Brazil collection profile

Relevant financial information on domestic traders is not reliable. Indeed, although stock exchange listed groups tend to communicate reliable information, non-listed companies (which are the most common type of business in Brazil) fail to do so or tend to release information on an informal basis. As a result, efforts to avoid doubtful practices are increasingly put into place, especially in relation to anti- corruption efforts. Relying on local and settled banks is therefore advisable, and financial information should be obtained through specialized providers.

Allianz Trade in Brazil has access to the most up-to-date financial information and obtains the most relevant contacts for future assessment. Allianz Trade allocates each company a grade reflecting its financial health and how it conducts business. Grades represent a core of our knowledge and analyses, and help clients identify and avoid risk. Data is continuously monitored to offer the most up-to-date information to support management decisions.

Liability for business debts is determined by legal structures, which are described as follows: Corporations (Sociedade Anônima, SA) and Limited Companies (Limitadas, LTDA) are frequently used in the establishment of subsidiaries and joint ventures. Both may be fully owned by local/foreign individuals and undertakings alike, and while there are no minimum capital requirements, certain limitations may apply in protected sectors. Limitadas require at least two shareholders (otherwise, Individual LLCs may be set up). In addition, Mixed-Capital Companies allow private investors to conduct business in collaboration with public entities (which take control).

Brazil is divided into 26 states and the Federal District and has a peculiar legal environment operating at both federal and state levels. At the federal level , the courts (Justiça Federal em Primeiro Grau and Tribunais Regionais Federais) deal with claims concerning federal laws  and have a geographic jurisdiction (e.g. Brasilia, Rio de Janeiro, Sao Paulo, Porto Alegre and Recife). At the state level (each state has its own jurisdiction responsible for prosecuting and rule cases in that state), the courts deal with all the matters excluded from federal jurisdiction.

Brazilian jurisdiction works with Common Law, meaning that judges must follow codified rules, but decisions can also be guided but the “jurisprudencia”, which can be often confused with Common Law, since it is an understanding of the law formulated after several decision towards the same direction. For that reason, Brazilian legal environment  can be considered rather complex and litigation may be lengthy and difficult.

Collection costs may also be fully charged to the debtor, although the law does not provide a uniform rule as to whether a default sum may be charged to the debtor, therefore negotiating this as a contractual issue is important. Courts can rule costs up to 20% (usually 10%) of the outstanding debt (especially in the legal action phase), but amounts may be used as a negotiation tool.

Retention of Title provisions are not commonly used in Brazil to retain ownership over traded goods as long as the debt is not fully paid. Indeed, this is not a straightforward process. RoT provision is very formal: the contract must carefully describe the goods at stake and, in order to be valid and opposable to third parties, it must be translated into Portuguese and registered with the Registro Público de Títulos e Documentos. Seeking legal advice is necessary.

As an alternative, the Chattel mortgage is much more used in Brazil. Suppliers selling on credit terms are considered as lenders and as such, have the possibility to use chattel mortgage to secure payment. In case of default, the lender may file a search and seizure warrant in order to get the goods back. The contract requires a chattel mortgage clause, which must be notarized and registered. The timeline to get a judgement can vary based on the specifics of the case and the risk of delays due to procedural requirements.

Once the insolvency process begins, creditors are able to lodge a claim against the debtor’s assets and reclaim any goods that were delivered to the debtor but were not paid.

The most common payment methods are as follows:

Bank transfers are among the most popular payment methods as they are fast, secured, and supported by an increasingly developed banking network internationally and domestically.

Export transactions may be guaranteed through an Export Credit Insurance policy, which helps minimize the risk of sudden or unexpected customer insolvency. Allianz Trade’ worldwide network of risk offices monitors the financial well-being of customers and grants them a specific credit limit up to which clients may trade and claim should something go wrong. Alternatively, Standby Letters of Credit (a bank guarantees the debtor’s credit quality and repayment abilities) constitute reliable guarantees which can be interpreted as a sign of good faith since they can be triggered as a ‘payment of last resort’ if the client fails to fulfil a contractual commitment. Also, irrevocable and confirmed Documentary Letters of Credit (a debtor guarantees that a certain amount of money is made available to a beneficiary through a bank once certain terms specifically agreed by the parties have been met) may be considered as they can be obtained easily from local banks.

Due to the advanced technology used in the banking system, a form of bill also known as ‘duplicata’ which used to be relied upon in business-to-business transactions has progressively been replaced by bank bills or payment slips (boleto bancario).

Generally speaking, bank guarantees can be obtained but may remain expensive depending on the issuing institution. Advance payments of up to 100% of the invoice are authorized by law.

Given the length and cost of legal action in Brazil, chances of obtaining enforceable judgments in a timely manner are low and it is preferable to consider amicable arrangements (such as payment instalments) as a solution. As a matter of law, negotiation through conciliation or mediation is not mandatory but the Civil Procedure Code strongly encourages the judges to give the parties additional opportunities to reach a settlement through Alternative Dispute Resolution methods before the evidence phase and before the judgment (see below). As a result, commencing collection with strong negotiation efforts is never a loss of time.

Before starting legal proceedings against a debtor, assessment of assets is furthermore extremely important as it allows verification as to whether the company is still active and whether recovery chances are at best. In addition, it is essential to be aware of the debtor’s solvency status: if insolvency proceedings have been initiated, it indeed becomes impossible to enforce a debt.

It should first be noted that distances may be troublesome. On one hand, jurisdiction depends on the debtor’s geographic location and the size of the country can make proceedings complicated (however if the contract provides for another jurisdiction clause then the problem may be avoided). On the other hand, and for the same reason, finding the debtor may prove difficult and would slow the proceedings down insofar as trial may only start after the debtor’s notification by a service process.

Before the legal procedure starts, the creditor must send the Credit Title to Legal dunning (protesto), a registered Demand Letter recalling the debtor’s obligation to pay the principal together with late payment interest (as contractually agreed or taking a legal rate as a reference).

The first option is the fast track proceedings (Ação de Execução), that may be initiated when the creditor has written proof, signed by two witnesses and registered by a public notary (documents must be translated into Portuguese by a sworn translator and apostilled), that the claim is legitimate: if the debtor’s obligation is deemed certain, liquid and due (certo, liquido e exigivel), the First Degree Courts (Justiça de Primeiro Grau) usually render Payment Orders within 15 days. If the debtor fails to comply within three days, the Order then becomes enforceable. The debtor can oppose to the execution, but only by offering a guarantee to the court (a Surety Bond, for example) and following the hypotheses provided by law.

The second option is and Ordinary legal action (Ação Monitória), for when the creditor has to constitute a liquid, certain and enforceable credit title in order to be executed. The claimant must serve the respondent with a registered Writ of Summons, to which the debtor must answer within 15 days of receipt. This step is essential as Brazilian courts are very strict as to the way defendants should be summoned in court proceedings.

The proceedings are inquisitive in nature and encompass an investigation phase conducted by the court, an examination phase and a hearing phase. However, the tribunal may render a default judgment (revelia) if a duly served writ is left unanswered for. In this case, the alleged claim would be considered legitimate and the decision would reflect accordingly.

• Commercial invoices
• Documentary bills
• Proof of transport and delivery of products
• Promissory notes
• Power of attorney
• Articles of association or constitution acts of the legal entity
• Document evidencing the legitimacy of who executes the power of attorney on behalf of the legal entity
  

Limitation periods (prescrição) vary from one to ten years according to the subject matter of the claim, starting from the day the cause of action arose. Beyond these time limitations, legal action will not be granted.

Provisional measures may help preserve the creditor’s interests pending a final and enforceable judgment. Indeed, the courts may order protective injunctions ex parte (without the presence of both parties), before or during the proceedings, to avoid irreparable damage (preservation of the status quo, protection of rights). Cause for emergency must be demonstrated (significant burden of proof) and that the alleged right is plausible to preserve the debtor from irresponsible lawsuits. Where evidence is likely to disappear, the courts would also order precautionary measures aiming at preserving or obtaining such evidence.

As a general rule, decisions rendered in first instance by First Degree Judges can be appealed (apelação) to Second Degree Courts. Decisions rendered in appeal may also be disputed before the Supreme Court of Justice (Superior Tribunal de Justiça) in Brasilia, depending on the subject.

In some cases, due to multiple appeals, higher courts issue binding decisions, which even first-instance courts can and should use to support their rulings, based on the same understanding, thereby avoiding new lawsuits and appeals.

A judgment becomes enforceable as soon as it has become final (i.e. when all appeal venues have been exhausted) and final judgments ought to be automatically enforced by Brazilian courts.

Since reforms in 2005 and 2006 aiming at reducing enforcement periods, attachment of the debtor’s assets is now possible if the latter fails to obey a final Order within three days. The ‘Penhora on-line’ instrument, also, allows any amount available on the debtor’s account to be blocked in order to enforce a judgment.

In practice, execution can prove to be difficult since there are only limited means with which to trace assets in Brazil.

Obtaining a default judgment can take between eight and 18 months while a full judicial procedure can last for two to four years, depending on the complexity of the case and the availability of the courts. As previously mentioned, enforcement may also be a lengthy procedure. Cases involving foreign parties would normally not take longer than cases involving domestic parties only, however some delays may be expected if document translations are necessary.

As a general rule, procedural costs (which may represent up to 5% of the claim) and legal costs are charged to the defeated party, which may therefore be required to pay up to 20% of the claim in compensation to the successful party. However, since Brazilian Law prevents courts from rendering decisions on subject matters not included in the parties’ claims, it is essential to include cost-related demands in the Writ when serving the debtor. Court fees reaching 1% of the claim (depending on the state) must be paid prior to commencing legal proceedings. If the lawsuit is decided on behalf of the creditor, this amount should be reimbursed by the debtor. Contingency fees, whereby the legal professionals are entitled to receiving a percentage on the final award, are lawful though uncommon.

Alternative Dispute Resolution methods are increasingly common in Brazil for business-related disputes. In particular, arbitration (regulated under the Arbitration Act, Law No. 9307/96) is often viewed as being more efficient than ordinary lawsuits since it offers expeditious and confidential proceedings together with a binding award on the merits. Arbitral awards may then be enforced directly. Mediation has gained recognition and is increasingly used as an ADR method. The Brazilian Civil Procedure Code and other legal instruments provide guidelines for mediation, encouraging its use to resolve disputes amicably. Additionally, Law No. 13.140/2015, known as the Mediation Law, establishes a framework for mediation proceedings, promoting its use as a viable alternative to litigation.

Foreign traders may alternatively agree to solve their business disputes in a foreign forum (i.e. under a foreign law or before a foreign court) provided that the agreement is characterized by an international connection (for example, one party has elected domicile in another country, or the place of execution is located abroad), and that a jurisdiction clause is specifically drafted for this purpose.

In practice, Brazilian courts tend to retain exclusive jurisdiction to decide on various subject matters (such as real estate issues and international contracts entered into by Brazilian federal, state and municipal government entities). In addition, it is worth adding that some Brazilian courts have insisted on a right of nationals to benefit from due process of law (i.e. a right to appear before Brazilian courts) notwithstanding the existence of a foreign jurisdiction clause which might thus be simply ignored.

As previously explained, Brazilian courts normally retain exclusive jurisdiction over various subject matters and would thus tend to deny recognition of certain foreign judgments aiming at escaping domestic courts.

Nonetheless, foreign judgments may be enforced in Brazil within three months on average, provided that certain conditions are observed. Essentially, foreign decisions must be confirmed by the Superior Court of Justice to become enforceable in Brazil. This implies that the decision must be final and enforceable in the issuing jurisdiction. The decision must also be translated in Portuguese and certified by the Brazilian consulate residing in the said country. It must have been duly served, and must be compatible with Brazilian public policy, sovereignty and good moral principles.

Once confirmed, the foreign judgment becomes final and a certified copy (Carta de Sentença) of the Brazilian decision is provided in order to commence enforcement before the federal courts.

Brazil is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. Therefore, domestic courts also ought to recognize and enforce decisions rendered through international arbitration proceedings. Having said this, it may be emphasized that reference to the New York Convention is rare, as the courts rather tends to support enforcement decisions towards foreign arbitral awards under the Arbitration Act of 1996, which stipulates that such decisions must be recognized and enforced by the Superior Court of Justice. This procedure, indeed, seems more constraining than the New York Convention proceedings insofar as it aims at verifying the existence of a valid (and translated) arbitration agreement as well as various formalities (examination never implies verifications on the merits) as previously listed. Enforcements are then dealt with through a standardized one-stop-shop procedure handled by specialized judges.

Since 2005 (Federal Law 11.101/05) and remodeled by the FL 14.111/20, the insolvency legislation inspired by the U.S. Chapter 11  has facilitated rescue proceedings. Greater priority has been given to creditors, thus increasingly the availability of fresh restructuring cash for companies facing temporary financial difficulties.

The law alternatively allows out-of-court restructuring proceedings (Recuperação Extrajudicial). The debtor is thus given a chance to negotiate a restructuring plan informally and confidentially with its creditors, without having courts. The plan must be agreed upon by creditors representing a minimum of 60% of the business’ debts and it must be approved by the court.

