Secured Transactions Law

PURPOSE OF THE LAW. The provisions contained in this Law are intended to increase access to credit by expanding access to goods, rights or shares that may be subject to guarantee by simplifying the constitution, publicity and enforcement thereof. This Law shall be applicable to the constitution, publicity and enforcement of secured transactions on obligations of any nature, present or future, determined or determinable at the time of constitution and enforcement of all types of actions, rights or obligations on corporeal goods, incorporeal goods, commercial chattels, rights over obligations or any other nature on movable property or commercial chattels. CHAPTER II UNITARY SYSTEM OF GUARANTEES ON MOVABLE PROPERTY

CONCEPT OF SECURED TRANSACTION. The secured transactions referred to in this Law may be constituted constructively or by operation of law on one or several specific movable goods, on generic types of movable goods or on all movable property of the guaranteed debtor, whether present or future, corporeal or incorporeal, susceptible to pecuniary valuation at the time of constitution or subsequently, in order to guarantee the fulfillment of one or several present or future obligations regardless of the form of the transaction or who is the owner of the property. The secured transaction shall comprise any transaction whose purpose or effect is to constitute a secured transaction, regardless of its form or nomenclature. The concept of secured transaction includes, among others, those agreements, pacts or clauses commonly used to guarantee obligations with respect to movable property, such as sale with reservation of ownership, trusts in guarantee, floating pledge of commercial establishment or goodwill, guarantees and transfers on accounts receivable, including purchases, assignments in guarantee and leasing (Financial Lease), secured transactions with displacement and any other movable guarantee contemplated in legislation prior to this Law. When other legal provisions make reference to regulations on pledge, civil pledge, commercial pledge, pledge of shares, pledge of credits, agricultural pledge, industrial pledge, mining pledge, pledge of vehicles, global and floating pledge, pledge of aircraft engines, pledge of securities, pledge of trademarks, patents and other rights of analogous nature, vehicle pledge, mortgage on vessels, mortgage on aircraft, mortgage of fishing vessels, mining mortgage, mortgage of enterprise and other similar ones, they shall be understood to refer to the secured transaction regulated by this Law. Tax liens and judicial liens shall be governed, solely for purposes of their publicity, registration and priority, by the provisions of Titles III, IV and V of this Law. CHAPTER III COLLATERAL, SECURED OBLIGATIONS AND DEFINITIONS

COLLATERAL. To guarantee present or future obligations, any natural or legal person may, in addition to cases contemplated in other laws, constitute secured transactions in favor of another natural or legal person on:

• 1)

  Corporeal goods;

• 2)

  Incorporeal goods;

• 3)

  Rights over future goods on which the guaranteed debtor shall acquire rights after the constitution of the secured transaction;

• 4)

  Fungible goods;

• 5)

  Intellectual property rights;

• 6)

  Deposits in bank accounts and investment accounts, as defined in numeral 9) of Article 5 of this Law;

• 7)

  Individual elements of the commercial enterprise;

• 8)

  Shares and partnership interests representative of the capital of commercial corporations; and,

• 9)

  In general any other good, right, contract or action that the parties attribute economic value to, are susceptible to alienation, as established in Article 2057 of the Civil Code, and is not prohibited by law; including, among others, derivative or attributable goods as defined in numeral 3) of Article 5 of this Law.

SECURED OBLIGATIONS. The secured obligations, in addition to the principal debt, may consist of:

• 1)

  The ordinary and default interest generated by the principal sum of the secured obligation, calculated according to what is established in the guarantee or credit contract; in case there is no provision regarding default interest, it shall be calculated according to the average active rate of the financial system on the date of default;

• 2)

  The commissions that must be paid to the guaranteed creditor, as the same are determined in the guarantee or credit contract;

• 3)

  The expenses reasonably incurred by the guaranteed creditor for the custody and safekeeping of the collateral;

• 4)

  The expenses reasonably incurred by the guaranteed creditor by reason of the necessary acts to carry out the enforcement of the guarantee;

• 5)

  Damages and prejudices caused by the breach of the secured obligation of those quantified judicially, or by virtue of an arbitral award or through a settlement contract; and,

• 6)

  The conventional liquidation of damages and prejudices when it has been agreed upon.

