Brazil
Lending
Pursuant to the applicable regulation, financial institutions are prohibited to carry out credit operations with related parties, except in some limited circumstances. For this purpose, the law defines as a financial institution’s related party the following:
- its controlling shareholders, directors and members of other statutory bodies (fiscal, advisory and others) and their respective spouses and relatives up to second degree;
- individuals or legal entities that hold a qualified interest (as per current regulations) in their capital;
- legal entities in which they have qualified interest (direct or indirect);
- legal entities in which they have effective operational control or preponderance in the deliberations, regardless of the equity interest; and
- legal entities with common directors or members of the board of directors.
The restrictions with respect to transactions with related parties do not apply to: (i) transactions carried out under conditions compatible with the common market (including, but not limited to, in respect of limits, interest rates, grace periods, guarantee requirements and risk classification criteria), which shall be similar to those conditions that the financial institution adopts in transactions with unrelated parties; (ii) arms-length transactions with entities controlled by the Union, (iii) credit operations whose counterparty is a financial institution that is part of the same prudential conglomerate, provided that they contain a subordination clause; (iv) certain interbank deposits; (v) setoff obligations; and (vi) other situations authorized by the CVM.
Moreover, there are currently certain restrictions imposed on financial institutions limiting the extension of credit to public sector entities, such as government subsidiaries and governmental agencies. These are in addition to certain limits on indebtedness to which these public-sector entities are already subject.
Borrowing
Borrowers are generally not regulated. Borrowers under consumer and housing financing usually benefit from the protection of the Brazilian Consumer Defense Code and other relevant regulations from the Central Bank.
Are there any restrictions on giving and taking guarantees and security?
Some of the key areas affecting the giving of guarantees and security are as follows.
General comments
The creation of a security interest (in rem guarantee) is a very formal procedure under Brazilian law. In order for it to be valid and enforceable in Brazil, the underlying obligation being guaranteed and, if such obligation is related to, or part of, a more complex transaction, the transaction as a whole must be considered legal, valid and binding under the relevant applicable laws. If the underlying obligation, the transaction generally or just elements of the transaction are not valid, the guarantee or security is also invalid. Additionally, the security agreement must comply with certain conditions (which are considered below) and the parties to it must perform all required formal acts.
The conditions that a transaction (negócio jurídico – a term which includes security documents) must comply with are set out in Article 104 of the Brazilian Civil Code. The conditions concern the capacity of the parties, the existence of an object of the transaction and the form of the documents).
Capacity of the parties
Capacity relates to the power and authority of a given party to enter into a transaction. The parties to the security agreement must be properly represented and duly authorized and empowered to enter into the transaction and create a security interest over certain assets. Capacity is determined by reference to matters such as restrictions under the constitutional documents of the entity entering into the security agreement.
Object
Brazilian law prevents parties from entering into agreements in which the object is not possible or considered to be illicit under Brazilian law. An example of something that is not possible would be an agreement by two private parties to sell an asset owned by the state. An illicit object could be, for example, the exploitation of a casino in Brazil.
Form and other requirements
Security agreements must follow a form established or not forbidden under Brazilian law in order to be capable of being enforced in Brazil. For example, Article 1,452 of the Brazilian Civil Code and Article 127 of the Public Registries Law require that a pledge of shares be constituted by means of a written agreement (private or public) duly registered in the competent Registry of Documents and Deeds in Brazil.
Furthermore, the security agreement must be drafted in order to comply with the other formal requirements of Brazilian law, such as including a detailed description of the assets being pledged and the main financial terms and conditions of the obligation being secured, including:
- the principal amount of the debt;
- the repayment dates; and
- the applicable interest rate.
Economic benefit
In addition to the formalities for the creation of a security interest, the economic benefit generated or a commercial justification for the granting of such security interest by a given issuer of a security interest will have to be analysed. Although this aspect would not generally affect the validity or enforceability of the security agreement, if there is no economic benefit for the guarantor there is a risk of claims being filed by interested third parties, such as minority shareholders or other creditors of the guarantor upon the bankruptcy of the guarantor, as explained below.
Minority shareholders
As a general rule, minority shareholders of an issuer of a security interest may challenge the execution of a security agreement on the basis that the relevant transaction was not entered into in the best interests of the company. Any claim to be brought by minority shareholders on this basis would most likely relate to the fact that there was an abuse of power by the controlling shareholder and/or that the managers carried out acts that conflicted with the company’s best interests. The grounds supporting any such claim for damages placed by minority shareholders may be strengthened to the extent that the security interest is enforced.
