This chapter provides an overview of the current legal framework in Brazil concerning: transactions which can be considered fraudulent in the event of a debtor’s insolvency; the types of security and guarantees which can be taken over debt; and the recognition and enforcement of foreign judgments and arbitral awards.
This article is part of the PLC multi-jurisdictional guide to restructuring and insolvency. For a full list of contents visit www.practicallaw.com/restructurehandbook.
The development of the Brazilian economy over the past decade has turned Brazil into one of the most attractive emerging markets for investors who have been traditionally investing in Europe, US and Asia. Investors need to be aware, when deciding whether to invest, of the answer to certain key legal questions, which include:
Will certain transactions be regarded as void or ineffective in the event of the other party's insolvency?
What forms of security and guarantees are available to offer protection in the event of the debtor failing to pay and the investor needing to compete with other creditors?
How are foreign judgments and arbitral awards against debtors recognised and enforced in Brazil?
In an attempt to answer these and other issues, this chapter provides an overview of the current legal framework in Brazil concerning:
Transactions which can be considered fraudulent in the event of a debtor's insolvency.
The types of security and guarantees which can be taken over debt.
The recognition and enforcement of foreign judgments and arbitral awards.
There are different legal requirements for a transaction to be regarded as fraudulent in the event of a debtor's insolvency and much depends on the particular circumstances in which the fraud has been committed (such as the identity of the parties involved and whether they had the intention to defraud).
Frauds are generally regulated by the Brazilian Civil Code 2002 (BCC) and by the Code of Civil Procedure 1973 (BCCP), which prohibit fraud against creditors and fraud against foreclosure (there are other sorts of fraud, such as fraud against tax foreclosure, but they fall outside the scope of this chapter). Finally the court can set aside certain transactions under the Brazilian Bankruptcy Act 2005 (BBA).
A court may consider an act carried out by a debtor to be a fraud against creditors where:
It is evidenced that it has been carried out with the intention to defraud creditors.
The law presumes that it has this intention (see below).
The BCC provides four specific situations where a creditor can challenge a fraudulent act in court:
The debtor has transferred assets free of charge (for example, a gift or any other act under which the debtor voluntarily transfers title of an asset to another person without any consideration) or has forgiven debts, provided that either:
the debtor was insolvent by the time the transaction was carried out; or
the transaction caused the debtor's insolvency.
In either case, the transaction will be deemed as fraudulent regardless of the debtor's intention to defraud creditors. A creditor can only challenge these transactions in court if it was a creditor at the time the disputed transaction had been carried out.
The debtor carries out transactions even though the debtor's insolvency:
is evident or notorious;
should be known by the party contracting with the debtor.
In those circumstances, the court can legally presume the existence of a fraudulent collusion between the debtor and the third party. There is case law in Brazil where the court has presumed that the insolvency of a debtor should have been known by the other contracting party because:
the debtor and the contracting party were close friends; or
the contracting party had previously filed a claim against the debtor for non-payment under a different transaction.
An insolvent debtor pays unsecured debts that were not yet due and payable. The creditor who benefited from the early payment must return the received amount to the debtor's insolvent estate.
An insolvent debtor grants security to a creditor (see below, Security over debt and guarantees). This aims at keeping the equal treatment of creditors (par conditio creditorum) by avoiding transactions directed at enhancing the position of a particular creditor by facilitating its payment to the detriment of other creditors. Currently, it is thought that only in rem security, rather than personal guarantees, should be considered fraudulent under this scenario.
The creditor can challenge a transaction under the allegation of fraud against creditors by filing a specific claim under the BCCP for the revocation of the transaction (ação pauliana). If the court grants the claim, the transaction is deemed void and the status quo before the transaction was entered into will be restored. This has the following consequences:
The rights and/or assets transferred by the debtor must return to the debtor.
The debtor must reimburse the purchase price (if any).
However, some legal experts believe that the transaction should only be regarded as ineffective, rather than void, which has less severe legal and practical consequences. This is because the voidance of the transaction may benefit the debtor and damage the other party involved in the transaction:
On voidance the right or asset involved in the transaction should return to the ownership of the debtor, to enable payment of the credit held by the creditor that led to the allegation of fraud. However, where the value of the right or asset is larger than the amount of the credit, the debtor would hold an excess after the payment of the credit. In addition, the other party will have to bring a court case against the debtor to get refund of the purchase price, and it would be uncertain that the purchase price would in fact be refunded given the debtor's poor financial status.
