments. Currently, Portugal is not a party to any convention regarding securities over aviation, rail and shipping assets (such as the Convention for the Unification of Certain Rules relating to Maritime Liens and Mortgages, adopted in Brussels on 10 April 1926, and the Convention relating to Maritime Liens and Mortgages, adopted in Geneva on 6 May 1993).

i SecurityShipping

Portuguese law provides a specific and mandatory framework on security interests over vessels that, among other aspects: (1) sets out a list of 15 credits that enjoy a priority-ranking privilege (Article 578 of the Commercial Code); and (2) establishes that the vessel's constructor and the maritime rescuer are granted the right to retain the vessel as security for the payment of the credits arising from its construction and the maritime salvage (Article 25 of Decree-Law 201/98, of 10 July (DL 201/98) and Article 14 of Decree-Law 203/98, of 10 July). This mandatory framework prevails over any provisions set forth in the asset financing agreement and its respective security package.

According to that special framework, namely the provisions of the Commercial Code, there is a special regime for mortgages over vessels that differs from the mortgage's general framework set out in the Civil Code. In fact, the mortgagee is granted a priority-ranking privilege, which prevails (even in the event of the mortgagor's insolvency) over: (1) the priority-ranking privileges provided for by the Civil Code and any other statutes (Article 574 of the Commercial Code); and (2) rights of retention subsequently constituted (Article 750 of the Civil Code). In this regard, the recent Decree-Law 92/2018, of 13 November (DL 92/2018) introduced some reforms to the regime for mortgages over vessels. On the one hand, parties are now allowed to designate the law applicable to the mortgage, which must be indicated at the time of registration, together with the handing over of a copy of the relevant legislation. On the other hand, Article 21, No. 6 sets forth that the purchaser of mortgaged assets can only exercise the right to extinguish the mortgage (provided for in article 721 of the Civil Code) if the exercise of this right guarantees the mortgagee full payment of all the rights and charges arising from the mortgage agreement. Notwithstanding this, still pursuant to the above-mentioned special regime, court expenses and monetary consideration for maritime salvage are ranked as having priority over the mortgagee's credit (Article 578(1)(2) of the Commercial Code).

Aviation and rail

Portuguese law does not grant specific priority-ranking privileges to entities that finance the acquisition of aviation or rail assets. As such, the lender's position − if a security interest is constituted over the aircraft or the rolling stock − results from the general framework set out in the Civil Code.

In fact, Portuguese law only provides the Portuguese state, the autonomous region of the Azores and the airports' managing body with a priority-ranking privilege over the aircraft as security for the payment of: (1) fees due for the operation of airline companies in Portuguese airports; and (2) administrative fines imposed for infringement of the framework governing non-scheduled transport services (Article 46 of Decree-Law 254/2012 of 28 November, Article 30 of Regional Legislative Decree 35/2002/A of 21 November and Article 38 of Decree-Law 19/82 of 28 January).

According to general rules, the mortgagee's credits shall be ranked as having priority over: (1) the credits secured by a priority-ranking privilege that has been subsequently constituted; and (2) the credits held by entities that enjoy a right to retain the aircraft (Articles 686, 750 and 758 of the Civil Code).

In practice, aircraft are usually acquired under a financial lease agreement. Generally, the parties enter into a sale and leaseback arrangement: the airline operator negotiates the construction and acquisition of the asset, purchases it and oversees the import procedure; then, registers the aircraft and sells it to the financial lessor. Subsequently, the operator is granted the use of the asset under a financial lease agreement (the term of which may not exceed 30 years). In many cases, the financing is granted by several financial lessors (acting as a consortium), as a means to mitigate the economic risk of the transaction.

ii Enforcement

A secured creditor may enforce security by means of judicial action filed against the debtor, which may encompass an interim measure (namely, an arrest), a main declaratory action and, finally, an enforcement procedure in which the asset is sold through the court. The merits of the dispute may be decided in accordance with the laws of another jurisdiction if private international law leads to the exclusion of Portuguese law (e.g., in the event that the parties have validly chosen the law of another jurisdiction to govern the financing or the security relationship).