DEFINITIONS. For purposes of this Law, the following terms are understood as:

• 1)

  GUARANTEED CREDITOR: The person in whose favor a secured transaction is constituted, with or without displacement, whether for its own benefit or for the benefit of a third party. The term guaranteed creditor also includes, among others, the seller with reservation of ownership of goods in sale or consignment, the lessor of movable property in any lease of more than one year, the lessor in any leasing (financial lease) regardless of its duration and the assignee, acquirer or factor of accounts receivable;

• 2)

  AGRICULTURAL GOODS AND LIVESTOCK: Includes present or future crops, sowings and plantations and harvests, as well as existing livestock and livestock to be born, and the products derived from these, such as milk, cheese, eggs, fruits and vegetables;

• 3)

  DERIVATIVE OR ATTRIBUTABLE GOODS: Those that can be identified as derived from the originally encumbered goods, such as fruits, new goods, including, among others, cash and deposits in bank accounts and investment accounts, that result from the alienation, transformation or substitution of the movable property in guarantee of the original obligation, regardless of the number and sequence of these alienations, transformations or substitutions. These also include negotiated securities and insurance indemnification that protect the collateral, as well as any other right of indemnification for loss, damages and prejudices caused to the collateral and dividend payments;

• 4)

  COLLATERAL: All those goods referred to in Article 3 of this Law;

• 5)

  GOODS BY INCORPORATION OR DESTINATION: Those goods that are or are intended to be part of a real estate property either by their incorporation or destination, that are used or specifically destined in or for the real estate and that can be separated without physical detriment to the real estate or to the movable property itself. These movable goods include the goods enumerated in Article 604 of the Civil Code, but do not include those movable goods that are part of the inventory of the guaranteed debtor;

• 6)

  BUYER OR ACQUIRER IN THE ORDINARY COURSE OF MERCANTILE OPERATIONS: Is a third party acting in good faith that without knowledge that its transaction is carried out on corporeal goods subject to a secured transaction whose transfer is prohibited by the guaranteed creditor, purchases or takes possession of them from a guaranteed debtor dedicated to trading goods of the same type as the goods subject to the secured transaction, within the normal course of their commercial operations. Excepted from this category shall be relatives of the guaranteed debtor within any degree of kinship by consanguinity or affinity, as established in Articles 21 and following of the Civil Code, its partners, its legal representatives, its officers or employees and any other person who has a labor or investment relationship with the same;

• 7)

  CONTROL: It is understood that control exists with respect to the right to payment of deposits in bank accounts or with respect to the right to securities deposited in investment accounts when: a) Automatically at the time of constitution of the secured transaction when the depository institution is the guaranteed creditor, or when the intermediary that maintains the investment account is the guaranteed creditor; and, b) If the depository institution or intermediary have executed a control contract with the guaranteed debtor and the guaranteed creditor. Control shall be effective even when the guaranteed debtor retains the right to dispose of the deposits or securities. The control contract is an agreement between the depository institution or intermediary, the guaranteed debtor and the guaranteed creditor, according to which, the Depository institution or intermediary accept to comply with the instructions of the guaranteed creditor with respect to the payment of the funds deposited in the bank account or with respect to the disposition of the securities deposited in the investment account without requiring the subsequent consent of the guaranteed debtor.

• 8)

  CREDITS: The contractual or non-contractual right of the guaranteed debtor to claim or receive payment of a sum of money from a third party, currently owed or that may be owed in the future including, among others, accounts receivable and royalties;

• 9)

  BANK ACCOUNTS AND INVESTMENT ACCOUNTS: Bank account refers to an account maintained by a depository institution in which funds can be deposited or credited. Investment account refers to an account maintained by an intermediary in which securities can be deposited or credited;

• 10)

  GUARANTEED DEBTOR: The person, whether the principal debtor or a third party, who constitutes a secured transaction in accordance with this Law. The term guaranteed debtor also includes, among others, the buyer with reservation of ownership on goods in sale or consignment, the lessee of movable property in any lease of more than one (1) year, the lessee in any leasing (financial lease) regardless of its duration and the assignee, acquirer or factor of accounts receivable;

• 11)

