2015 ICTF’s Annual Global Trade Symposium Latin America - Trade Creditors' Rights and Protection - Lessons Learned the Hard Way BRAZIL Ft. Lauderdale, FL November 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 Codearticle 186 of the Brazilian Taxation Code —Liquidation scenario – articles 83 and 84 of the Brazilian Bankruptcy Lawarticles 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.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/DistributionCommercial 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.

Thank you! Ricardo H. Safini Gama

Brazilian Taxation Code Art The tax credit has preference of any other, irrespective of its nature or time of constitution, exception made to the credits derived from the employment legislation or work-related accidents. Sole Paragraph. In case of liquidation: I -the tax credits will not have preference over the non- concourse credits or the amounts subject to restitution, as provided for by the bankruptcy laws, nor over the credits given as guarantee, up to the limit of the collateral.

Brazilian Bankruptcy Law Art. 84. It shall be considered non-concourse credits and shall be paid with preference over the ones mentioned in art. 83 of this law, in the following order, the following ones: I -compensation of the judicial administrators and their assistants, and credits derived from the labor laws or work-related accidents in connection with services rendered after the bankruptcy was declared; II -amounts provided to the Estate by the creditors; III -expenses incurred with the verification of assets, administration, sale of the assets and distribution of the proceeds, as well as the costs of the liquidation proceeding; IV -court fees related to the lawsuits and enforcement proceedings in which the estate lost; V - obligations derived from valid acts performed during the business reorganization, or after the bankruptcy was declared, and taxes related to facts occurred after the bankruptcy was declared, in accordance with the order of art. 83 of the law.

Brazilian Civil Procedure Code Art In case of default by the buyer, proven by the protest of title, the seller may request, preliminary and without the answer from buyer, the seizure and deposit of the item that was sold. § 1. Upon granting the request, the judge will appoint an expert, who shall inspect the item and assess its value, describing its current situation and itemizing its characteristics. §2. Once the deposit is made, the buyer shall be served with process to present a response within 5 days. If the buyer has already paid more than 40% of the price, it may request the judge 30 days to repossess the item by paying the past due installments, interest, attorney’s and court fees. §3. If the defendant does not present a defense, does not request the term for payment or fails to actually make the payment foreseen above, the plaintiff may, provided the submission of the past due and incoming titles, request the immediate possession of the item under deposit; in this case, it shall be discounted from the value of the assessment the value of the debt accrued with the judicial and non-judicial expenses, the plaintiff shall reimburse to the defendant the balance.