Lending and taking security in Brazil: overview

A Q&A guide to lending and taking security in Brazil. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security and guarantees. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Lending and taking security in country Q&A tool.

This article is part of the global guide to finance. For a full list of contents visit www.practicallaw.com/finance-guide.

Marina Anselmo Schneider and Bruno Tuca, Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados
Contents

Overview of the lending market

1. What have been the main trends and important developments in the lending market in your jurisdiction in the last 12 months?

On 7 October 2014, the federal government enacted Provisional Measure No. 656, creating the Real Estate Secured Bills (Letras Imobiliárias Garantidas (LIG)), the Brazilian version of the covered bond. The Provisional Measures were converted into Law No. 13,097, of 19 January 2015 (Law 13,097).

The creation of the LIG is part of the Ministry of Finance’s previously announced measures to promote the housing market and promote the offer of credit in the financial markets.

The LIG has similar features to the European version of the covered bond, which typically has all of the following characteristics:

  • Is a security issued exclusively by financial institutions.

  • Is collaterised by a pool of assets composed mainly by real estate credit rights.

  • Provides its holders with the typical dual recourse mechanism that is intrinsic to this type of bond (that is, investors will have unlimited and exclusive recourse to the cover pool at the same time, and will be considered a pari passu creditor in relation to all senior unsecured creditors of the issuer).

Law 13,097 brought some innovations to the LIG in comparison to covered bonds in other countries, including the:

  • Possibility of the LIG being backed by a percentage of governmental-issued securities (Títulos do Tesouro Nacional) or derivative transactions.

  • Non-existence of a third party to manage the pool of assets related to the LIG.

In addition, Law 13,097 provided that for a real estate credit to be eligible to back an LIG it must either:

  • Be guaranteed by a mortgage or real state fiduciary assignment (alienação fiduciária de imóvel see Question 2.

  • Arises from a real estate project that is legally separated from the assets of the developer of the project (as provided by Law No. 4,591/64).

There are several aspects of the LIG that are pending further regulation by the National Monetary Council (CMN) and until such regulation is enacted, no issuance is able to occur.

The Brazilian capital market has seen a continued trend in connection with the securitisation of agribusiness commodities. The certificate of agribusiness receivables (CRA) is a registered and freely-traded debt security backed by agribusiness credit rights. These credit rights arise from financing operations or loans related to agricultural production, trading, processing or industrialisation of products, machinery or equipment, all of which are employed in agricultural and animal husbandry production. CRA are issued exclusively by securitisation companies, which consist of legal entities registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM), whose sole corporate purpose is the acquisition of agribusiness credit rights for the issuance of CRA.

The market has been creative when it comes to the structures related to the securitisation of agribusiness receivables. As a result, CRA has become more attractive to companies of varied sectors within the agribusiness industry, such as paper, sugar, alcohol (ethanol), fertiliser or even crops protection products (defensivos agrícolas).

 

Forms of security over assets

Real estate

2. What is considered real estate in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)?

Real estate

Real estate (or immovable property) is considered to be land and anything attached to it, whether naturally or artificially (for example, edifices), as well as any security interests created over real estate.

Common forms of security

The most common forms of security interest that can be granted over immovable property are:

  • Mortgage. Under Brazilian law, a mortgage creates a lien over a real estate property and its accessories, which encompasses everything that is incorporated into the soil (such as trees, founts and seeds), as well as everything that the owner intentionally maintains on the real estate property for its industrial exploitation (including machines and equipment), comfort and/or improvement, provided that such goods fall within the definition of immovable assets under Brazilian law (assets that cannot be moved from the real estate property without prejudice to their original structure).

  • Fiduciary transfer (real estate fiduciary transfer). Consists of the provisional transfer of ownership of an asset by a debtor to its creditor, as a guarantee for the payment of the amounts due. After the payment of the guaranteed obligations, the debtor recovers the ownership of the asset or the real estate property, as applicable.

Formalities

A mortgage must be created in writing by a private or public deed (a private deed is admissible for mortgages involving low amounts). It must contain information relating to the amount, maturity and interest rate (if applicable) of the underlying obligation and a description (including particulars) of the real estate property.

A real estate fiduciary transfer must:

  • Be created in writing.

  • Contain information regarding the amount, maturity and interest rate (if applicable) of the underlying obligation and a description (including particulars) of the collateral.

  • Describe the method of extrajudicial enforcement of the security in case this becomes necessary (see Question 20).

  • Give a valuation of the real estate, which will be the minimum value of the real estate for auction purposes if enforcement takes place.