  SPECIFIC PURCHASE GUARANTEE (SPG): Is a guarantee on specific corporeal goods, that guarantees the obligation to pay the purchase price or acquisition costs in favor of the seller or of whoever provides the necessary funds or financing for the purchase or acquisition. This guarantee may, under certain specific conditions, have priority over other guaranteed creditors in favor of whom the guaranteed debtor has granted a secured transaction on the same type of goods. The debtor may waive his right to create this type of guarantee. It may also agree with its guaranteed creditors that such guarantees shall not be constituted;

• 12)

  INVENTORY: Refers to one or more movable goods in possession of a person for sale or lease in the ordinary course of that person's commercial activity. Inventory does not include movable goods in possession of a guaranteed debtor for its ordinary use or consumption;

• 13)

  POSSESSION: By possession is understood the legitimate, material or physical apprehension of corporeal goods, and does not refer to fiduciary or constructive possession of corporeal goods. It includes the physical possession of corporeal goods by a person, by his representative, or an employee of that person, or by another third party that physically possesses the corporeal goods for such person;

• 14)

  REGISTRY: The Registry of Secured Transactions;

• 15)

  LEGITIMATE CUSTODY: By legitimate custody is understood having come into possession of the good by legal means or with appearance of legitimacy and not by means of theft;

• 16)

  LEASING: Lease with option to purchase the leased object; and,

• 17)

  FUNGIBLE GOODS: Are things in which every individual of the species is equivalent to another of the same species, and that can be substituted by one another of the same quality and in equal quantity. Things that the contracting parties consider as equivalent are deemed fungible. TITLE II CONSTITUTION OF SECURED TRANSACTIONS CHAPTER I CONSTITUTION

MEANS OF CONSTITUTION. A secured transaction is constituted by contract between the guaranteed debtor and the guaranteed creditor or by operation of law.

POSSESSION AND RIGHT OF POSSESSION OF THE GUARANTEED DEBTOR. Secured transactions may be constituted by whoever has possession, a right to possession or the right to transfer or transmit the same. For purposes of the constitution of secured transactions on movable goods that are not susceptible to being registered in a property registry, the possession of the guaranteed debtor of the good given in guarantee is equivalent to its title.

REGISTRATION IN SPECIAL REGISTRY. When the goods given in guarantee are subject to registration in a special registry, such goods may be given in guarantee by the persons mentioned in Article 7 of this Law and by whoever appears as the owner in such special registry. The secured transaction must be registered in the Registry to establish its priority, without prejudice to the registration that must also correspond in the corresponding special registry.

SECURED TRANSACTION CONTRACT AS EXECUTIVE TITLE. For the extrajudicial enforcement of the secured transaction, the original contract or a summarized version of the original contract, signed by the guaranteed debtor, must be registered jointly with the registry form of enforcement of the secured transaction in order to have the character of executive title. For the judicial enforcement of the secured transaction, the original contract together with the registered registry form of enforcement of the secured transaction, with or without documents attached to it, shall have the character of executive title.

REAL RIGHT OVER THE ORIGINAL GUARANTEE AND DERIVATIVE OR ATTRIBUTABLE GOODS. When a secured transaction has been duly constituted in accordance with this Law, the guaranteed creditor shall have the right to be paid from the product of the sale or any other disposition of the collateral, and its derivative or attributable goods. The effects and priority of the secured transaction against third parties shall be established in accordance with the provisions of Titles III and V of this Law.

ELEMENTS OF THE SECURED TRANSACTION CONTRACT. The guarantee contract must be granted in writing and must contain:

• 1)

  The constitution of the secured transaction;

• 2)

  Data and signatures that permit the identification of the contracting parties;

• 3)

  The maximum amount guaranteed by the secured transaction;

• 4)

  The description of the collateral, it being understood that such description may be made generically or specifically;

• 5)

  The express mention that the goods described shall serve as guarantee to the secured obligation;

• 6)

  A generic or specific description of the secured obligations, whether present or future;

• 7)

  The authorization by the guaranteed debtor to the guaranteed creditor to submit the initial registry registration form and subsequent amendments, as provided in Article 43 of this Law; and,

• 8)

  Date of execution.

