REALWorld Law

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

As long as the individual or legal entity is registered with the Federal Tax Department, it is entitled to grant a security over real estate, regardless of whether it is foreign or not. However, foreign individuals or legal entities controlled directly or indirectly by foreigners are subject to restrictions on the acquisition of rural and border areas. Therefore, although Law No. 5,709/1971 (included by the Law No. 13,986/2020) does not extend to the constitution and registration of the fiduciary alienation of rural property to foreigners, this restriction may create difficulties in executing a security in such scenario.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

Notary fees and real estate registry fees are due when the title or transaction is granted and registered, respectively, with the notary office and the real estate registry office. Fees are also payable in the event of cancellation or modification.

Any security involving a transfer of the property will also require the payment of the property tax (ITBI) when granting of the security.

Registration and Notaries’ fees are calculated according to regional fee tables updated annually by the State’s Internal Affairs, which, as a rule, consider the price of the real estate transaction.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

The granting of securities over a company’s assets must comply with the provisions of its bylaws/articles of association and applicable laws. The misuse of the company’s assets may subject managers to liability. Brazilian law does not specifically regulate financial assistance. Therefore, the company must follow the general rules applicable to all transactions when giving security over its real estate assets, including in relation to the corporate benefit rules.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

No, but the debtor or its legal representative must register with the Central Bank of Brazil payments made to a foreign lender. If it is a security document, it must comply with the rules and regulation applicable to foreign exchange. There are certain countries Brazil considers to be tax heavens, and additional bureaucracies will apply to any remittance to such country. It is also important to notice that Brazil has specific Transfer Pricing (TP) rules (Brazil is transitioning from its own TP model to OECD rules, which are optional in 2023 and they should be mandatory in 2024, but an approval from the Legislative branch is still pending) and thin capitalization rules that must be followed. Also, interest is subject to withholding income tax (WHT): usually at 15%, but if payment is made to a beneficiary in a tax, a 25% rate is applicable.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

Priority in Brazil is determined by the order of registration of the security agreement in the relevant Real Estate Registry or Registry of Deeds and Documents (depending on the collateral). As such, the order of priority can only be changed if a first lien is deregistered and then registered again as a second lien (so that the previous second lien would move forward in lien and become the first lien). That could obviously give rise to other problems, in particular if there are further liens already registered (third, fourth etc.). Upon deregistration of the first lien, that lien could not be placed in a specific order in the line (eg second, ahead of other liens already registered), but would have to go to the end of the line.

In theory, it would be possible to enter into contractual arrangements to structurally (but not legally) change the order. For example, by having an agreement whereby the first lien creditor would hold any funds received as a result of the execution of the security agreement and use them to pay any eventual amount due to the second lien creditor.

Finally, in the event of bankruptcy, judicial recovery or judicial enforcements, the credit must obey a certain order of preference established by law.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

As per Decree-Law No. 4,657/42, article 12, paragraph 1, Brazilian courts have jurisdiction over claims related to real estate assets located in Brazil and the relations regarding assets must be ruled by the law of the country where they are located. Additionally, the contracts to be executed must be in accordance with Brazilian law, according to the article 9, paragraph 1, of the Decree-Law No. 4,657/42. However, arbitration procedures allow the parties to choose the applicable law, as long as there is no violation of good customs and Brazilian public order.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

This will depend on the nature of the debt. In any case, regarding credits related to the insolvency procedure per se, validly recorded in rem rights will prefer non validly recorded in rem rights and obey the following order: labour claims until 150 minimum wages per creditor and those deriving from labour accidents, credits recorded with in rem guarantees up to the limit of the recorded asset, tax credits, unsecured claims and those provided by law or agreement. Such preference will be limited to the value obtained with the sale of the asset or in case of a joint sale the value of the evaluation made of the asset.