Both a mortgage and a real estate fiduciary transfer are perfected by registration with the Real Estate Registry of the place where the relevant real estate is located.

Tangible movable property

3. What is considered tangible movable property in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected?

Tangible movable property

Movable property is considered to be any asset capable of being moved, whether of its own accord or by someone else, while undergoing no change in its substance or in its socio-economic purpose. It includes security interests created over such assets.

Common forms of security

The following are the most common forms of security interests that can be granted over movable property:

  • Pledge. This involves creating a security interest over personal property and, except for certain circumstances set out in law (see below), it requires the transfer of possession of the pledged asset to the pledgee. Under Brazilian law (Brazilian Civil Code), there are different types of pledges, which vary depending on the type of movable asset that is being pledged:

    • Rural pledge. The goods being pledged consist of, among others listed in the Brazilian Civil Code, agricultural machinery, crops to be harvested, fruits in warehouses, charcoal or animals used in the daily labour of the agricultural establishment;

    • Industrial or commercial pledge. The goods being pledged consist of: equipment and machinery used in industrial plants or commercial establishments such as hotels, and goods deposited in warehouses for subsequent commercialisation;

    • Pledge of rights or securities. The goods being pledged consist of intangible assets, for example shares or quotas of legal entities, receivables, copyrights and securities, such as debentures;

    • Vehicles pledge: The goods being pledged consist of any type of vehicles;

    • Legal pledge. This pledge arises by law and takes effect in certain common situations, for example, the luggage of a guest in a hotel is considered pledged for the benefit of the hotel for payment of the room fee and any other debts that the guest may have incurred.

  • Fiduciary property. The provisional transfer of legal title over fungible assets is a mechanism available to guarantee transactions within the financial and capital markets. Such guarantee mechanisms have the effect of transferring to the creditor, title to certain movable assets or to certain rights over movable assets, as the case may be. The provisional transfer of legal title over fungible assets and the provisional assignment of rights over movable assets must be documented by a written agreement and registered with the competent Registry of Deeds and Documents in order to be valid and effective against third parties.

  • Fiduciary transfer as security in financial and capital markets (fiduciary transfer). Title to fungible, movable property is conditionally transferred to a creditor, provided that the relevant, guaranteed obligation has been executed in the context of the financial and capital markets or that it is a tax or social security debt.

(For a fiduciary transfer, there is a risk, untested to date, that a cross-border transaction not involving a Brazilian financial entity, even if the foreign counter-party is a financial institution in its place of incorporation, may be considered by a Brazilian court not to be an agreement executed in the context of the financial market. Consequently, a fiduciary transfer between such parties could be held invalid.)

The pledge has been the most common form of security interest over movable property used in banking and financial transactions, but this is changing rapidly, with the pledge being replaced by the fiduciary transfer.

Formalities

Creation requirements. A pledge, fiduciary property and fiduciary transfer, must:

  • Be created in writing.

  • Be executed by the creditor and debtor (and, preferably, two witnesses to be a reliable enforcement instrument).

  • Contain, at least, information regarding the amount, maturity and interest rate (if applicable) of the underlying obligation, as well as a description (including particulars) of the collateral.

The fiduciary transfer document must also include information concerning any applicable fees, expenses and penalty fines.

Perfection requirements. A pledge, fiduciary property and fiduciary transfer, must be registered with the appropriate Brazilian Public Registry (in most cases, a Registry of Deeds and Documents).

A pledge usually requires physical transfer of the asset from the pledgor to the pledgee (see Question 8). However, certain types of pledge (for example, agricultural or industrial pledges and pledges of vehicles or bonds and notes) may require compliance with other specific requirements in addition to, or instead of, those set out above (see Questions 4 to 7).

There may also be additional requirements in certain circumstances if foreign lenders are involved in a transaction (see Question 25).

Financial instruments

4. What are the most common types of financial instrument over which security is granted in your jurisdiction? What are the most common forms of security granted over those instruments? How are they created and perfected?

Common forms of security

Security over financial instruments can be granted through a pledge or a fiduciary transfer. The most common types of financial instrument over which security is granted are quotas, shares, claims, deposits and receivables.

Formalities

The pledge or fiduciary transfer must satisfy the same legal formalities as a pledge over, and fiduciary transfer of tangible movable property and are subject to the same risks of validity (executed in the context of the financial and capital markets) (see Question 3, Common forms of securities and Formalities).

