Castellán

When the trust was introduced into Uruguayan law in 2003 by Law No. 17,703, it seemed destined to generate a great revolution in our environment, especially in relation to guarantee businesses. It was presented as an attractive alternative to traditional guarantees (real right of mortgage and pledge). In particular, given the difference in the process of executing the assets given as collateral, which takes place entirely in the extrajudicial sphere and according to the process defined by the contracting parties themselves, giving the institute the long-awaited speed that mortgage and pledge increasingly lack.

However, today, more than 12 years after the introduction of the Trust in our legal system, it is evident that it -at least in its guarantee instrument modality- has not been used as much as expected, since when opting for the establishment of a guarantee, many operators continue to choose the mortgage or pledge.

What is and how does the trust in guarantee work?

The guarantee trust is basically a contract by which the debtor transfers one or more assets as collateral to a trust, in order to guarantee a credit with a third party. In it, the debtor instructs the trustee or administrator to execute privately the transferred assets in case of default (either through a sale, auction, tender, or the form provided for in the contract), and with the proceeds satisfy the creditor's credit.

Let's see it with an example: a person requests a loan from an individual or a bank, or acknowledges or refinances a debt contracted previously agreeing to a payment plan, and as collateral for the fulfillment of the assumed obligations, offers one or several assets (real estate, movable property, machinery, credit rights, or a combination of these) agreeing with the creditor that the guarantee will be implemented through a trust contract. Under this contract, a trustee or administrator will be appointed to whom the owner of these assets -who may or may not coincide with the debtor's person- will transfer ownership of them, for a specified period and with precise instructions on how to manage, preserve, and even dispose of them, and the main instruction that in case of the debtor's failure to comply with the obligations assumed in the contract that gives rise to the obligations being guaranteed, proceed to sell privately the trust assets and with the proceeds pay the creditor designated in the contract (beneficiary). On the contrary, in case of compliance in time and form, the assets contributed and transferred to the trustee will return to the patrimony of the contributor.

What are the weaknesses of the instrument?

Operators who refuse to use this instrument mostly justify it by the circumstance that, unlike what happens with the mortgage or pledge, in the trust in guarantee the ownership of the assets to be affected is transferred to the trustee or administrator. That is, the assets given as collateral leave the debtor's personal assets to enter a third party's assets. However, as we will see, this transfer does not have unlimited but limited effects, as it is carried out for a specified period in the contract itself and under the conditions agreed upon by the parties. The assets transferred to the trust in the figure of the trustee constitute an autonomous and affected patrimony uniquely and especially for the fulfillment of the trust. The trust patrimony is not the trustee's personal assets and is not confused with his personal assets, but maintains absolute independence from his personal assets, and therefore during the trust's validity, it remains safe from possible claims by the creditors of the trustee's person, as well as from possible claims by the creditors of the debtors (previous owners of the assets) -for having ceased to be part of their personal assets- and also safe from the creditors of the Beneficiary. In short, the trust property will only respond to the obligations contracted by the trust through the figure of the trustee. This circumstance marks a great difference regarding the right of pursuit of the creditors of the mortgagor or pledge giver, who by keeping the assets in their assets expose them to the action of their creditors.

Another weakness that some operators find refers to the difficulties that arise on some occasions to determine when the default occurs. As seen, the factual assumption that enables the private realization of the transferred asset is precisely the debtor's default, turning the trustee or administrator into a kind of private judge who must qualify the facts and based on them decide whether the default occurred or not. However, this mentioned weakness can be adequately counteracted with a professionally drafted trust contract, with the adoption of all necessary precautions and provisions.

What are the benefits of the trust institute for the creditor?

a) as mentioned, it is a self-liquidating guarantee, in the sense that unlike the mortgage or pledge creditor, this one will not be obliged to resort to the increasingly slow judicial execution procedure. Once the debtor's default is verified in accordance with the regulations in the contract, the trustee will be obliged to deploy all the mechanisms for the economic realization of the asset, in order to pay the creditor

b) it facilitates execution in case of voluntary or necessary debtor's bankruptcy, not being included in the provision of article 61 of Law 18,387 that prohibits promoting executions and suspends executions for a period of one hundred and twenty days from the declaration of bankruptcy

c) by allowing the designation of substitutes for the beneficiaries, in case of the death of a natural person creditor, it may be dispensed with the respective probate procedure if substitute/s have been designated.

What are the benefits of the trust institute for the debtor?

a) it facilitates the efficient realization of the assets transferred as collateral by being carried out entirely outside the judicial sphere, allowing the realization of the guarantee at values normally higher than those of the judicial auction, and therefore a higher return on it

b) it allows the debtor to successfully complete the project that motivates the indebtedness, by not exposing the assets to the action of other creditors

c) it allows, through the same guarantee instrument, to regulate payment to several creditors, bringing together more than one creditor simultaneously or successively guaranteed by the same trust, which facilitates the rotation of creditors and limits the costs that the debtor incurs in constituting new trusts; d) the management acts carried out by the trustee can increase the guarantee constituted with the fruits from its management, which can benefit both the debtor and the creditor.

Costs and tax regime

Contrary to what many may believe, establishing a trust in guarantee is not more expensive than establishing a mortgage, and it may even generate a more accessible fee, since the trust can be granted by a private document with notarized signatures, unlike the mortgage which always requires a public deed. Although the Trust Agreement operates the transfer of the assets given in trust from one patrimony to another, said transfer is exempt from the Property Transfer Tax -generated each time the ownership of a property is transferred-, both at the time of the trust's establishment and its fulfillment or execution.

Final considerations

In short, the trust in guarantee institute constitutes an excellent guarantee, not only because it is a self-manageable guarantee, being this its main distinctive feature compared to traditional guarantees, but also because it contains various benefits for both the debtor and the creditor.

Montevideo, April 5, 2015.