INFORMATION IN WRITING. When this Law requires that information be in writing, that requirement shall be satisfied with a data message if the information contained therein is accessible in a form that can be used for its subsequent consultation. The document where the secured transaction is recorded may be documented through any tangible medium or through reliable electronic communication that leaves permanent evidence of the consent of the parties in the constitution of the guarantee. Including, the electronic exchange of data, email, optical media or other similar means in accordance with the applicable rules in this matter taking into account international practice and atypical means of evidence recognized by the State of Honduras through special laws, treaties or international agreements.

SIGNATURE. When this Law requires the signature of a person, that requirement may be satisfied in the case of an electronic data message: 1) If a method is used to identify that person and if that method is reliable to indicate that such person approves the information contained in the data message; and, 2) If that method is reliable for the purposes for which the data message was generated or communicated, in light of all circumstances of the case, including any written agreement between the parties.

EFFECTIVENESS OF UNSECURED GUARANTEE. If the collateral is in the possession of the guaranteed debtor, the contract by which the secured transaction is constituted must be in writing and becomes effective between the parties from the moment of its execution, unless agreed otherwise. With respect to third parties, it shall become effective from the moment of its registration in the Registry. The secured transaction on future goods or to be acquired later shall generate the rights of the guaranteed creditor personal or real with respect to such goods, only from the moment in which the guaranteed debtor acquires such rights in accordance with the provision of Title V of this Law.

COLLATERAL IN THE POSSESSION OF THE GUARANTEED CREDITOR. A secured transaction with displacement on a movable corporeal good becomes effective between parties and against third parties from the moment in which the guaranteed creditor or a third party designated by it obtains possession of the collateral. The priority of the secured transaction against third parties shall be established from the moment of its registration in the Registry. Without in any way limiting the scope of the provisions of the foregoing paragraph, the following secured transactions do not require registration in the Registry to acquire or maintain their priority:

• 1)

  Secured transactions granted in favor of pawn shops or lending institutions on tangible goods with market value less than twenty (20) minimum salaries on the upper scale;

• 2)

  Secured transactions on representative documents of goods in warehouse depots or in possession of a carrier;

• 3)

  Secured transactions on securities issued on paper;

• 4)

  Secured transactions on representative documents of negotiable or non-negotiable merchandise issued on paper or in electronic form; and,

• 5)

  Secured transactions on deposits in bank accounts and investment accounts. CHAPTER II RIGHTS AND OBLIGATIONS OF THE PARTIES

RIGHTS AND OBLIGATIONS OF THE DEBTOR OBLIGOR. If the movable security interest is without displacement, the debtor obligor or any person who acquires the goods subject to the security interest, unless otherwise agreed, shall have the right to use and execute collections of accounts receivable in relation to the security goods and their derived or attributable goods in the ordinary course of the debtor obligor's commercial operations. Likewise, the debtor obligor shall have the right to dispose of the security goods in the ordinary course of the debtor obligor's commercial operations, when these are part of the debtor obligor's inventory. Such rights shall be subject to the following obligations:

• 1)

  The obligation to suspend the exercise of such right when the secured creditor notifies the debtor obligor of its intention to proceed with the execution of the movable security interest over the goods in guarantee under the terms of this Law;

• 2)

  The obligation to prevent losses and deterioration of the rights and other movable property subject to the movable security interest and to do everything necessary for such purpose;

• 3)

  The obligation to permit the secured creditor to inspect the goods in guarantee to verify their quantity, quality, and state of preservation;

• 4)

  When agreed upon, the obligation to contract appropriate insurance on the goods in guarantee against destruction, loss, or damage in favor of the secured creditor; if such agreement does not exist, the debtor obligor assumes the risk of loss or damage of the security goods; and,

• 5)

  The obligation to pay all costs, expenses, and taxes related to the security goods.