If the transaction is regarded as ineffective, the right or asset involved in the transaction should remain with the other party, but may be subject to court seizure or sale for payment of the credit held by the creditor that alleged the fraud. Where the value of the right or asset is larger than the amount of the credit held by the creditor that alleged the fraud, any excess would remain with the other party, without the need to bring a court case against the debtor. Therefore, if the transaction is regarded as ineffective (rather than voided), the other party can suffer fewer damages.
The BCCP prohibits fraud against foreclosure. A creditor can challenge encumbrance over or transfer of a debtor's asset or right on the basis that, at the time the transaction was carried out, there was either:
A pending legal claim (of any nature) filed against the debtor which could lead to the debtor's insolvency. This may happen, for instance, whenever the creditor can provide proof that the:
payment of its claim is put at risk as a result of the encumbrance or transfer of the asset or right; and
debtor lacks other assets to cover the payment claimed against it in the claim.
If the asset had been subject to seizure due to a court order and that seizure had been registered with the Real Estate Registry (Cartório de Registro de Imóveis) (this is the registry for, among other assets, real estate (see below, Security over debt and guarantees: Formalities: General formalities)), the court can presume fraud and the transaction may be regarded as ineffective regardless of whether the debtor was insolvent. On the other hand, if the asset had been subject to seizure due to a court order but, at the time the transaction had been carried out, that seizure had not been registered with the Real Estate Registry, the court should only grant the challenge if the creditor provides evidence that the purchaser was aware of the seizure.
A pending legal claim filed against the debtor relating to in rem rights in respect of the assets or rights concerned. Currently, it is not thought that the claim must be registered with the Real Estate Registry to ground a challenge based on fraud. In that case, however, the creditor has the burden of proving that, by the time the transaction had been carried out, the purchaser was aware of the pending legal claim.
The court can also recognise a fraud against foreclosure on its own initiative.
It is currently thought that where the court grants a challenge based on a fraud against foreclosure, the relevant transaction is considered to be ineffective. Therefore, from a creditor's perspective, the asset or right would still be subject to seizure to secure the payment of the debt.
On a debtor's insolvency, the court can set aside certain transactions under the BBA that have been carried out before the start of the insolvency proceedings. These are transactions which have put assets of the debtor (which would otherwise be part of its insolvent estate on liquidation) beyond the reach of its creditors. The court can order that the transaction is void or ineffective in relation to the insolvent estate.
The bankruptcy court can regard the following transactions as ineffective, regardless of whether the debtor intended to defraud creditors or the other contracting party knew of the debtor's financial difficulties:
Transactions which take place up to 90 days from:
a request for liquidation;
a request for judicial recovery (a procedure to re-negotiate the company's debts with its creditors under court-supervised proceedings); or
the first formal notice of default being presented by a creditor against the debtor.
These transactions include:
payments by the debtor of debts that were not yet due and payable;
payments made by the debtor in a way differing from the terms set out in the relevant contract; and
the granting of security for existing debts.
Transactions for no consideration (for example, a gift or any other act under which the debtor voluntarily transfers title of an asset to another person without any consideration) carried out within two years of the declaration of liquidation.
The sale of the debtor's business if the:
value of the debtor's assets is insufficient to pay its debts; and
consent of unpaid creditors' has not been obtained, unless they have been notified of the sale and have not opposed it within 30 days.
In addition, the court may void transactions which were carried out with the intention of defrauding creditors if insolvency proceedings are opened, provided there is evidence of:
Fraudulent collusion between the debtor and the other contracting party.
Damages to the insolvent estate as a result.
As a pre-requisite for the court's voidance of those transactions, the judicial administrator, a creditor or the public prosecutor must file a lawsuit within three years from the declaration of the debtor's liquidation. Some experts have criticised the time limit established by the BBA, arguing that it should be counted from the moment when the judicial administrator, creditor or public prosecutor became aware of the fraud, rather than from the declaration of liquidation. There is, as yet, little case law on this issue.