For a pledge of shares, bonds or notes, however, the pledgor does not need to deliver the documents representing such assets, provided that they are deposited in custody with a bank or other financial institution in the pledgee's name, and that any other formal requirements for the particular pledge are observed. The same rule applies to shares, bonds or notes.

Additionally, pledges or fiduciary transfer of shares and quotas must be registered in the issuer's share records and issuer’s articles of association, respectively.

Claims and receivables

5. What are the most common types of claims and receivables over which security is granted in your jurisdiction? What are the most common forms of security granted over claims and receivables? How are they created and perfected?

Common forms of security

Under Brazilian law, there are no specific types of claims and receivables over which security can be granted (such claims and receivables vary according to the company's corporate purpose, area of activity and business). Security over claims and receivables can be granted through a pledge or fiduciary transfer.

Formalities

The pledge or fiduciary transfer must satisfy the same legal formalities for creation as a pledge or fiduciary transfer over tangible movable property (see Question 3, Formalities).

Registration with the Registry of Deeds and Documents is required, but there are no specific additional perfection requirements for this type of pledge.

Cash deposits

6. What are the most common forms of security over cash deposits? How are they created and perfected?

Common forms of security

Security over cash deposits can be granted through a pledge or fiduciary assignment.

Formalities

The pledge or fiduciary assignment must satisfy the same legal formalities for creation as a pledge or fiduciary transfer over tangible movable property (see Question 3, Formalities). The pledge or fiduciary assignment agreement is executed by the creditor, the bank or other financial institution in which the cash deposits are deposited and the debtor (and, preferably, two witnesses to be a reliable enforcement instrument).

Registration with the Registry of Deeds and Documents is required, but there are no specific additional perfection requirements for this type of security.

Intellectual property

7. What are the most common types of intellectual property over which security is granted in your jurisdiction? What are the most common forms of security granted over intellectual property? How are they created and perfected?

Security over intellectual property can be granted through a pledge, although this rarely happens in practice. The most common types of intellectual property assets over which security is granted are trade marks, patents and software.

The pledge must satisfy the same legal formalities as a pledge over movable property (see Question 3, Formalities), (excluding delivery), and is perfected by registration in the Registry of Deeds and Documents. Further, according to the Brazilian Industrial Property Law, any liens and encumbrances granted over intellectual property assets (such as trade marks and patents) must be registered with the Brazilian National Institute of Industrial Property to be effective against third parties.

Problem assets

8. Are there types of assets over which security cannot be granted or can only be granted with difficulty? Which assets are difficult or problematic when security is granted over them?

Future assets

A pledge usually requires the actual physical transfer of possession of the asset from the pledgor to the pledgee. However, there are many exceptions. For certain types of pledge, such as a pledge of rights, vehicles and future harvests, possession of the pledged asset does not have to be physically transferred, provided any other specific requirements are observed.

Therefore, pledges that do not require the transfer of possession of the pledged assets could possibly be used to create security over future assets.

However, it is unlikely that mortgages or pledges that require the transfer of possession of the asset can be used to create security over future assets. In these cases, the parties can promise to create a security interest in the future, but they cannot create and perfect it in advance (see Questions 2 and 3).

In addition, a further problem with granting security over future assets is that Brazilian law requires that the collateral is described (with particulars) in the relevant security document (see Questions 2 and 3). Failing to comply with any legal requirement will result in the voidance of the relevant security document.

It is likely a real estate fiduciary transfer, fiduciary property and fiduciary transfer can be used to create security over future assets.

Fungible assets

A pool of assets (fungible assets) is frequently used as collateral for pledges. Accounts receivable, for example, or their proceeds, deposited in a certain bank account can be pledged as security for a debt. Provided the pledge is created and perfected correctly, fulfilling the requirements set out by law, the courts will recognise it as a security interest over a fluctuating pool of assets. If the debtor defaults on the principal obligation, then the pool of assets available at that time and the amount represented by it becomes the collateral.

Other assets

Certain types of security interests can only be granted over certain specific types of assets (for example, fiduciary property can only be granted over non-fungible, movable assets, whereas a fiduciary transfer requires fungible, movable assets). If this is the case, the legal provisions must be observed or the security interest is void.

In addition, credit rights arising from social security (such as wages, alimony and retirement) cannot be assigned.

Securities granted over operational assets (such as an immovable asset consisting of a factory) can be difficult to foreclose.

 

Release of security over assets

9. How are common forms of security released? Are any formalities required?

The release of any security must comply with the procedures provided in the relevant security document (that is, terms and release statements). Usually, the relevant security document provides for a release statement that must be signed by the creditor and presented to the debtor within the term established in the relevant security document.