If a security interest has not been validly perfected (that is, not registered begore the relevant Real Estate Registry Office, in case of real estate securities), it is only valid between the parties who signed the contract and is not enforceable against third parties, since the absence of registration prevents the legal transaction to produce erga omnes effect.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

Administrative and criminal environmental liability can only be subject to the ones that actually violated or contributed to a violation of environmental rulings. However, the lender holding or enforcing security over real estate may be held liable under environmental civil liability if they hold the property/possession of the land, or benefit from the property in which the environmental damages occurred. The civil liability over the lender holding or enforcing security is inapplicable if the financial institution proves that they acted diligently, that they did not benefit from the environmental damages, and that they were not aware of the environmental damages (nor its cause).

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

Usually, a notice of default should be sent to the borrower. If the borrower does not remediate the default, a formal court proceeding will be necessary to enforce the guarantee and enable the judicial sale or acquisition of the property. In general, a debt foreclosure process, even if secured, can take years to be concluded. It depends if the creditor could find assets in the debtor’s name, such as cars, real estate or a positive bank balance, to be attached by a judicial decision.

Certain guarantees, notably fiduciary sale (alienação fiduciária), have an extrajudicial procedure which is enforced by the applicable real estate registry office, as imposed by law.

In such procedure, the debtor will be summoned, at the creditor's request, to pay, within 15 days, the amount due, including the conventional interest, penalties and other contractual or legal charges, such as taxes, the condominium contributions attributable to the real estate, in addition to the collection and summons expenses. If not paid by the debtor, the Real Estate Registry Official will certify the fact and the creditor may request the consolidation of the fiduciary property. And, if the fiduciary party purges the arrears, the Real Estate Registry Official will deliver to the creditor the amount received within three days. If the arrears are not paid, the property will be auctioned by the Real Estate Registry Official.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

Yes, the debtor may have the right to petition for judicial recovery or a general claim of the latter before the creditors of extra-judicial recovery of debts. This may affect lenders with security if a certain percentage of the creditors and/or the judge, as applicable, approve debtor’s payment proposal within the procedure.

When a company gets into an economic and financial crisis, the debtor entrepreneur may request its judicial recovery. This can be granted not only to the debtor in financial crisis with temporary difficulties in their business, but also to one with illiquidity, insolvency or in a patrimonial situation that deserves a planned readjustment of their business activity.

However, only the debtor entrepreneur that regularly carries out its activities for more than two years, in addition to fulfilling the following requirements may apply for such benefit:

• not to be bankrupt and, if they were, to have the resulting liabilities declared extinct by final and unappealable decision;
• not to have been granted judicial rehabilitation for the last five years;
• not to have been convicted or not to have, as administrator or controlling partner, a person convicted of bankruptcy crimes.

The debtor must file an application for judicial reorganization, demonstrating the reasons for its financial crisis and, mainly, the capacity to recover and its initial application must be mandatorily instructed with accounting statements, nominal list of creditors, among other documents expressly required by law.

Regarding the extra-judicial recovery of debts, it is a type of agreement signed between the debtor and its creditors to facilitate the payment of outstanding debts. It works in a similar way to a judicial recovery but with a fundamental difference: it’s not necessary for the negotiation to be carried out with the approval of Justice.

Extrajudicial recovery gives more autonomy to companies that are experiencing serious financial difficulties. The organization itself calls its creditors to make a collective negotiation, all the rights, payment conditions and obligations of each party are defined, the document is drafted and then signed by all.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

If such interests were affected during the period the borrower is considered insolvent by law, the security granted might be declared invalid, as per Law No. 11,101/2005.

Last modified 20 Dec 2023

Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?

First, we must note that mortgages are usually of first and second degree and would observe this order in terms of preference. Nevertheless, in case of different timings they become due or other discussions, there should be a petition, in the insolvency procedure requiring the declaration of the right to priority of payment regarding the debt with real estate rights. The other parties may oppose, and the judge will have to rule on the matter. Eventual appeals may be presented to the decision.

Overall, creditors must be paid in accordance with the following preference order: labour claims until 150 minimum wages per creditor and those deriving from labour accidents, credits recorded with in rem guarantees up to the limit of the recorded asset, tax credits, unsecured claims and those provided by law or agreement.

The rights of creditors arising from a fiduciary sale (alienação fiduciária) are not affected by bankruptcy and judicial reorganization.

Last modified 20 Dec 2023