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2015ICTF’s Annual Global Trade
SymposiumLatin America - Trade Creditors' Rights
and Protection - Lessons Learned the Hard Way
BRAZIL
Ft. Lauderdale, FLNovember 16, 2015
Case study
Seller, Inc., a Delaware based company, will sell and export to Brazil heavy machinery to be installed in a new factory being built in São Paulo by Poultry Ltda., a Brazilian limited liability company.
Poultry Ltda. has made a 30% down payment and the remaining 70% of the purchase price is supposed to be paid as follows:— 20% of the purchase price shall be paid upon
delivery in Brazil; and— 50% of the purchase price shall be paid in 5 equal
installments every 30 days after delivery. Seller, Inc. wants to mitigate the risks of the
transaction. What are the best ways to do so in Brazil?
Mitigation of risks
Most common ways of mitigating the risks of default of the future instalments of the purchase price:
1. Third party guarantee (personal guarantee from shareholders, letter of credit from financial institutions, insurance, etc.).
2. Pledge (penhor) of the equipment.
3. Sale with retention of title (venda com reserva de domínio) of the equipment.
4. Fiduciary assignment (alienação fiduciária) of the equipment.
1. Third party guarantee
Personal guarantee— Clearance certificates from the courts in order to
check the number of lawsuits involving the guarantor
— Clearance certificates from the notaries to check if there are protests against the guarantor
— SERASA-EXPERIAN clearance certificate Real Estate asset as collateral
— Clearance certificate of the property— Is the property the home of the guarantor and
his/her only real estate asset? If yes, it can be a problem.
Letter of credit from a financial institution Insurance
2. Pledge (penhor)
The pledge needs to be properly registered in order to be opposed to third parties.
No absolute priority rule in Brazil. Other creditors may have privilege over the proceeds of the sale of the collateral.— Labor credits— Tax credits –
article 186 of the Brazilian Taxation Code— Liquidation scenario –
articles 83 and 84 of the Brazilian Bankruptcy Law The creditor will be subject to a business
reorganization proceeding of the debtor (“Brazilian Chapter 11”).
After 2005 it has become less used.
3. Sale with retention of title (venda com reserva de domínio)
The agreement which provides for the sale with retention of title with needs to be properly registered in order to be opposed to third parties.
It allows the creditor to repossess the collateral and keep it (instead of having to sell it to third parties).
The repossession procedure is expedite – article 1071 of the Brazilian Civil Procedure Code.
In case of repossession of the asset, the creditor shall retain only the amount necessary to compensate (i) its collecting costs and (ii) the depreciation in value of the asset.
The credit is not subject to a business reorganization proceeding, but the repossession is subject to the stay period.
In case of liquidation, the credit has privilege and the asset, if still in the debtor’s possession, can be repossessed.
4. Fiduciary assignment (alienação fiduciária)
The fiduciary assignment agreement needs to be properly registered in order to be opposed to third parties.
The creditor cannot retain the collateral in case of default of the debtor. After being repossessed, the collateral will have to be sold and only the proceeds will benefit the creditor.
The credit is not subject to a business reorganization proceeding, but the repossession is subject to the stay period.
In case of liquidation, the credit has privilege and the asset, if still in the debtor’s possession, can be repossessed.
The safest option, for there are several precedents in Brazil protecting the creditor’s rights.
Common aspects of all options
Arbitration vs. Judicial Courts in Brazil— Choice of governing law.— Possibility of filing an enforcement procedure in
Brazil (more expedite and provides creditors with very effective ways for collecting and/or securing the credit).
— Place of arbitration may be an issue and delay the actual collection of the credit, given that foreign awards must be ratified by the Brazilian Superior Court of Justice.
— Brazil is a big country and the State Courts are very different in terms of quickness for deciding a case.
Full enforceability requires strict compliance with the formalities provided by law.
Wording of the documents should be clear and objective to avoid future challenges.
What if the exportation relates to intangible goods?
Third party guarantee is the safest option. Pledge is possible, but not much effective.
— In order to be effective, the parties may agree to safeguard the product in a warehouse and have some sort of warranty that the products will be kept for as long as the debt remains unpaid.
Fiduciary assignment and sale with retention of title are not feasible because of the current legislation.— Only Brazilian financial institutions may have
fiduciary assignment over intangible assets (receivables, commodities, etc.).
— If the goods can be individualized (e.g., liters of chemical products deposited in numbered barrels) it may be possible to use either a fiduciary assignment or an agreement for the sale with retention of title.
Brief comments on a different scenario – Sale through third parties in Brazil
There are basically two sorts of agreements that a foreign producer may enter into so as to empower a third party to sell its products in Brazil:
— Agency and distribution• The Brazilian party acquires the product from the
producer and sells it in the local market. The difference between the acquiring and selling price constitutes the main (or sole) compensation of the agent/distributor.
— Commercial representatives• The Brazilian party markets and facilitate the sale of the
product, but the transaction is actually closed between the producer and final buyer. The main (or sole) compensation of the commercial representative is a commission, which typically is set in a percentage of the value of the transaction.
Brief comments on a different scenario – Sale through third parties in Brazil
Agency/Distribution Commercial Representative
Termination is cheaper, but may be prevented or postponed.
Termination may be very expensive, specially in cases of long relationship.
Exclusivity may be inferred and should be expressly denied in the agreement.
Exclusivity cannot be inferred if the agreement is silent in this regard.
Labor risks may be extended to the distributor’s employees, due to the nature of the relationship.
The most prominent labor risk is related to the representative himself/herself, due to the personal nature of the relationship.
The parties may fix a defined term for the agreement and there is no limit for renewals of such term.
If the fixed term of the agreement is extended, the relationship is automatically deemed for an undefined period of time.