It is generally stated that, after the breach of the contract, the mortgagee may take possession over the secured asset without filing a claim if the parties have entered into an agreement whereby the mortgagee undertakes: (1) to request an updated valuation of the asset (in accordance with a procedure defined by the parties); and (2) to repay the amount corresponding to the difference between the asset's value and the amount of the debt. In fact, it is said that the rules prohibiting self-enforcement only apply if the procedure is not agreed with the mortgagor and may not be controlled by this entity (otherwise, their rights are not jeopardised).

iii Arrest and judicial saleShipping

Portugal has ratified the Convention for the Unification of Certain Rules relating to the Arrest of Sea-going Ships, adopted in Brussels on 10 May 1952 (the Brussels Convention). The arrest of a vessel is governed by Brussels Convention whenever: (1) the claimant holds a maritime claim pursuant to Article 1 of the Brussels Convention (namely a credit secured by a mortgage); and (2) the vessel is present in Portugal and flying the flag of a contracting state. The nationality or the address of the owner of the vessel or its domicile is thus irrelevant.

The Brussels Convention can only be applied when at least one of two elements (the flag of the vessel or the domicile of the applicant for the arrest) does not have a connection with the Portuguese jurisdiction (Article 8(4)).

The Brussels Convention regulates: (1) the arrest of the ship to which the credit refers (offending ship), when the debtor is the owner or the charterer or whenever a third party is a debtor of a maritime credit related to that ship; and (2) the arrest of another ship (sister ship) belonging to the person who, on the date of the constitution of the credit, is the owner or the charterer of the ship to which the credit refers, or debtor of a maritime credit, unless the injunction seeks coercive compliance regarding the credits indicated in Article 1(1)(o)(p) or (q) of the Brussels Convention.

For a vessel to be arrested under this international instrument, a mere claim of the right of maritime credit suffices; it is not necessary for the claimant to present evidence for the procedure, nor to allege and prove the risk of the loss of the guarantee represented by the asset (periculum in mora) (Articles 3 and 5 of the Brussels Convention).

If the case does not fall within the scope of the Brussels Convention, the Portuguese Civil Procedure Code (CPC) will be applicable. In this circumstance:

  1. the claimant must allege and present evidence of the relevant facts, including the credit entitlement and the grounds for granting the interim measure (fumus boni iuris), the risk of losing the security and the admissibility of attaching the vessel (Articles 365(1), 368(1), 391(1), 392(1) and 394 of the CPC);
  2. if the legal requirements are met, the arrest is declared by the court without hearing the defendant (Article 393(1) of the CPC); and
  3. the vessel may be arrested even if it is undertaking a journey (Article 9(1) of DL 201/98).

The Brussels Convention and the CPC set out similar provisions:

  1. the claimant may request the arrest even if it does not enjoy any security interest (mortgage) over the vessel;
  2. other ships owned by the debtor may be arrested, even if they have not been given as security; and
  3. the claimant may be liable for all damages arising out of the arrest in the event that the measure is deemed unjustified (this liability shall be governed by the Portuguese internal rules).

If the arrest is granted, the asset is judicially seized and physically apprehended. Notwithstanding, the mortgagee may request the court that the vessel continues to operate until its judicial sale, if the mortgagor expressly agrees or, if said agreement is obtained, by providing an adequate guarantee (Articles 769 and 770 of the CPC).

Following the arrest decision, the claimant must file a main declaratory action within 30 days to obtain an enforceable decision regarding its credit and the respective security.

After obtaining a favourable ruling in the main proceedings, the claimant has to file an enforcement proceeding to judicially sell the vessel. The judicial sale is carried out by an enforcement agent, in accordance with the rules set out in the CPC that sets forth several sale methods (sealed bids, public auction, private negotiation). The vessel is sold free from any charges or encumbrances and normally 'as is'.

If the debtor is insolvent, the sale of the asset is governed by the Insolvency Code, as any other asset seized for the insolvency estate.

Aviation

In case the aircraft was acquired under a financial lease agreement, Article 21 of Decree-Law 149/95, of 24 June, entitles the financial lessor to make a request to the court for the immediate apprehension and restitution of the leased asset in the event of termination of the financial lease agreement (due, among other grounds, to an event of default attributable to the financial lessee).

The granting of the interim measure depends on:

  1. the termination of the agreement having been declared by the financial lessor, by serving a written notice to the counterparty;
  2. the registration of the agreement having been cancelled; and
  3. the court considering proved − prima facie − the defaulting event, the non-delivery of the asset and the termination of the agreement.

Once the apprehension is ordered, the financial lessor is entitled to grant a third party the use of the asset, namely by entering into a sale and purchase, lease or financial lease agreement.

If the aircraft is owned by the airline company, judicial action (declaratory action or enforcement procedure) has to be filed to collect the debt (through judicial sale).