The pledged stock of boats: a practical guarantee for dealers and financial institutions

A pledge without transfer of stored goods or raw materials is one of the many real guarantees that a debtor can grant by making use of the moveable property in the debtor’s possession, specifically from the stocks in the debtor’s business. This is stated in Article 1.2 of the 16 December 1954 Act on Chattel Mortgage and Pledge without Transfer of Possession (the CMPTP), and is known colloquially as the pledge of stock.

In line with the above, from the notable Resolution on 12 March 2001 by the General Directorate of Registers and Notaries (DGRN), in consultation with ASNEF, it has been accepted in legal practice that motor vehicles — and now recreational boats —, which are stored by dealers as stock (before putting them into circulation) are considered to be goods for the purpose of the CMPTP, and may therefore constitute a pledge of stock to guarantee the obligations of the dealer.

Even though in practice stored goods and raw materials are an indeterminate group of consumables, recreational boats are perfectly individualized goods which, strictly speaking, do not fall within that concept.

The main reason that the DGRN adopted this position is due to the need to ease and speed up economic circulation and, in particular, contracting. Through the pledged stock of boats, corresponding dealers have easier access to credit, the ability to purchase goods for their business and the ability to use their own acquired property or assets as security for carrying out their duties, so that if the finance granted (usually a loan or credit) is not returned, the financial or credit institution can recover the credit against the financed goods.

It is important to note that the pledged stock of boats against other guarantees offers both parties to a contract, the financial institution or creditor and the debtor or boat dealer, a practical and flexible solution.

On the one hand, unlike an ordinary pledge, with a pledge in stock, the financial institution does not have to acquire actual possession of the boats or hold them as security against the debtor, allowing the latter to retain possession of the boats. The opposite situation greatly hinders the dealer from continuing with its business and marketing boats to the general public.

At the same time, by means of this model, any boat financed under the respective loan or line of credit automatically included in the stock of boats is allowed, and therefore burdened by the pledge, and affects the implementation of the obligation without having to provide a new guarantee for each boat that will be funded, unlike what happens in other areas such as a naval mortgage.

In regards to the requirements for its creation, validity and effectiveness, the pledge in stock of boats must be formalized in a public document — in writing or executed before a notary — and then registered in the Property Registry where the boats are deposited by the dealer or debtor.

Once the above requirements have been met, the pledge in stock gives the creditor the prerogatives of real guarantees, providing the creditor with a privileged or preferential credit with respect to the pledged assets when executing them and satisfying their credit, to the extent of the value thereof. This is in the case of bankruptcy of the debtor.

In any case, on the creditor’s behalf, it is always appropriate to adopt certain additional measures to ensure the effectiveness of the pledge in stock and avoid problems that arise from uncertainty of the assets that comprise the stock or sudden and unexpected withdrawal from it.

In this regard, it is common that pledge in stock contracts for boats include the ability of the creditor to monitor the sales of the respective boats that make up the stock pledged by the dealer (among others, by retaining on behalf of the creditor the documentation relating to the boats until it is sold, when the amount of the related debt is repaid immediately). It is also standard practice to include clauses providing the creditor with the right to carry out checks on stock periodically or the obligation for concessionaries to declare the stock status before a notary at a given point in time.

In light of the above, the pledge in stock of boats — especially in financing a considerable volume of boats — is shown as a guarantee which is certainly functional and efficient both in terms of time and costs for both contractual parties. Moreover, so long as the relevant mechanisms to determine and control the stock of boats held by a dealer are adopted at all times, we can speak of an effective tool to properly protect the interests of a creditor.are adopted to at all times determine and control the stock of boats held by a dealer, we can speak of an effective tool to properly protect the interests of a creditor.

This article is not considered as legal advice

José María Mesa

With both a Business Administration degree and a Law degree, José María Mesa specializes in company law, civil-commercial contracts and mergers and acquisitions. For any further enquiries please Contact us