Artigo elaborado pelo Dr. Christian Moritz, publicado no site da Câmara de Comércio Suíço-Brasileira04/09/2015
Debt collection in Brazil
With the Brazilian economy in difficult times, customers and suppliers have reason to be concerned about the future performance by one or another business partner in Brazil. The most recent development in insolvency proceedings highlights the seriousness of the economic situation of many Brazilian companies: Within the first seven months of 2015 alone, 523 Brazilian companies have been declared bankrupt (regular insolvency) and 627 applied for of court-supervised restructuring proceedings. In contrast, 2014 saw in the same period “only” 427 and 476 cases respectively. It is hence cautiously estimated that there will be a total rise of between 20 – 35% in the number of companies that are insolvent or require judicial restructuring in 2015.
Among the currently increasing numbers rank well-known heavyweights of the Brazilian energy and construction industry, such as OAS, Schahin and Galvão Engenharia, which in recent months filed for insolvency and initiated judicial restructuring proceedings respectively as a result of being involved in the current Lava Jato investigation pertaining to the Petrobras bribery scandal. In addition, the majority of Brazilian-domiciled car manufacturers are drastically reducing their local production due to a slump in sales, which is causing more than a few of their suppliers to falter. What fits in with this picture is the fact that, , according to the credit check agency SERASA Experian, the Brazilian corporate default rate raised 12,9% in the first semester of this year compared to the corresponding prior year period. A similar deterioration tendency in payment behaviour has been observed by Euler Hermes. The latter predicts 68 days in the average Days Sales Outstanding (DSO) related to Brazilian listed companies for this year which means the increase of two more days in comparison to 2014.
In this difficult scenario, business partners of companies operating in the above-mentioned industries are at particular risk of their counterparts defaulting on claims for payment or performance either partially or even entirely. Suppliers and customers are therefore well-advised to concern themselves in advance with the settling and realisation of debts in the event that one of their Brazilian partners becomes insolvent. Christian Moritz, lawyer in São Paulo,* deals with important aspects of this topic in the following FAQs.
How will I find out about the insolvency of my Brazilian business partner?
At the latest, it will be necessary to take the initiative when there are growing signs of serious financial difficulties like delays or requests for payment deferrals on the part of the Brazilian business partner. This is because the Brazilian judicial administrator will not always notify the overseas creditor directly and in a timely manner of the fact that insolvency proceedings have commenced. In some instances, the administrator will not (yet) be aware of the claim of the relevant creditor either because of an absence of duly-maintained records or because the debtor will not have informed the administrator of the claim. Monitoring developments affecting the business partner, litigations it is subject to, its entries in the company register as well as Brazilian insolvency publications by the competent Regional Court at the debtor’s place of business through publicly available sources will be one’s mercantile duty in times of crisis in order to find out about (imminent) insolvency of the Brazilian business partner at an early stage.
How are claims to be filed in Brazil?
A creditor of a company subject to insolvency proceedings who seeks to have a share in the distribution of assets or vote at creditors’ meetings, for instance in relation to a rescue plan, as part of preliminary protection proceedings must file its claim with the Brazilian administrator for entry into the table maintained by the administrator. While the procedure governing the filing and determination of claims is similar, by way of example, to the German Insolvency Act in its fundamental principles, the specific requirements and limitation periods differ significantly from German procedure. Procedural mistakes, such as filing claims late or omitting to file claims altogether will not remain without consequences, but will usually lead to the loss of voting and preferential rights as well as cost orders.
Will the creditor be able to initiate insolvency proceedings against the debtor’s wishes?
Subject to the requirements below, a creditor can itself initiate insolvency proceedings against its Brazilian debtor. Thus, it will not have to remain idle indefinitely, or until the debtor itself files for insolvency. A Brazilian debtor will frequently see little reason to do the latter. This is because in Brazil, unlike Germany, the Damocles’ sword of direct liability for failure to file for insolvency in due time is not hanging above the debtor. While omitting to file for insolvency despite indications to the contrary may give rise to damages claims under Brazilian law, there is no (final) judicial decision to this effect yet.