In contrast to the insolvency regimes of the US and the UK, the BBA does not provide that transactions at an undervalue, or for less than a reasonably equivalent price, can be set aside; however, there is case law to suggest that in such a case the court would presume fraudulent intent and void the transaction, provided that the debtor later becomes insolvent (see box, Setting aside transactions: a comparative perspective).
To protect itself against the risks of a debtor becoming insolvent, an investor will often obtain security or a personal guarantee for the debt. Brazilian law provides the following ways to guarantee the repayment of debt:
In rem security, under which the debt is secured by a restriction established on a particular movable or immovable asset. The three types of in rem security are the:
pledge (penhor), which generally relates to movable assets and credit rights;
mortgage (hipoteca), which relates to immovable assets; and
antichresis (anticrese), which relates to immovable assets.
Fiduciary transfer and fiduciary property. These are forms of security which can be taken over non-fungible assets (fungible assets are a pool of assets indistinguishable from each other that may change over time). Fiduciary transfer applies to immovable assets, and fiduciary property applies to movable assets. Under this form of security, the ownership of the asset and the indirect possession are transferred to the creditor, while the direct possession remains with the debtor.
Personal guarantees, under which the debt is secured by an additional obligation imposed on a third party with that third party's express consent.
General formalities for the creation of security and specific rules for personal guarantees are discussed further below.
There are some general formalities that apply to all forms of security.
The agreement that creates an in rem security must provide for a detailed description of:
The assets granted as security.
The key financial terms of the secured obligation, including the:
amount of the debt;
repayment dates; and
applicable interest rate.
To be enforceable against third parties, the agreement must be registered with the competent public registry, that is the:
Registry of Deeds and Documents for security over movable assets other than aircraft and ships.
Brazilian Aeronautical Registry for security over aircraft.
Maritime Tribunal for security over ships.
Commercial Registry at the company's place of incorporation, for security over shares.
Real Estate Registry for, among other assets, real estate.
If the agreement is not in the Portuguese language, it must be translated into Portuguese by a certified translator before it can be registered. If the agreement is executed by a party located outside Brazil, its signature must be notarised and the notary's signature authenticated by the competent Brazilian consular authority. If the secured asset is a real estate, the agreement must be entered into using a public instrument, such as a public deed.
Brazilian law must govern the agreement in certain cases, for example, if the asset given as security is:
Real estate located in Brazil.
A share in a company established in Brazil.
A receivable governed by Brazilian law.
A movable asset in the possession of a Brazilian resident (in the case of a pledge over movable assets (see below)).
A debtor can pledge a movable asset to a creditor, as either a:
Standard pledge. The debtor transfers possession of the pledged asset to the creditor to secure payment of the debt.
Special pledge. The debtor keeps possession and ownership of the pledged asset and must preserve it. Special pledges are created by contract and can only apply to certain assets listed in the BCC, including:
industrial and trade assets, such as machinery and equipment used in industrial facilities, or raw materials;
vehicles; and
rural assets, such as agricultural machinery, harvesting products and farmyard animals.
To be valid, an agreement setting out a pledge over movable assets must describe the real estate where the relevant asset is located. A pledge over rural assets must have a term which is no longer than three years. The parties can, however, extend this term for a further three years.
If the debtor does not pay the debt within the required term, the creditor can either:
Foreclose the pledge agreement. This involves the creditor applying to court for sale of the asset. If the sale does not raise sufficient money, additional assets of the debtor can be seized and auctioned.
Sell the underlying asset privately, provided that the debtor has authorised this in the relevant agreement or by power of attorney. The debtor keeps any surplus funds which remain after the asset has been realised and the debt repaid.
After the maturity date of the pledge, the debtor can also give the asset to the creditor in payment of the debt.
To be valid, a mortgage agreement over real estate must be:
Entered into by a public instrument (such as a public deed).
Registered with the local Real Estate Registry (see above, General formalities).
If a mortgage is in place:
The debtor must refrain from any act or omission which could adversely affect the value of the mortgaged asset.
Any contractual provision prohibiting the re-sale of the mortgaged asset is void, but the parties can agree that the debt will be accelerated on re-sale of the asset.
If the debtor does not pay the debt when it becomes due, the creditor can use a court procedure to sell the mortgaged asset and use the sale proceeds to repay the debt.