Creditors’ claims
Creditors of an issuer of a security interest may also challenge the execution of a security agreement if the transaction is not justifiable from an economic or commercial point of view. A Brazilian court will take into account the current credit strength (ie solvency) and the outstanding indebtedness of the guarantor when considering this issue.
What are common types of guarantees and security?
Common forms of guarantees
Generally, there are two types of personal guarantees: surety (fiança) and the so-called ‘aval’. Under a surety, an individual or a legal entity undertakes to perform/repay an obligation if the obligor fails to do so. Aval is a specific guarantee used to secure debt instruments. Personal guarantees are always formalized in writing.
Common forms of security
There is more than one type of in rem guarantee. The nature of the assets that support the guarantee affect which type of in rem guarantee is used. Under Brazilian law, assets can be divided into the following categories:
- movable assets, eg shares and equipment; and
- immovable assets, eg land and buildings.
Certain assets such as aircraft and ships, although considered to be movable assets, are subject to the requirements applicable to immovable assets (such as registration requirements).
The two most usual types of in rem guarantees are:
- pledge (penhor), which relates to movable assets and credit rights; and
- mortgage (hipoteca), which relates to immovable assets.
In the case of in rem guarantees, each asset given as security must be duly referred to in the relevant agreement.
The Brazilian Civil Code provides for another form of guarantee in respect of movable assets which are not fungible. This type of guarantee results in the ownership of the asset and the indirect possession of it being transferred to the creditor, while direct possession remains with the guarantor. The guarantor assumes the duties and liabilities of a bailee in relation to that asset.
Are there any other notable risks or issues around giving and taking guarantees and security?
Upstream and cross-stream guarantees
Upstream and cross-stream guarantees are not prohibited by Brazilian law. Where a guarantee is given in respect of the obligations of a non-Brazilian holding company, certain foreign exchange restrictions may apply.
Financial assistance
Financial assistance (which under Brazilian law includes assistance by way of loans, guarantees, security or reduction of liability) is not specifically regulated by Brazilian law. However, depending on the legal status of the company (regulated entity, financial institution, publicly or privately held corporation, limited liability etc), and the relationship between the grantor and the beneficiary of the financial assistance, restrictions may apply.
For example, financial institutions are prohibited to carry out credit operations with related parties (as defined in specific regulation), except in some limited circumstances.
Additionally, if financial assistance involves a company located outside Brazil, certain foreign exchange rules will have to be observed.
It will be necessary to take advice on a case-by-case basis as to whether restrictions apply to a particular scenario.
Notarization and apostillation or consularization
If security agreements are signed by a party outside Brazil, it must be duly apostilled (apostilado) by the competent authority of the place the foreign judgement was issued or, in case the country in which the place the foreign judgement was issued is not a party to the 1961 Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents of 5 October 1961, be legalized by a consular official of Brazil having jurisdiction over the place of issuance.
Translation into Portuguese
Only Portuguese language documents may be registered with Brazilian public registries. If the security agreements are not drafted in Portuguese, they must be translated into Portuguese by a certified translator and registered with the competent Brazilian Registry of Deeds and Documents or Real Estate Registry, as the case may be.
Registration
In other to be valid against third parties (and to ensure priority in a bankruptcy proceeding), the security agreements must be registered with the appropriate Brazilian public registries. The relevant register depends on the nature of the asset secured. For example, security over moveable assets other than planes, trains and ships is registrable at the appropriate Registry of Deeds and Documents in Brazil. Security over real estate should be registered at the appropriate Real Estate Registry. Other registrations may be required according to the type of asset that is secured. For example, security over shares in a Brazilian company would need to be registered in that company’s share registry book.
Fees
The registries in Brazil will charge a fee to perform the registration of the security agreements or any amendments to them. The amount to be charged by the registries will depend on the:
- location in which the security agreement must be registered in (for instance, mortgages must be registered in the place where the real estate asset is located); and
- amount being secured.
There will also be the cost related to the translation of the security agreements into Portuguese, which will be charged by the certified translator based on the number of pages to be translated, as well as the cost related to the apostillation or consularization of the signatures.
Roberto Barros
Partner
Campos Mello Advogados
[email protected]
T +55 11 3077 3513
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