A Q&A guide to finance 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, negative pledge clauses, guarantees, and loan agreements. 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 Finance Country Q&A tool. This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
Brazil, like most other countries, has suffered from the effects of the credit crisis. However, the secured lending market has shown signs of recovery.
Real estate (or immovable property) is considered to be the ground and anything attached to it, whether naturally or artificially, as well as any security interests created over real estate.
The most common forms of security interest that can be granted over immovable property are:
Mortgage. This involves the creation of a security interest over real estate and its accessories. (Mortgages can also be granted over ships and aircraft.)
Fiduciary sale (real estate fiduciary sale). This involves the conditional transfer of title to real estate from the debtor to the creditor as a guarantee over a debt. (The use of this type of security interest has increased over the last two years.)
A mortgage must be created in writing, by a private or public deed (a private deed is admissible for mortgages involving low amounts), and contain, at the least, information relating to the amount, maturity and interest rate (if applicable) of the underlying obligation, as well as a description (including particulars) of the real estate property.
A real estate fiduciary sale must:
Be created in writing.
Contain, at the 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.
Describe the method of extrajudicial enforcement of the security in case this becomes necessary (see Question 23).
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 sale are perfected by registration with the Real Estate Registry of the place where the relevant real estate is located.
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.
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.
Fiduciary property. Title to non-fungible, movable property is conditionally transferred to a creditor to secure an exposure to risk.
Fiduciary sale as security in financial and capital markets (fiduciary sale). 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 sale, there is a risk, untested to date, that a cross-border transaction not involving a Brazilian financial entity, even if the foreign counterparty 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 sale 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 sale.
Creation requirements. A pledge, fiduciary property and fiduciary sale, must:
Be created in writing.
Be executed by the creditor and debtor (and, preferably, two witnesses to be a reliable enforcement instrument).
Contain, at the 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 sale document must also include information concerning any applicable fees, expenses and penalty fines.
Perfection requirements. A pledge, fiduciary property and fiduciary sale, 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 30).
Security over financial instruments can be granted through a pledge or a fiduciary sale.
The pledge or fiduciary sale must satisfy the same legal formalities as a pledge over and fiduciary sale of tangible movable property (see Question 3, Formalities: Creation requirements).
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 dematerialised shares, bonds or notes.
Additionally, pledges of shares must be registered in the issuer's share records.
Security over claims and receivables can be granted through a pledge.
The pledge must satisfy the same legal formalities for creation as a pledge over tangible movable property (see Question 3, Formalities: Creation requirements) (excluding delivery).
Registration with the Registry of Deeds and Documents is required, but there are no specific additional perfection requirements for this type of pledge.
See box, Note on 2012 edition.
Security over intellectual property can be granted through a pledge, although this is rarely done in practice.
The pledge must satisfy the same legal formalities as a pledge over movable property (see Question 3, Formalities: Creation requirements) (excluding delivery), and is perfected by registration in the Registry of Deeds and Documents.
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, mortgages or pledges that do require the transfer of possession of the asset probably cannot 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 the law requires that the collateral is described (with particulars) in the relevant security document (see Questions 2 and 3), failing which it will be void.
A real estate fiduciary sale, fiduciary property and fiduciary sale, can probably be used to create security over future assets.
A pool of assets (fungible assets) is frequently used as collateral for pledges. Accounts receivable, for example, as deposited in a certain bank account, or the proceeds in such an 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 such 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.
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 sale requires fungible, movable assets). If this is the case, the legal provisions must be observed or the security interest will be void.
See box, Note on 2012 edition.
See box, Note on 2012 edition.
This is not a commonly used security mechanism in Brazil.
This is not a commonly used security mechanism in Brazil.
This is not a commonly used security mechanism in Brazil.
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.
See box, Note on 2012 edition.
See box, Note on 2012 edition.
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.
The granting of security by a subsidiary company in connection with a loan to its parent should 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.
Banks are not allowed to grant security in respect of a loan to any of its subsidiaries or affiliates.
The enforcement or holding of a security should not, in itself, attract any liability under environmental laws. Any such liability would arise, in any event, from the property itself (for example, due to its very nature or use). The security should have no impact on this.
Under a real estate fiduciary sale, the owner of the property is liable for any environmental damage caused by its property. In these circumstances, the environmental liability results from ownership of the property. However, with a mortgage, because the mortgage holder is not, and does not become, the owner of the property, as it is only entitled to the proceeds from the public sale of the property and not the property itself (except if the property is not sold after a second auction), it is not held liable for environmental damage caused by the real estate.
Subordination of debt is possible 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 27).
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.
See box, Note on 2012 edition.
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.
A security trustee can enforce its rights in the Brazilian courts, provided that it presents sufficient evidence that it has the necessary power and authority.
Different types of security interests apply to differing property types and/or have different requirements for their creation and perfection (see Questions 2 to 7). Consequently, each type of security interest is documented separately. The agreement providing for the principal obligation can globally state that certain types of security will be given in connection with it, but each of those security interests must be created and perfected individually, according to its applicable requirements.
See box, Note on 2012 edition.
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 23).
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 sale. 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 extrajudicial 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 extrajudicial 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 extrajudicial 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 sale. 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 extrajudicial measure. The creditor then uses the sale proceeds towards satisfaction of its claim. Any leftover amounts afterwards must be given to the debtor.
It is important to distinguish between the proceedings available to a company undergoing financial difficulties. The general aim of the Bankruptcy Law (a relatively new law only introduced in 2005) 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.
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 sale and fiduciary sale 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.
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.
Extrajudicial 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 extrajudicial 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 extrajudicial recovery process does not affect secured creditors under a fiduciary property, real estate fiduciary sale or fiduciary sale, 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 (seeQuestion 27). 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.
For pledges and mortgages, the start of liquidation prevents a secured creditor from seeking extrajudicial 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 27). 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 sale and fiduciary sale, 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 26).
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 24, 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.
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 26) 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).
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.
Extrajudicial liquidation (liquidação extrajudicial). 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 (see Question 27). 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.
Security can be granted to foreign lenders in any of the forms discussed in Questions 2 to7 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.
In addition, when a Brazilian resident grants security to a foreign lender, it must be registered with the Brazilian Central Bank, together with registration of the loan itself, so that any amounts obtained through enforcement of the security can be remitted abroad (see Question 31).
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.
When a security interest is granted to a foreign lender for a loan to a Brazilian resident, the security interest must be registered with the Brazilian Central Bank, together with the loan itself (see Question 30).
Issues relating to a collateral asset located in Brazil (for example, a movable asset or real estate) are governed by the laws of Brazil (Article 8, Introductory Law to the Civil Code), except for movable assets (that are being constantly moved) and pledges.
With regard to movable assets brought into Brazil or destined for transport to other places, the law of the country where the owner of the assets is domiciled applies (Article 8, paragraph 1, Introductory Law to the Civil Code).
Pledges are governed by the law of the place of domicile of the person who has possession of the pledged asset (that is, the pledgee, when transfer of possession occurs, or the pledgor or a third party when transfer is not required) (Article 8, paragraph 2, Introductory Law to the Civil Code). This means that pledges are governed by the law of the pledgee's, pledgor's or third party's place of domicile when the security interest is created (that is, where its headquarters are located).
A security document containing a foreign choice of law clause may therefore be governed by Brazilian law, if Brazilian courts apply the above rules. This may be the case despite a foreign choice of law clause in the principal agreement to which the security interest is ancillary.
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 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 BRL90.54, for assets worth up to BRL836, to a fee of BRL81,411 for assets worth BRL51,541,344 and above (as at 1 December 2011, US$1 was about BRL1.8).
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 BRL41.79 for a financing agreement worth up to BRL836, to a fee of BRL9,004 for a financing agreement worth BRL42,513,000 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 BRL30.16 and BRL4.31 for any additional page.
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.
Generally, although the fees for creating and registering security and for documents executed abroad and/or in a foreign language (see Question 33) can be substantial, they are not usually considered prohibitively expensive and so no such strategies are required.
There are currently no proposals for major reform in Brazil in the area of taking security.
Due to time constraints, answers to Questions 6, 9, 10, 12, 13, 18 and 21 have not been provided for this year's edition. Please contact the contributor for further information.
T +55 11 3147 7634
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E jeaduardo@mattosfilho.com.br
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