Once received, the release statement must be registered in the relevant Registry of Deeds and Documents.

Additionally, pledges or fiduciary transfer of shares and quotas are registered in the issuer's share records and issuer's articles of association, respectively. In such cases, the pledge or fiduciary transfer must be cancelled from the issuer's share records or issuer's articles of association.

 

Special purpose vehicles (SPVs) in secured lending

10. Is it common in your jurisdiction to take security over the shares of an SPV set up to hold certain of the borrower's assets, rather than to take direct security over those assets?

Both securities over the shares of an SPV and over the assets of an SPV are commonly used as a security mechanism in Brazil.

Lenders usually take both types of security and, during any enforcement procedures, choose the most liquid and cost efficient security to be foreclosed.

 

Quasi-security

11. What types of quasi-security structures are common in your jurisdiction? Is there a risk of such structures being re-characterised as a security interest?

Sale and leaseback

This is not a commonly used security mechanism in Brazil.

Factoring

This is not a commonly used security mechanism in Brazil.

Hire purchase

This is not a commonly used security mechanism in Brazil.

Retention of title

Retention of title is very common in transactions involving real estate. The seller retains the title to the real estate and only transfers it to the buyer after the amounts due are paid in full.

 

Guarantees

12. Are guarantees commonly used in your jurisdiction? How are they created?

Personal guarantees are commonly used in Brazil. They consist of the commitment of a third party not directly related to a credit transaction for the payment of the full or part of the amount of the debt on behalf of the debtor on the occurrence of an event of default.

Under Brazilian law there are two types of personal guarantee:

  • Surety (fiança). This consists of a payment guarantee for a direct credit transaction (that is loans, financings and revolving facilities). To be binding and effective in Brazil, the surety must be in writing and is restrictively interpreted and registered in the Registry of Deeds and Documents. It is advisable that all indebtedness that is being guaranteed by the third party granting the surety (fiador) be described in the document (including, without limitation, information relating to the amount, maturity and interest rate).

  • Aval. This consists of a payment guarantee on a credit title (título de crédito), such as a promissory note. It is created and becomes valid and binding when a third party signs the face of a credit title or the back of a credit title, in this case with the inscription "guaranteed by aval" or similar wording.

 

Risk areas for lenders

13. Do any laws affect the validity of a loan, security or guarantee (or the terms on which they are made or agreed)?

Financial assistance

There is no specific concept of unlawful financial assistance in Brazil. However, a company granting security to secure a debt used to purchase its own shares or the shares of its holding company could be viewed as an abuse by the controlling shareholder of its rights and power to control the company. The controlling shareholders and the management of the company have a fiduciary duty to act in the company's best interest.

Corporate benefit

The granting of security by a subsidiary company in connection with a loan to its parent does not, on its own, trigger any concerns with respect to corporate benefit rules. However, depending on the structure (for example, in case the loan solely benefits the parent company), this transaction could be viewed as an abuse by the controlling shareholder of its rights and power to control the company.

Others

Banks are not allowed to grant security in respect of a loan to any of its subsidiaries or affiliates.

 
14. Can a lender be liable under environmental laws for the actions of a borrower, security provider or guarantor?

In Brazil, non-compliance with environmental laws and regulations can, whether by individuals or legal entities, result in administrative and criminal sanctions, regardless of the obligation to repair any damages caused to the environment and third parties affected (civil liability).

With reference to administrative and criminal infractions, it is not possible for a lender to be liable under environmental laws for actions and omissions of third parties, given that conduct is an essential element of liability. The Brazilian regime does not provide a specific environmental violation related to funding activities in this regard.

Nevertheless, civil liability in environmental matters is strict, joint and several. It is therefore only necessary to prove the environmental damage and the chain of causation between the damage and the activity. In theory, a loan in relation to an activity that has caused environmental damage could be connected to the damage and result in the lender's joint liability for the damage.

However, the chances of a lender being held liable for environmental damage are remote and may depend on the degree of the lender's interference in the funded activity. For example, public financial institutions are legally obliged to require from the borrower environmental permits for disbursements. This increases the degree of involvement and provides a clearer chain of causation. Likewise, some private and public institutions are signatories to the Equator Principles and consequently committed to evaluate the environmental impact of their financed projects. In addition, a new regulation is being developed by the Brazilian Central Bank (Banco Central do Brasil) to force financial institutions to establish and implement environmental liability policies compatible with the business' size, nature and complexity.

