Trade Alert: Brazil

• Published date: 11 November 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy
• Law Firm: Brown Rudnick LLP
• Author: Ms Louisa Watt, Iden Asl and Natalie C. Grundy

The second round of voting in the Brazilian presidential elections took place on 30 October 2022. It has been reported that approximately 118 million Brazilians voted in that round. Former president and left-wing candidate Luiz In'cio Lula da Silva defeated rival Jair Bolsonaro, who had been in office since 2019, marking one of the most astonishing comebacks in political history. In the end, Lula da Silva received 50.9 per cent of the vote, while Bolsonaro won 49.1 per cent.

The cost of living and inflation in Brazil is increasing which is why many voters turned towards a Lula da Silva government, with his strong policy focus on tackling extreme poverty and hunger. However, Lula da Silva's rhetoric has unnerved some investors, with a clear focus on past achievements, rather than details of his fresh economic agenda. There are concerns he has not focused on the structural changes needed to improve productivity and generate long-term growth in the country, such as a more progressive tax regime to overhaul Brazil's infamously complex tax system.

Although inflation is rising, the Brazilian economy reportedly expanded more than expected in June. The central bank's economic activity index rose by 0.69 per cent from May. It also reported that activity increased by 3.09 per cent year on year. Bolsonaro's social program was approved by government, which will see lower income households receiving monthly payment increases of R200, coinciding with the election campaign. Lula da Silva has suggested he would maintain this recently approved social welfare program. Forecasters predict unemployment could hit a seven-year low of 8.5 per cent. More generally, market commentators are predicting that inflation could reach 7.02 per cent as the increase in social spending keeps pushing it higher, however, they also believe that the key SELIC rate should remain at 13.75 per cent this year and drop to 11 per cent by the end of 2023.

SPECIAL THANKS

We appreciate the assistance of Eduardo Mattar, Renata Machado Veloso, and Jo'o Pedro Nascimbeni, of Padis Mattar Advogados, with the following discussion of Brazilian law, regulation and practice.

BRAZILIAN LEGAL SYSTEM

Brazilian law derives mostly from continental European (Portuguese, German, French, Italian) civil law. It is based on statutes and recent constitutional reform. The Federal Constitution, in force since 21 October 1988, is the supreme law of the country and organises the country as a Federative Republic. There are 26 federative states (and the federal district) in Brazil, each of which have the powers to adopt their own Constitutions and laws, subject to the rules and principles provided for under the Federal Constitution.

Accordingly, Brazil has a very complex legal system, with a set of specific laws - issued by the Federal, State and Municipal Governments - and regulations - issued by administrative governmental authorities, such as the Central Bank of Brazil and the Brazilian Securities and Exchange Commission (Comiss'o de Valores Mobili'rios) - governing a variety of situations and environments, including rules applicable to the members of the Brazilian financial and security system, to credit/debt environment, and to local and foreign investments. Most aspects of private law are governed by federal statute or regulations issued by federal governmental authorities.

Among these laws and regulations, the most relevant for the purchase and sale of credit and foreign investments in Brazil are the Brazilian Civil Code, Federal Law No. 4131/1962, and National Monetary Council Resolution No. 4373/2014.

KEY POINTS FOR TRADERS

• Transfer of credit is generally carried out through a simple written assignment from the seller to the purchaser. Foreign entities do not require any government or local authority consent or authorisation to acquire credits in Brazil, even if such credit is already being enforced in court or out of court.
• In order to be enforceable against third parties, the assignment must be entered in writing, inform place and date of its execution, the identification of assignor and assignee and (where applicable) be registered with the competent registrar agent.
• Debtor's consent is not required; however, an assignment only becomes enforceable against the debtor once notified thereto or formally acknowledged thereby.
• Any inflows or outflows of cash to/from Brazil require prior registration with (not authorisation by) the Central Bank of Brazil. As such, an assignment of credit will typically trigger electronic registration requirements with the Central Bank of Brazil, to facilitate remittance of funds (e.g., from the debtor to the assignor for payment of the claim). Absent such electronic registration, future remittances under the credit may be more cumbersome. F/X agreements are required to allow the inflow and outflow of cash. No Central Bank authorisation is required, but F/X operators (banks, brokers) are typically rigid in reviewing and scrutinising the underlying transactions as a requirement to engage in such F/X agreements.
• Brazil has usury rules that restrict the amount of interest rate that a non-banking institution may charge a debtor. However some credit instruments, such as debentures or bank notes, may be issued or assigned to non-banking institutions without such restrictions applying to the assignee.
• Credits secured by fiduciary transfer/assignment (alienaç'o e cess'o fiduci'ria) enjoy the...