RIGHTS AND OBLIGATIONS OF THE SECURED CREDITOR. The secured creditor shall have the right to:

• 1)

  Exercise reasonable care in the custody and preservation of the goods in guarantee. If the security goods are in its possession, reasonable care implies the obligation to take the necessary measures to preserve the value of the guarantee and the rights derived from it;

• 2)

  Keep the security goods that are in its possession in such a manner that they remain identifiable, but in the case that these are fungible goods, it must maintain the same quantity and quality;

• 3)

  The use of the security goods in its possession only within the scope contemplated in the security agreement or according to Article 2082 of the Civil Code;

• 4)

  Collect from the debtor obligor any maintenance expense;

• 5)

  At the request of the debtor obligor, the secured creditor shall inform in writing third parties regarding the amount pending payment of the secured credit and the description of the goods covered by the movable security interest. The debtor obligor may request information once every three (3) months at no cost; and,

• 6)

  When all the obligations of the debtor obligor to the secured creditor are completely paid, the debtor obligor shall have the right to request that the secured creditor:

  • a)

    Return possession of the security goods, within the scope contemplated in the security agreement, or according to Articles 2083, 2084, and 2085 of the Civil Code;

  • b)

    Cancel the control;

  • c)

    Notify the debtor of the assigned credit of the fulfillment of the entire obligation, freeing the debtor from any obligation to the secured creditor; and, d) Present the registral form for termination of the movable security interest. TITLE III PUBLICITY CHAPTER I GENERAL RULES

ENFORCEABILITY. The rights conferred by the movable security interest shall be enforceable against third parties only when publicity is given to the movable security interest, except those enumerated in Article 15 and other provisions of this Law. Publicity of a movable security interest may be given by registration under this Title and Titles II and IV or by delivery of possession or control of the goods in guarantee to the secured creditor or to a third party designated by the secured creditor in accordance with this Title. The priority of movable security interests shall be determined solely through registration in the Registry.

SPECIFIC PURCHASE SECURITY INTEREST (SPSI). A specific purchase security interest shall be publicized by means of the registration of an initial registral inscription form that makes reference to the specific and special character of the security interest and that describes the goods burdened by it. In the event that the security goods are part of the debtor obligor's inventory, the secured creditor in addition to registering the movable security interest, must notify in writing or in accordance with Article 12 of this Law, to the secured creditors with registrations on goods of the same type as the security goods burdened with the specific purchase movable security interest. For this security interest to be validly and legitimately constituted, the debtor must not renounce the right to create it or have agreed with creditors that it will not create it. The registration and notifications must be made before the debtor obligor enters into possession of the security interest. The notification shall be effective for a term of five (5) years. CHAPTER II CREDITS

SCOPE OF APPLICATION. The provisions of this Law relating to movable security interests on credits also apply to any kind of assignment of credits. Even if the assignment is not in guarantee, it must be complied with, insofar as applicable, with the rules on constitution and publicity established in this Law; likewise, the rules of priority established in this Law must be complied with.

EFFECTIVENESS OF ASSIGNMENTS. An assignment shall be effective between the debtor obligor and the secured creditor from the moment of the assignment agreement in guarantee and the effectiveness and priority of the right of a secured creditor shall not disappear, by reason of an assignment of more than one credit, of future credits, of a part of a credit of undivided credits on the credit, if such credits are described: 1) Individually as credits subject to the assignment; or, 2) In any other manner, as long as they are identifiable as credits subject to the assignment at the moment of the assignment or, in the case of future credits, at the moment the underlying contract is executed. Unless otherwise agreed, the assignment of one or more future credits shall take effect without requiring a new act of transmission for each credit.

GUARANTEES GIVEN IN FAVOR OF THE SECURED CREDITOR. Unless the debtor obligor and the secured creditor have agreed otherwise, the debtor obligor guarantees to the secured creditor that at the moment of execution of the assignment agreement:

• 1)

  It has the right to assign the credit;

• 2)

  It has not previously assigned the credit to another assignee or secured creditor; and,

• 3)

  The debtor of the assigned or burdened credit cannot and will not be able to raise exceptions or rights of setoff. Unless the debtor obligor and the secured creditor have agreed otherwise, the debtor obligor does not guarantee that the debtor of the assigned or burdened credit has or will have financial solvency to effect payment.

PUBLICITY AND PRIORITY OF THE SECURITY INTEREST ON CREDITS. Publicity is given to a movable security interest granted by a debtor obligor on credits through its registral registration and shall be effective against the debtor obligor and third parties without the need for any personal notification to the debtor of the assigned credit. The order of priority established in Title V of this Law is preserved.