These measures have the power to reach the lenders behind funded activities in terms of environmental protection, raising the chances of being liable.

The lender's environmental liability is a controversial subject in Brazil and so far there have been only a few court decisions where the possibility of liability was briefly mentioned.

 

Structuring the priority of debts

15. What methods of subordination are there?

Subordination of debt is possible under Brazilian law and certain subordination provisions are created by law. Additionally, subordination can be achieved through contract.

Under the Law for the Recovery of Companies (Law No. 11,101) (Bankruptcy Law), as amended, subordinated debts rank below all other debts of a given debtor, except for the debts owed by a company to its shareholders.

Secured creditors can subordinate debts between themselves by contract. However, the agreement is only valid between the parties and, on the insolvency of the debtor, creditors rank in the order set out in the Bankruptcy Law (see Question 24).

 

Debt trading and transfer mechanisms

16. Is debt traded in your jurisdiction and what transfer mechanisms are used? How do buyers ensure that they obtain the benefit of the security and guarantees associated with the transferred debt?

Brazilian law states that, unless provided otherwise, the assignment of a debt includes all of its accessories. Accordingly, secured debt can be, and is, traded or negotiated in Brazil.

In these circumstances, the agreement through which the principal obligation is assigned, transferred or negotiated will also provide for the transfer, to the benefit of a new creditor, of the relevant security interest. To perfect the security transfer, it is then necessary to register the security interest in favour of the new beneficiary in the Public Registry where the original security interest was registered.

 

Agent and trust concepts

17. Is the agent concept (such as a facility agent under a syndicated loan) recognised in your jurisdiction?

Recognition

Brazilian law recognises the concept of the trustee (agente fiduciário) for certain types of financing operations, such as debentures, CRA and Certificates of Real Estate Receivables (CRI).

The trustee represents the interests of the creditors before the issuing company, with specific duties to defend all rights and interests of such creditors. The trustee has powers assigned by law in the case of default, such as to:

  • Declare early maturity of the debt.

  • Charge principal and interest.

  • Enforce securities (if any).

  • Require the bankruptcy of the company.

In addition, although not provided under Brazilian law, security agents are recognised under security agreements to act on behalf of creditors to assure that all validity requirements have been perfected, follow up with financial and non-financial covenants and, in the case of default, foreclose all securities to ensure the full payment of the debt.

An agent created under the law of a foreign jurisdiction, as well as any foreign entity, is also recognised in Brazil as long as it is not deemed to be contrary to Brazilian law, particularly with regard to rights of succession and creditors' rights.

Enforcement

An agent can enforce its rights in the Brazilian courts, provided it presents sufficient evidence that it has the necessary power and authority.

 
18. Is the trust concept recognised in your jurisdiction?

Recognition

Brazilian law does not recognise the concept of a trust as it exists in common law jurisdictions. However, a trust created under the law of a foreign jurisdiction, as well as any foreign entity, is recognised in Brazil as long as it is not deemed to be contrary to Brazilian law, particularly with regard to rights of succession and creditors' rights.

Enforcement

A security trustee can enforce its rights in the Brazilian courts, provided it presents sufficient evidence that it has the necessary power and authority.

 

Enforcement of security interests and borrower insolvency

19. What are the circumstances in which a lender can enforce its loan, guarantee or security interest? What requirements must the lender comply with?

A secured creditor can enforce its security if the underlying obligation matures (whether by acceleration or otherwise) (that is, the debt becomes due and payable) and the debtor defaults.

Automatic foreclosure of collateral is strictly not allowed and provisions to that effect are void.

The requirements a creditor must comply with to enforce its security depend on the asset and the type of security interest (see Question 20).

Methods of enforcement

20. How are the main types of security interest usually enforced? What requirements must a lender comply with?

In the absence of insolvency proceedings, security interests can be enforced as follows:

  • Mortgage. The creditor must petition the court to start enforcement proceedings to foreclose on the real estate. If the public sale of the real estate in the enforcement proceeding does not raise enough money to satisfy the creditor, additional assets of the debtor can be seized and auctioned until the debt is fully repaid.

  • Real estate fiduciary transfer. When a debt has matured but not been paid, a grace period, set out in the relevant agreement, begins. If the grace period expires without the debtor paying the debt, the creditor acquires full, unconditional title to the real estate. At this time, the creditor must pay income tax on the transfer of the real estate (which can be high). After this, the creditor must organise the first extra-judicial auction to sell the real estate. In this auction, the minimum value of the real estate is the value set out in the agreement. If the real estate is not sold, a second extra-judicial auction occurs where the minimum value of the real estate is the value of the secured debt, plus any expenses incurred during the enforcement procedure. If the real estate is still not sold, the creditor can keep the property and sell it in the future. At this point, the debt is considered settled.