If the sale proceeds do not fully repay the debt, the debtor is personally liable for the unpaid amount and the court can confiscate its remaining assets. This remaining debt does not bear the same special priority as the debt initially secured by the mortgage in relation to other secured creditors and is considered unsecured.
If more than one mortgage and/or antichresis are registered against an asset, priority of payment between creditors is governed by the date of registration of the mortgage and/or the antichresis in the Real Estate Registry.
The antichresis secures the payment of the debt by attaching it to a real estate property. To be valid, the antichresis agreement must:
Be entered into by a public instrument.
Be registered with the local Real Estate Registry.
State the:
value of the debt that is secured;
term of the debt;
interest charged on the debt; and
precise description of the asset.
If an antichresis is in place:
The creditor takes over possession of the property and keeps it until the payment of the debt (direito de retenção).
The creditor can use the real estate property for the payment of its secured credit even where the debtor had assigned the property to a third party.
The creditor has priority over:
unsecured creditors;
creditors that are secured by a mortgage created after the registry of the antichresis agreement with the Real Estate Registry.
If the debtor does not pay the debt when it becomes due, the creditor can use a court procedure to sell the asset and use the sale proceeds to repay the debt. If the sale proceeds do not fully repay the debt, the debtor is personally liable for the unpaid amounts and the court can attach its remaining assets. This remaining debt is considered unsecured.
A fiduciary transfer agreement over immovable property must generally be entered into by public instrument (which must be registered in the Real Estate Registry).
A fiduciary transfer agreement must include:
A clause giving fiduciary ownership of the asset to the creditor.
A clause giving direct possession and regular use of the asset to the debtor.
The value of the asset.
The procedure to be followed in case of default.
The period of time after which the debtor must pay the debt, in case of default.
If a fiduciary transfer is in place:
The debtor transfers title over an asset to a creditor for as long as its debt is unpaid.
The debtor keeps direct possession of the asset and has the right to carry on using it.
Ownership transfers back to the debtor, by operation of law, when the debtor has fully paid its debt.
If the debtor fails to pay the debt, the creditor can sell the asset at public auction. If the sale is unsuccessful after two attempts, the creditor keeps the asset and the debtor is released from the debt, even if the value of the debt exceeds that of the asset. The creditor cannot sell the asset at a private auction.
The creditor's claim is excluded from the effects of insolvency proceedings.
The main advantages for a creditor using a fiduciary transfer rather than another type of security are that:
The creditor would become the owner of the asset.
Its credit would be excluded from the effects of insolvency proceedings affecting the debtor.
Fiduciary property of a movable asset works in the same way as a fiduciary transfer of an immovable asset (see above). To be valid, a fiduciary property agreement must:
Be entered into by private or public instrument.
Be registered with the Public Registry of Securities and Documents of the domicile of the debtor or, if the asset is a vehicle, with the body in charge of its licensing.
Include the:
value of the debt;
term of the debt;
applicable interest; and
description of the asset.
A claim that is secured by fiduciary property is excluded from the effects of insolvency proceedings. In the case of default, the creditor can sell the asset publicly or privately without needing to apply to the court (however, the creditor does not have the right to keep the asset). If the sale proceeds are insufficient for the full payment of the debt, the debtor remains liable for the outstanding amount.
There are generally two sorts of personal guarantees:
A surety (fiança). Under a surety, an individual or a legal entity undertakes to perform or repay an obligation if the obligor fails to do so. A surety must:
be in writing;
guarantee the performance of a valid obligation.
A surety can be used to guarantee part of a debt.
A bail (aval). The bail is a specific guarantee used to guarantee debt instruments. It must be signed by the guarantor on the back of the debt instrument. If the guarantee is invoked against the guarantor, and the guarantor performs the obligation, it has a right of recourse against the debtor and any other joint guarantors. Unlike the surety:
the bail cannot be used to guarantee part of the debt and therefore must cover the entire debt; and
the validity of the bail does not depend on the validity of the guaranteed obligation (except where the invalidity results from a formal defect in the debt instrument).
