BRAZIL Law and Practice Contributed by: Alberto Malta, Davi Ory, Ana Vogado and Maria Eduarda Amaral, Malta Advogados
auction, adjudication or private sale in mortgage cases. A public auction must occur within 60 days. If unsuccessful, a second auction is held (in fidu - ciary sale) or the asset may be appropriated or sold privately. If sale proceeds are insufficient, the debtor remains liable for the balance, which can be pursued judicially. The 2023 Legal Framework for Guarantees intro - duced a streamlined, unified procedure, offering a faster alternative to traditional court actions. Judicial enforcement remains slower and more complex, although COVID-19 pandemic-related foreclosure restrictions have been lifted. Despite faster extrajudicial options, many credi - tors choose debt restructuring to avoid fore - closure costs and property holding expenses. Meanwhile, a growing non-performing loan (NPL) market has emerged, with banks and financial institutions selling distressed assets to specialised funds and FIDCs, which take over recovery efforts. 3.7 Subordinating Existing Debt to Newly Created Debt Subordination may arise either by agreement between creditors, through specific clauses or contractual arrangements, or by operation of law. Under the Legal Framework for Guarantees, multiple fiduciary transfers over the same prop - erty are permitted, with automatic subordination of later guarantees to earlier ones. In judicial reorganisation or bankruptcy, an approved plan may restructure the priority of claims, including suspending enforcement, which can effectively subordinate secured credi - tors. Additionally, debtor-in-possession (DIP) financing, introduced in 2020, grants super pri -
ority to credit extended during a reorganisation, allowing its guarantees to override pre-existing ones. 3.8 Lenders’ Liability Under Environmental Laws Environmental liability does not generally apply to creditors who only hold a security interest, such as in a fiduciary sale or unenforced mort - gage and have not yet consolidated ownership. According to the STJ, liability is propter rem, attaching to the title holder, meaning the party in possession and control of the property. Mere holding of a security interest therefore does not trigger environmental liability, even under strict liability laws. However, once ownership is consolidated, or if the creditor exercises effec - tive control over the property, they may become liable. This interpretation reinforces that envi - ronmental responsibility depends on the actual acquisition and exercise of ownership rights. 3.9 Effects of a Borrower Becoming Insolvent The borrower’s insolvency does not automati - cally invalidate previously established security interests, except in cases of fraud or transactions made during the “suspect period” . As a rule, guarantees remain valid, as the pledged asset is excluded from the bankrupt estate. However, guarantees created or reinforced shortly before the insolvency declaration may be annulled by the court to avoid undue creditor preference. In judicial recovery, the enforcement of guarantees may be suspended during the stay period. In bankruptcy, secured creditors retain their legal priority in the distribution of proceeds from the secured asset.
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