  • Pledge. Creditors are not allowed to simply liquidate the asset at will. On the debtor's default, the creditor can carry out an extra-judicial sale of the asset with the express consent of the pledgor or debtor, or if the pledge agreement expressly allows it. In addition to this express provision, the pledge agreement should contain a power-of-attorney clause, by which the debtor grants special and irrevocable powers to the creditor to sell and carry out all associated measures, as well as to establish criteria for determining the price of the asset in such situations. Otherwise, the creditor must petition a court to start enforcement proceedings to foreclose on the asset. If the public sale of the asset in the enforcement proceeding does not raise enough money to satisfy the creditor, additional assets of the debtor can be seized and auctioned until the debt is fully repaid. Any balance from the auction of the collateral must be given to the debtor.

  • Fiduciary property and fiduciary transfer. The creditor, by operation of law, can (and indeed must, in the case of fiduciary property), sell the collateral, irrespective of any auction (public or otherwise) or legal or extra-judicial measure. The creditor then uses the sale proceeds towards satisfaction of its claim. Any leftover amounts afterwards must be given to the debtor.

Rescue, reorganisation and insolvency

21. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? How do they affect a lender's rights to enforce its loan, guarantee or security?

It is important to distinguish between the proceedings available to a company undergoing financial difficulties. The general aim of the Bankruptcy Law is to assist the recovery of economically viable companies and make it more difficult for them to go into liquidation. The Bankruptcy Law introduced the following recovery mechanisms for companies before the start of liquidation proceedings.

Judicial recovery

A committee of creditors is created to negotiate payment of the company's debts and draft a plan for the financial recovery of the company. In such cases, a judge officially takes part in drafting the recovery plan, which must be presented within 60 days of the date the grant of judicial recovery is officially published. The law also provides for the judicial recovery of micro or small companies, which can propose a special recovery plan solely for unsecured creditors.

For pledges and mortgages, secured creditors are affected by the suspension of enforcement proceedings against the debtor. On the granting of judicial recovery, the judge must immediately suspend most enforcement proceedings and other actions against the debtor, for a maximum of 180 days (Bankruptcy Law). Following this period, the applicable creditors can once again initiate or continue enforcement proceedings against the debtor. This delays secured holders of pledges and mortgages from enforcing their security. However, it does not apply to fiduciary property, real estate fiduciary transfer and fiduciary transfer because title to the collateral has already effectively been transferred to the creditor.

This delay also does not apply to secured creditors in a judicial recovery of a micro or small company, as this only affects unsecured creditors.

Extra-judicial recovery

In this process, a company can negotiate an agreement directly with its creditors with a view to its financial recovery. Such an agreement need only be approved by a majority of the company's creditors, and following that, by a competent court.

Extra-judicial recovery does not suspend any enforcement proceedings against the debtor or prevent a secured creditor from starting them. At most, a secured creditor can be bound by an extra-judicial recovery plan approved by the majority of the class of creditors it belongs to. Such a plan could prevent the creditor from exercising its rights.

An extra-judicial recovery process does not affect secured creditors under a fiduciary property, real estate fiduciary transfer or fiduciary transfer, as title has already been transferred.

Despite these recovery mechanisms, if a company goes into liquidation, the priority order set out in the Bankruptcy Law to pay the insolvent company's debts is still applied (see Question 24). In addition, the Bankruptcy Law encourages the purchase of insolvent companies, by abolishing the requirement that the buyer become a successor to that company's labour and tax debts.

 
22. How does the start of insolvency procedures affect a lender's rights to enforce its loan, guarantee or security?

For pledges and mortgages, the start of liquidation prevents a secured creditor from seeking extra-judicial sale of their collateral, and from commencing enforcement proceedings against the debtor. In most cases, the secured creditor is automatically included by the judicial administrator in the general list of creditors drawn up by the bankruptcy court. If not, it can petition the court for its inclusion. The liquidation then takes place and the secured creditor receives funds to the extent that the bankruptcy estate's assets are sufficient to satisfy all other preferred creditors (see Question 24). In addition, at the start of liquidation, the creditor must return collateral to the bankruptcy estate if applicable (for example, pledges where transfer of possession has occurred).