Mediation and arbitration are third-party mechanisms that facilitate negotiation and ensure the secure enforcement of the agreement without initiating traditional judicial proceedings. Mediation seeks consensus, while arbitration imposes a binding decision.

Out-of-Court proceedings offer more room for negotiation, but mediation and arbitration are rarely used. When applied, haircuts are generally moderate, with significant reductions occurring only in cases of severe financial distress.

Every judicial recovery begins with the company requesting that the judge grant such a claim, demonstrating the situation of financial loss and the need to remain in the market or obtain discounts and instalments on debts. It presents an initial petition, attaching, for example, the company's balance sheet, as well as accounting documents for the last three years.

The Reorganization Plan is presented within 60 days of the judge's approval of the judicial reorganization processing. It details the creditors and the way the company can pay (discounts, instalments, etc.). This plan will be voted on at the Creditors' Meeting, normally after a few months or years of the process, where creditors can qualify and challenge the credits that are placed in the Plan.

Initially, a stay period of 180 days is granted. During this suspension period, most debts before recovery, except for some considered in the law itself (e.g. tax debts), will not be collected. And those assets that are necessary for the maintenance of the company cannot be taken during the course of the judicial reorganization (the so-called essential assets).

At the Creditors' General Assembly, at the appropriate procedural moment, when the qualifications and judgment of the challenges to the amounts and credit legitimacy have already taken place, there is a vote on the Recovery Plan. If such a vote by the creditors is positive, the judge ratifies it. Failing to do so, the parties may shift to a bankruptcy procedure.

One of the most significant changes of the 2020 Federal Law is the possibility of the creditors to present a Recovery Plan alternative to the “Recuperanda” (as the company under Chapter XI is called). However, this is only possible if the plan first presented is rejected.

Bankruptcy is the judicial liquidation procedure of an insolvent entrepreneur or business company, governed by Law No. 11,101/2005. The declaration may occur at the debtor’s own initiative (voluntary petition) or upon request by creditors. According to Article 94 of said law, creditors may petition for bankruptcy when they hold liquid, certain, and enforceable claims that, individually or jointly, amount to a value equal to or greater than 40 minimum wages, provided that unjustified default or another act of bankruptcy established by law is proven

If petition for liquidation is granted, other creditors must then file their respective claims within 15 days following the public notification of the proceedings, it can vary depending on the specifics of the case and court orders. An administrator then formulates a list of admissible claims and commences the debtor’s assets liquidation prior to distributing the proceeds among the creditors according to the priority established by law.

Priority rules applies while distributing the proceeds to the creditors according to the priority below:

Extraordinary Claims (Extraconcursal)
Expenses essential to the administration of the bankruptcy estate, including court costs, fees of the judicial administrator, and costs related to asset preservation and realization.

Labor Claims
Employment-related claims up to five minimum wages per employee have priority immediately after extraconcursal expenses. Any excess amount is treated as an unsecured claim.

DIP Financing (Fresh Money)
Claims arising from financing granted to the debtor during judicial reorganization or bankruptcy proceedings, as authorized by the court.

Restitution Claims
Amounts delivered to the debtor under contracts subject to restitution (e.g., deposits, advances) as provided by law.

Secured Claims
Creditors holding collateral or liens on specific assets are paid from the proceeds of the sale of those assets, up to the value of the collateral.

Tax Claims
Claims owed to governmental entities, including federal, state, and municipal taxes.

Special Privilege Claims
Certain claims granted special privileges under Brazilian law, such as specific supplier or agricultural claims.

General Privilege Claims
Claims with general privileges under the law, including some supplier credits.

Unsecured Claims (Unprivileged)
Creditors without collateral or statutory privilege.

Subordinated Claims
Claims contractually or legally subordinated to other debts, such as shareholder loans or intercompany debts.

In addition, the liquidator may cancel various types of transactions concluded within 90 days prior to the insolvency proceedings (Section 129 of the Federal Law). Typically, fraudulent deals, improper payments, disproportionate sales, transactions aiming at favouring one creditor over the others, unfair loans etc. would be declared void.

Insolvency proceedings take around five years on average but may extend to ten years depending on the complexity of the case.

After two years from the approval of the Judicial Reorganization Plan, the Judge may terminate the insolvency proceedings; however, the plan remains valid, and the company under Judicial Reorganization must comply with the conditions set forth therein.

All original sales support documents, the amount of the credit, the derivation as well.

In addition to these documents, it is important for AZT Brazil to present the Subrogation Agreement, so that the insurer is recognized in the process as a creditor and obtains the same rights as those inherent to the insured’s claim.