When a debtor defaults on its debts, the creditor can bring foreign proceedings against the debtor. In that case, the rules concerning enforceability of foreign judgments in Brazil must be considered. In some circumstances, the dispute between the parties will be submitted to arbitration, and in that case the rules concerning enforceability of foreign arbitral awards in Brazil may become relevant.
There are two stages for the recognition and enforcement of a foreign judgement in Brazil.
First stage. The foreign judgment is first subject to a recognition process (exequatur) at the Superior Court of Justice (until 2004, recognition was held before the Brazilian Supreme Court, but this was changed to the Superior Court of Justice under Constitutional Amendment No. 45/2004).
The Superior Court does not re-examine the merits of the foreign judgment. Rather it assesses whether the:
Judgment is in accordance with Brazilian:
public policy;
national sovereignty; and
good morals.
Decision was granted by a competent court.
Process was duly served on the defendant.
Decision is final and enforceable according to the laws of the place where it was rendered.
Decision is authenticated by the Brazilian consular authorities and translated into Portuguese by a sworn translator.
If the defendant does not challenge the request for recognition of the judgment, the President of the Superior Court of Justice reviews the request. If this decision is unfavourable to the claimant, it may be able to appeal to a special chamber of the Superior Court of Justice (Corte Especial). After the appeal is filed, the President has the option to reconsider its decision.
The defendant can challenge recognition proceedings, on the following grounds, according to a Superior Court of Justice resolution:
The documents submitted by the claimant lack authenticity.
The decision that is subject to recognition lacks clarity.
The legal requirements for recognition of foreign judgments are not fulfilled.
The Corte Especial will directly analyse the challenge. The decision of the Corte Especial is subject to extraordinary appeal to the Federal Supreme Court where:
There is evidence of breach of the Federal Constitution.
All formal legal requirements for an extraordinary appeal are met.
The Superior Court of Justice can grant injunctive relief to the claimant before the recognition proceedings are completed where:
It is clear that potential damages could be caused due to delay in the recognition proceedings.
There is a good chance that recognition will be later granted.
There are only two known cases where the Superior Court of Justice granted injunctive relief in recognition proceedings.
Finally, if there are bilateral international treaties between Brazil and the country where the judgment was rendered concerning reciprocity of enforcement of judgments, the recognition requirements may be varied (usually to create less cumbersome proceedings).
Second stage. Once the Superior Court of Justice has ratified the foreign judgment, the claimant can initiate enforcement proceedings with the Brazilian local courts.
The process is the same as for the enforcement of domestic judgments. The merits are not re-examined and the award is not subject to changes. The defendant has limited grounds to challenge enforcement and those grounds are usually related to procedural issues. Discussions on the quantum of the award may be required if the foreign award does not provide for a specific amount. This will, of course, delay the process.
Under the Brazilian Arbitration Act 1996 (BAA) and the BCCP, a domestic arbitral award can be directly enforced at the local court level without needing to submit it to recognition by any other court.
In relation to foreign arbitral awards, Brazil became a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) in July 2002. The New York Convention provides that proceedings for the recognition and enforcement of foreign arbitral awards must not be substantially more burdensome than proceedings for the recognition and enforcement of domestic arbitral awards.
In the UK and the US, foreign arbitral awards which are issued in countries which are a party to the New York Convention are generally enforceable to the same extent, and through the same procedure, as domestic arbitral awards. This is not currently thought to be the case in Brazil, where, as with foreign judgments, it is necessary that the Superior Court recognises the foreign arbitral award before its enforcement at the local court level (see above, Foreign judgments).
As well as the usual grounds to refuse recognition of foreign judgments, the BAA provides for additional grounds to refuse the recognition of foreign arbitral awards which are basically in line with the provisions of the New York Convention:
The parties to the arbitration agreement were under an incapacity.
The arbitration agreement was not valid under:
the law to which the parties have subjected it; or
failing any indication of such a law on the agreement, the law of the country where the award was rendered.
The party against whom the award is to be enforced was:
not given proper notice of the appointment of the arbitrator or of the arbitration proceedings;
otherwise unable to present his case.
The award was rendered beyond the scope of the arbitration agreement, and it was not possible to separate the part of the award that was beyond the scope of the agreement from the rest of the award.
The arbitration was not instituted in accordance with the agreement of the parties.