In relation to fiduciary property, real estate fiduciary transfer and fiduciary transfer, because title to the collateral has already effectively been transferred, liquidation proceedings have no effect on such creditors, who can keep the transferred assets and sell them to satisfy their claims.

Certain transactions (including granting security) can be set aside if they occur within a certain time before a liquidation order (see Question 23).

 
23. What transactions involving loans, guarantees, or security interests can be made void if the borrower, guarantor or security provider becomes insolvent?

Certain acts performed within certain time periods preceding a court's order to liquidate an insolvent company can be revoked and have no effect on the bankruptcy estate (Bankruptcy Law).

This time period is usually called the "legal term" or "suspect period", as there is a legal presumption that during such time the insolvent company may have carried out fraudulent acts to protect its shareholders or benefit certain creditors. The legal term is, when possible, set out by the court in the bankruptcy declaration, and cannot exceed 90 days from the date of one of the following:

  • The bankruptcy petition.

  • The request for judicial recovery (see Question 21, Judicial recovery).

  • The first protest by a creditor because of non-payment by the company.

The acts of the insolvent company during such time are closely scrutinised by the court.

Articles 129 and 130 of the Bankruptcy Law set out the acts that are revocable.

The actions in Article 129 are void in themselves, irrespective of whether the insolvent company sought to defraud creditors and cause them losses and of whether the contracting party had knowledge of the financial difficulties then faced by the insolvent company. Article 129 contains an exhaustive list of actions that can be voided by the bankruptcy court of its own initiative or when prompted to do so, including creating, during the legal term, a security interest over assets of the insolvent company to secure a debt incurred before the start of the legal term.

Article 130 sets out that acts of the insolvent company are void if they are carried out with the intent to defraud bona fide third parties. However, evidence of specific facts showing this intent, as well as evidence of harm suffered by the bankruptcy estate as a result, is required. In practice, this may be difficult to obtain.

 
24. In what order are creditors paid on the borrower's insolvency?

Under the Bankruptcy Law, creditors are classified according to the nature of their claims. Amounts raised in liquidation proceedings must be used to pay the debts of the insolvent debtor in the following order:

  • Post-bankruptcy credits, including:

    • the judicial administrator's fees and labour claims for services rendered after the bankruptcy was declared;

    • "fresh funds" provided to the bankruptcy estate by creditors;

    • expenses related to the liquidation proceedings and sales of assets;

    • court costs relating to unsuccessful lawsuits and proceedings involving the bankruptcy estate; and

    • obligations undertaken during a judicial recovery (see Question 23) or after the bankruptcy declaration and applicable taxes;

  • General labour claims (limited to a maximum value), including indemnification for workplace accidents.

  • Secured debts (up to an amount equal to the value of the secured asset).

  • Tax claims of federal, state and municipal agencies (excluding tax fines) and social security claims.

  • Personal claims enjoying special privileges, as defined by law.

  • Personal claims enjoying general privileges, as defined by law.

  • Unsecured debts.

  • Contractual fines and monetary fines from breaching penal or administrative laws, including tax fines.

  • Subordinated debts.

  • Reimbursement of capital to shareholders.

Additionally, labour claims relating strictly to the three-month period preceding the bankruptcy declaration are paid as soon as there are funds available (irrespective of whether the above debts have been paid or not, and in each case, limited to a maximum value).

Special provisions for financial institutions and state-owned companies

The Bankruptcy Law does not apply to state-owned companies or private or public financial institutions. For financial institutions controlled by Brazilian state and local government branches, insolvency situations are regulated by the insolvency procedure for private financial institutions provided for in the Bank Insolvency Law (Law No. 6,024, 13 March 1974).

The most common insolvency proceedings for financial institutions are:

  • Intervention (intervenção). An individual is appointed by the Brazilian Central Bank to manage the bank for a period of six months, renewable for another six months.

  • Extra-judicial liquidation (liquidação extra-judicial). This is similar to the bankruptcy of non-financial companies and aims at the total winding-down of the liquidated bank. The Bank Insolvency Law provides for the subsidiary application of the Bankruptcy Law in this case. Therefore, the order of payment of creditors set out by the Bankruptcy Law applies (see above).

However, in relation to financial institutions controlled by the Brazilian Federal Government, there is no clear legal framework applicable for their insolvency. It is possible that, if these institutions became insolvent, any third party suffering damage or loss as a result could seek reparation under paragraph 6 of Article 37 of the Brazilian Federal Constitution (which provides, in general, that the public entity which controlled the insolvent Brazilian entity would be responsible for its obligations).