Are all creditors eligible to initiate insolvency proceedings?
Pursuant to Brazilian law, a creditor may initiate regular insolvency proceedings if the debtor is in arrears in the amount of 40 monthly minimum wages of 788 BRL (current as of 1.1.2015). In order to meet this threshold of approximately 8250 EUR (current as of 12 August 2015) several creditors may proceed together by way of permissive joinder. Further grounds on which creditors can initiate insolvency proceedings arise from a fruitless attempt at individual enforcement of a claim as well as from the debtor committing one of seven legally-defined breaches of duty (with potentially adverse effects for the creditor). Hence, in contrast to German law, actual insolvency or over-indebtedness is not a prerequisite for the initiation of insolvency proceedings. Rather, one of the above-mentioned circumstances – all of which are mere indicators of insolvency – will suffice for the purposes of commencing proceedings.
Will it make a difference in the insolvency proceedings if the creditor is not domiciled in Brazil?
Creditors whose registered office is outside of Brazil will have to appoint a Brazilian-domiciled agent. Where such creditors seek to initiate insolvency proceedings, they will also have to provide security that covers the costs as well as potential claims for damages by the debtor.
And what about the capacity of debtors to be the subject of insolvency proceedings?
Only merchants (individuals), stock companies and “commercially active” legal entities can be the subject of proceedings pursuant to the Brazilian Insolvency Act of 2005. By way of example, freelance professionals, non-commercial companies and cooperatives (the latter even when “commercially active”) are excluded. These are subject to insolvency regulations contained in the Brazilian Code of Civil Procedure that do not encompass restructurings. Further, the Insolvency Act is not directly applicable to state-owned entities, public-private partnership companies, financial institutions, credit cooperatives, social welfare institutions and insurance companies. This group is mainly subject to special legislation.
Which exchange rate will apply in insolvency proceedings with respect to claims in Euros, Swiss Francs or US dollars?
The amount of the claim filed is to be converted into Brazilian Reais. Different reference dates are pertinent: In the case of regular insolvency proceedings the exchange rate will be fixed as at the date the judge ordered the matter to proceed. In restructurings, the current exchange rate will apply, unless the creditor has expressly consented to a different stipulation; at creditors’ meetings, the preceding day’s exchange rate will apply for the purposes of determining how many votes attach to each claim.
How should a creditor proceed in the event of claims both against a parent company (outside Brazil) and its Brazilian subsidiary where both companies are insolvent or unwilling to pay?
In this instance, the circumstances may require the creditor to initiate separate proceedings in each country and to file the respective claims. By way of example, insolvency proceedings in Germany indeed cover the company’s assets worldwide. However, it is not possible to consolidate (secondary) insolvency proceedings in relation to the assets of the Brazilian subsidiary. This is because, very simply, Brazilian law lacks the necessary international provisions. Therefore, proceedings initiated in Brazil will solely be subject to Brazilian law.
What preventative measures against default of a debtor can creditors take when doing business in Brazil?
Like in many jurisdictions, only segregation rights will protect creditors from low quotas of realisation of claims. For example, both chattel mortgages and retention of title clauses in a sale of goods transaction on an instalment basis will entail such rights. In order to recover their property, secured creditors will need to apply in writing to the judge presiding over the proceedings and submit evidence of title. However, what many foreign-based creditors fail to complete (in time) is entry of these rights into the respective “document registries” at the debtor’s place of business. If not registered, these proprietary rights will not legally come into existence and will hence be unavailable to the creditor in the insolvency proceedings.
This article is based on an article first published in German in the journal Tópicos 2/2015 of the Deutsch-Brasilianische Gesellschaft.
Christian Moritz is a lawyer in São Paulo / Frankfurt a. M. He is the author of the chapter on Brazil in the Munich Commentary on the German Insolvency Act (“Münchener Kommentar zur Insolvenzordnung: InsO, Band 4: EGInsO, EuInsVO, Länderberichte”). The book contains an introduction to Brazilian corporate insolvency law.