INVALIDITY OF THE PROHIBITION TO ASSIGN THE MOVABLE SECURITY INTEREST. A movable security interest on a credit is valid regardless of any agreement between the debtor of the assigned credit and the debtor obligor that seeks to limit the assignment or transmission of the same credit. Nothing in this Article affects the liability of the debtor obligor to the debtor of the assigned credit for damages caused by the breach of such agreement.

INALTERABILITY OF THE UNDERLYING LEGAL RELATIONSHIP. A movable security interest granted on credits cannot modify the underlying legal relationship nor make the obligations of the debtor of the assigned or burdened credit more burdensome without the consent of such debtor. However, in the payment instructions, the name of the person, the address, or the account to which the debtor of the assigned or burdened credit must make the payment may be changed.

PAYMENT OF THE ASSIGNED OR BURDENED CREDIT. The debtor of the assigned or burdened credit may extinguish its obligation by paying the debtor obligor or the assignee as the case may be. Any balance due to the secured creditor or to the assignor from the moment the debtor of the assigned credit receives notice of the assignment or burden shall be paid to whoever is indicated in the first notice received. The notice of assignment must indicate which credits have been assigned, the name of the secured creditor, and the terms and conditions of payment. In relation to the notice, if the debtor of the assigned credit has designated a contractual address, such address must be used to effect the notice. In the event that the debtor of the assigned credit has not designated a contractual address or in the event that the information regarding the contractual address is incorrect or non-existent in which the secured creditor can proceed, once such circumstance is verified, to the notice through the publication of three (3) successive notices in a newspaper of national circulation or in a mass media outlet with national coverage of which there is verifiable record. The debtor of the assigned credit shall be understood as notified one day after the last publication.

REASONABLE PROOF OF THE SECURITY INTEREST. The debtor of the assigned credit may request from the secured creditor reasonable proof that the movable security interest has been constituted, and if such reasonable proof is not presented within a reasonable time prior to the date on which the payment must be made, the debtor of the assigned credit may fulfill its obligation by paying the debtor obligor or by consigning the obligation. By reasonable proof of the assignment shall be understood any written document signed by the debtor obligor or any equivalent proof, in which it is indicated that the credits have been assigned.

EXCEPTIONS AVAILABLE TO THE DEBTOR OF THE CREDIT. All real and personal exceptions resulting from the original contract, from any other contract or legal act that was part of the same transaction are available to the debtor of the assigned or burdened credit against the secured creditor. The debtor of the assigned or burdened credit may raise any other right of setoff against the secured creditor, provided that the debtor of the assigned credit was legitimated to employ it at the moment the debtor received the notice. The debtor of the assigned or burdened credit cannot raise against the secured creditor the exceptions and rights of setoff that the debtor has against the debtor obligor by reason of the breach of the prohibition of assignment clause.

WAIVER OF EXCEPTIONS. The debtor of the assigned credit may rely on the debtor obligor that waives raising, against the secured creditor, exceptions and rights of setoff that the debtor of the assigned credit may raise. Such agreement prevents the debtor of the assigned credit from raising such exceptions and rights of setoff. CHAPTER III NON-MONETARY OBLIGATIONS

PUBLICITY OF THE SECURITY INTEREST ON NON-MONETARY OBLIGATIONS. Publicity is given to a movable security interest on non-monetary obligations through its registral registration.

RIGHT OF NOTIFICATION BY THE SECURED CREDITOR. When the collateral consists of a non-monetary obligation, the secured creditor has the right to notify a person obligated to perform such obligation or to execute it for the creditor's benefit to the extent permitted by the nature thereof. CHAPTER IV DOCUMENTARY CREDITS OR INTERNATIONAL LETTERS OF CREDIT

SECURITY INTEREST IN THE PAYMENT OF LETTER OF CREDIT FUNDS. The beneficiary may create a security interest in the funds of a letter of credit, once such funds become due by presentation of documents in compliance with the letter of credit requirements, if the issuing or confirming bank accepts or consents to the assignment of such funds. For purposes of its perfection, this security interest shall be enforceable against the issuing or confirming bank and third parties from the date and time such bank gives its acceptance.