When property can be used as collateral more than once (as is the case with mortgages), the order in which the deeds were registered with the relevant Public Registry determines creditor priority (irrespective of what is set out in the deed itself, such as if it states it is a first, second or third degree mortgage).

If any of the required formalities have not been complied with, the relevant creditor does not rank as a secured creditor for the purposes of the payment order set out in the Bankruptcy Law. Instead, the creditor holds an unsecured debt, and only receives any proceeds from the liquidation if there are sufficient funds following the satisfaction of all creditors ranked above it.

 

Cross-border issues on loans

25. Are there restrictions on the making of loans by foreign lenders or granting security (over all forms of property) or guarantees to foreign lenders?

Security can be granted to foreign lenders in any of the forms discussed in Questions 2 to 7 although certain restrictions apply with respect to rural real estate and certain registration and other requirements must also be complied with.

When the laws of a jurisdiction other than Brazil govern a security, the parties must comply with any requirements of that law. Additionally, enforcement of such security depends on the relevant agreement being notarised and consularised in its place of execution, a sworn translation into Portuguese being made and registration of the agreement, along with the sworn translation, with the appropriate Registry of Deeds and Documents in Brazil. In any event, the relevant agreement cannot be contrary to Brazilian public policy, national sovereignty and good morals.

 
26. Are there exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

Under current foreign exchange rules and regulations, remittances of payments to foreign lenders relating to the enforcement of security under a properly created and perfected security interest, as well as related commissions, fees and expenses (up to a pre-determined amount) are allowed.

 

Taxes and fees on loans, guarantees and security interests

27. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security interest?

At this time, no documentary taxes are payable in connection with the granting or taking of security, or its enforcement.

The creation of mortgages and the perfection of most security interests require registration with the appropriate public registry. A pre-set fee is payable on registration.

Registration fees

Registration in the Real Estate Registry. The fees for registering a mortgage, rural pledge, industrial pledge, provisional transfer of legal title over immovable assets and provisional transfer of title of non-fungible movable property are based on a state fee table. Currently the fees range from BRL130.90, for assets worth up to BRL1,209, to a fee of BRL117,704.18 for assets worth BRL74,518,000 and above.

Registration in the Registry of Deeds and Documents. The registration fee for registering a financing agreement is also based on a state fee table. Currently, the fees range from BRL67.37 for a financing agreement worth up to BRL1,209, to a fee of BRL13,024.40 for a financing agreement worth BRL61,464,900.01 and above.

After the finance agreement is registered, each pledge and/or guarantee securing its payment is subject to a registration fee, which varies depending on the number of pages. The fee for a one page document or cover page is BRL50.55 and BRL6.23 for any additional page.

Notaries' fees

Notarisation of a security document is necessary when the document is executed abroad. In addition, the document must be submitted to a Brazilian consulate (for consularisation), to ensure its validity in Brazil. Any document executed in a foreign language must be translated into Portuguese and registered (along with its sworn translation) with the appropriate public registry in Brazil, to make it valid and effective in Brazil. All of these procedures require the payment of pre-set fees.

 
28. Are there strategies to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security interest?

Generally, although the fees for creating and registering security and for documents executed abroad and/or in a foreign language (see Question 27) can be substantial, they are not usually considered prohibitively expensive and so no such strategies are required.

 

Reform

29. Are there any proposals for reform?

There are currently no proposals for major reform in Brazil in the area of taking security.

 


Contributor profiles

Marina Anselmo Schneider

Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados

T +55 11 3147 7625
F +55 11 3147 7770
E manselmo@mattosfilho.com.br
W www.mattosfilho.com.br

Professional qualifications. São Paulo, Brazil, Lawyer

Areas of practice. Banking, finance and investment funds

Bruno Mastriani Simões Tuca

Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados

T +55 11 3147 2871
F +55 11 3147 7770
E btuca@mattosfilho.com.br
W www.mattosfilho.com.br

Professional qualifications. São Paulo, Brazil, Lawyer

Areas of practice. Banking, finance and investment funds


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1247320689384", "objName" : "Lending and taking security in Brazil overview", "userID" : "2", "objUrl" : "http://uk.practicallaw.com/cs/Satellite/resource/6-501-2354?utm_source=AmCham%20Brazil&utm_campaign=AmCham%20Brazil%20PL%20lending%20and%20taking%20securities%20Brazil%20chapter&utm_medium=email", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "25e8a493e:15b1c9c023e:-5269", "analyticsSessionCookie" : "25e8a493e:15b1c9c023e:-5268", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }