BRAZIL Law and Practice Contributed by: Roberto Panucci, Tiago Severo, Diogo Nebias and Guilherme Teles, Panucci, Severo e Nebias Advogados
5.7 Rules Governing the Priority of Competing Security Interests Priority in Brazil generally follows the first-to-register principle, meaning the earlier perfected lien prevails over later filings. Fiduciary transfers provide stronger protection, as the asset is segregated from the debt- or’s estate in insolvency. Contractual subordination was expressly recognised under the 2020 insolvency reform and is enforcea- ble in bankruptcy. Structural subordination naturally applies where creditors of a holding company rank behind those of its operating subsidiaries. Intercreditor agreements are commonly used to gov- ern relative rankings among lenders in unitranche or multi-tranche financings. Contractual variations of priority are enforceable among creditors but cannot override statutory preferences, such as labour claims, tax claims, and accident-related claims. 5.8 Priming Liens Brazilian law recognises limited categories of claims that may rank higher secured creditors in an insol- vency scenario. First, estate expenses (eg, court and insolvency administrator fees, expenses necessary to preserve and sell assets, certain post-petition labour and tax items) are paid before pre-petition claims. Second, within the waterfall for pre-petition claims, labour claims and occupational accident-related claims have statutory privileges. Tax claims rank after secured creditors on their collateral proceeds but may still compete on unencumbered assets. By contrast, assets held under fiduciary structures (eg, fiduciary transfer of real estate, fiduciary transfer of movables, or fiduciary assignment of receivables) are generally excluded from the insolvency estate. The creditor may reclaim or enforce them directly and these assets fall outside the pari passu pool available to unsecured creditors. In certain cases, courts may restrict the enforcement of fiduciary transfers where the asset is essential to operations. The 2020 insolvency reform allows court-approved DIP financing to obtain super-priority, subject to ade-
quate protection of existing liens. Lenders address priming risk by favouring fiduciary security over pledges/mortgages where available, monitoring tax and labour exposures, and incorporating intercredi- tor provisions that anticipate potential DIP funding. 6. Enforcement 6.1 Enforcement of Collateral by Secured Lenders Secured lenders in Brazil can enforce their collateral upon borrower default (after any contractual grace or notice periods) per the methods allowed by law for that type of collateral, as follows. • Extrajudicial (out-of-court) enforcement – certain security interests allow the creditor to enforce without a full court process. By way of example, in a fiduciary transfer, upon default, the creditor (fiduciary owner) can typically sell the asset pri- vately or via fast-track procedures. For fiduciary transfer of real estate, the law provides a specific extrajudicial foreclosure process: the creditor registers the default with the Real Estate Registry, notifies the debtor to cure within 15 days and, if not cured, proceeds to sell the property at auction (two rounds of public auction). • Judicial enforcement – if the collateral is not under a fiduciary transfer or assignment agreement, enforcement typically requires filing a lawsuit in court. This is because the creditor does not hold title as in a fiduciary transfer, only a lien. In terms of restrictions, Brazil has an automatic stay of judicial reorganisation (for 180 days, possibly extended) that freezes enforcement actions against the debtor and the debtor’s assets (except fiduciary transfer and assignments). In bankruptcy (liquidation), individual enforcements are ceased and assets are handled by the bankruptcy administrator. Secured creditors will then get paid from sale of their collateral through the bankruptcy proceeding and, if the col- lateral is a public concession or something requiring regulatory clearance, enforcement might need regula- tory approval.
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