The award has:
not yet become binding on the parties; or
been voided or suspended by a competent authority of the country where the award was rendered.
Finally, the Superior Court of Justice can refuse to recognise a foreign arbitral award if the:
Subject matter of the dispute cannot be settled by arbitration under Brazilian law.
Arbitral award is contrary to Brazilian public policy.
In summary, a potential investor into Brazil should be aware of the various procedures that may come into play should the Brazilian debtor fail to pay, or become insolvent: the possibility of certain transactions being declared fraudulent, the various forms of security which can be taken over debt, and finally the procedural hurdles that will be faced when enforcing a foreign judgment or arbitral award in Brazil. In many respects, the laws are similar in effect to comparable laws in the US and the UK. However, the potential investor should be aware of differences: for example, in the procedural enforcement of foreign arbitral awards, or in the setting aside of transactions on insolvency.
Bankruptcy law in the US and the UK provides a useful point of comparison to the law in Brazil, particularly in the area of setting aside transactions in the event of a debtor's insolvency. All three systems, in essence, provide that the court can set aside a transaction if the debtor:
Became unable to pay its debts as a result of the transaction.
Had the purpose of defrauding its creditors.
It is possible, under the US Bankruptcy Code, for the trustee to avoid under federal bankruptcy law any transfer by a debtor occurring within two years of the debtor's bankruptcy (11 USC § 548):
Made with actual intent to hinder, delay or defraud its creditors.
For which the debtor received less than reasonably equivalent value, and:
at a time when the debtor was insolvent (either before or as a result of the transfer), it was left with unreasonably small capital for engaging in its business or was unable to pay its debts as they became due; or
the transfer is to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
Interestingly, there is not a similar provision in the BBA, and transactions for which the debtor received less than a reasonably equivalent value or did not receive fair consideration are not expressly considered fraudulent. However, there is case law in which the court presumed fraudulent intent and voided the transfer of assets where the debtor received no fair consideration for the asset and later became insolvent.
It should also be mentioned that, under the US Bankruptcy Code, the debtor can invoke certain state laws to avoid transfers of assets, for example, under the New York Debtor and Creditor Law (as in effect as of 21 January 2011), every:
Conveyance made and obligation incurred with the actual, rather than presumed, intent to hinder, delay or defraud, either present or future creditors, is fraudulent.
Conveyance made by a person who is or will therefore be rendered insolvent is fraudulent as against creditors, without regard to his actual intent, if the conveyance is made without fair consideration.
The UK Insolvency Act 1986 also enables certain transactions carried out prior to liquidation or administration to be set aside, returning valuable assets to the debtor or to the insolvent estate. The provisions are complex and a number of hurdles must be overcome before any particular transaction can be avoided. In general, the provisions require that the debtor was unable to pay its debts at the time of the transaction or became so as a result of the transaction. The provisions are more stringent in relation to transactions with connected persons (that is, family members, group companies, and so on). As with the US Bankruptcy Code, but not the BBA, there are provisions concerning the setting aside of transactions where sufficient value was not provided. They include, for example, a transaction entered into:
For a consideration that was significantly less than the consideration provided.
Within two years before the start of administration or liquidation, or at a time when the company was insolvent or became so as a consequence of the transaction.
There are also provisions enabling the setting aside of transactions that defrauded creditors, created a preference to a certain creditor, constituted an extortionate credit transaction, created floating charges, or disposed of assets in liquidation proceedings.
T +55 11 3024 6470
F +55 11 3024 6200
E caio.campello@linklaters.com
W www.lefosse.com.br
Qualified. Brazil, 1999
Areas of practice. Arbitration; litigation; restructuring and insolvency.
Recent transactions.
For more details of recent transactions, publications, and so on, see full PLC Which lawyer? profile here.
T +55 11 3024 6349
F +55 11 3024 6200
E carla.crippa@linklaters.com
W www.lefosse.com.br
Qualified. Brazil, 2004
Areas of practice. Arbitration; litigation; restructuring and insolvency.
Recent transactions.
See above.
T +55 11 3024 6330
F +55 11 3024 6200
E fernanda.gomes@linklaters.com
W www.lefosse.com.br
Qualified. Brazil, 2009
Areas of practice. Arbitration; litigation.
Recent transactions.
See above.
