BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL. BRAZIL Demarest e Almeida

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1 BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL BRAZIL Demarest e Almeida CONTACT INFORMATION Altamiro Boscoli Demarest e Almeida Rua Pedroso de Moraes, 1201, Pinheiros, São Paulo - SP, Brazil aboscoli@demarest.com.br 1. Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. There are no general limitations on charges, liens or encumbrances. However, statutory restrictions on, or related to, the ownership of the underlying asset (e.g. restriction on the exploitation of mining resources, power energy, archeological monuments and other assets referred to in special laws) may apply whether before perfection or in the process of foreclosure. There are also other restrictions, as set forth below: - Homestead rights, which correspond to the real estate belonging to the couple or family entity; - properties owned by the government; - shares are normally freely eligible for security arrangements, but its enforcement may be subject to restrictions, considering the restrictions and prohibitions on the ownership by an offshore entity of certain industryrelated activities ; and - certain assets ("affected assets") owned by regulated entities, such as utility companies and financial institutions, or by companies operating under the concession, permission or authorization of the Government, may depend on the approval of, or communication to, the competent Governmental Agency. 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this

2 in your jurisdiction, whether bilateral or multi-lateral? requirements for enforcement in your jurisdiction? Are there any According to article 8 of Decree-law 4657/42 (Introductory Law to the Brazilian Civil Code) (which contains the basic conflict of laws rules principles), the general rule in order to qualify the assets and regulate the relations concerning them, is to apply the law of the country where the assets are located. For instance, if the debtor has a mortgaged real estate located in Brazil, the Brazilian law should apply. Additionally, the applicable law for the pledge movable assets shall be the law of the country where the person who has the possession of the pledged asset is domiciled, whether the possession is physical or contractual. The market practice when the assets (movable) are located in Brazil but the creditor is abroad is to appoint an attorney-in-fact (which may be a collateral agent) in Brazil to hold the possession of the pledged assets. The same should apply to chattel mortgage (fiduciary lien - "alienação fiduciária"). 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? As a general rule, Brazilian legislation does not accept floating charges or security over the overall assets of the debtor or third party grantor of collateral supplier. In other words, a business, enterprise or floating charge would not be admitted. Brazilian law carves out an exception to such provisions when the debtor issues debentures in favor of the creditor ("debêntures" are a type of bond (debt instrument), normally issued withhin Brazil, regulated by the Brazilian Corporation Law (Law of 1976). In this case, Brazilian law provides that a debenture issued by the debtor may be secured by a floating charge. The enforceability of such floating assets, however, is more likely to be challenged than a collateral where the secured asset has been accurately identified. Even in the case of debentures, the floating charge is not used in the market. 4. In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: (a) Aircraft; (b) Bank Accounts; (c) Animals, Crops (in ground and severed) and Timber; (d) Equipment; (e) Intellectual Property; (f) Inventory; (g) Leases; (h) Mineral Interests, including Hydrocarbons; (i) Promissory Notes and Chattel Paper; (j) Real Estate; (k) Receivables (credit rights under contracts or invoices); (l) Rights under Contracts (excluding Receivables); (m)shares (in book-entry and certificate form and other securities); (n) Vessels; (o) Vehicles;

3 (p) Business as an ongoing concern. In Brazil we have the following as basic forms of security: Mortgage: As a general rule, mortgages are used with real estate and can only be created by a public deed prepared by a public notary. Mortgage may be set forth as a separate instrument but referring expressly to the loan agreement, or in the underlying loan agreement itself. The perfection of a mortgage involves the recordation of the deed with the Real Estate Registry Office of the jurisdiction where the property is situated. The maximum term for a mortgage to be in course according to the Brazilian Civil Code is of 30 years (Art CC), although it may be reenacted by a new deed which must be recorded again. Once recorded, the mortgage is effective against third parties, although until such time it is legally binding between the contracting parties only. Thus, the proper recordation of a mortgage would give the mortgagee preference over any prior but unregistered mortgage created on that same property. In the mortgage, the mortgagor keeps the ownership and, in most of the cases, the possession of the real estate; Antichresis: The antichresis is an assignment - as repayment of the debt - of the right to proceeds arising from a specific real estate; Pledge: The Pledge Agreement, along with its sworn public translation (if signed in a foreign language), must be registered with the competent Registrar (which varies depending on the asset (eg. creditory rights in Deeds and Documents Registrar; industrial and agricultural pledge, with the respective Real Estate Registrar)). In case of vehicles, the pledge shall also be annotated in the ownership certificate issued by the competent traffic/ transport/ licensing department(s) if that is the case; and Fiduciary Lien ("Chattel Mortgage"): The fiduciary collateral of moveable property is deemed created upon registration of the fiduciary transfer agreement with the Registrar of Deeds and Documents. In case of real estate, the fiduciary transfer agreement shall be registered with the Real Estate Registry where the real estate which fiduciary title has been transferred is registered. It does not require a Public Deed. In the fiduciary transfer, the ownership of the asset is transferred to the creditor and, once the debt is paid, automatically returned to the original owner. The enforcement is much more expeditious than the other types of security, since it involves only a possessory lawsuit to recover the possession of the asset. Another advantage is that, since the ownership of the asset stays with the creditor, the credits secured by fiduciary transfer are not affected by the debtor's insolvency procedures. Except, during the period of judicial stay (which cannot exceed 180 days) for judicial reorganization (similar to USA Chapter 11) ("Recuperação Judicial"), if the asset is a fixed asset that is essential for the debtor. 5. Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? The foreclosure of a pledge usually involves the enforcement of the debt and as a general rule, an auction for the sale of the pledged asset supervised by the court. Once the asset is sold, the creditor is paid and the excess balance in relation to the amount of the debt should be returned to the debtor or the collateral supplier. The foreclosure of an asset secured by fiduciary transfer ("chattel mortgage") has a faster procedure, since the creditor is not required to enforce the debt, and the judicial measures concern the delivery, to the creditor of the possession of the asset. Once a default occurs, the ownership of the asset becomes definitive in the name of the creditor. However, it is obligated to sell the secured asset, judicially or extra-judicially, and apply the amount of

4 such selling in the payment of the credit. Foreign verdicts or arbitration awards are enforceable in Brazil without retrial. However, both have to be ratified by the Superior Court of Justice. 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? The figure of a trustee is only expressly mentioned in Brazilian legislation regarding the (i) issuance of founders' share, (ii) issuance of certificate of real estate receivables and regarding the (iii) public issuance of debentures. Therefore, as a general rule, the security must be granted in favor of all lenders. In practice, however, the figure of the trustee is accepted, provided that a power-of-attorney is granted by the lenders to the trustee. 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? The court decision which adjudicates bankruptcy shall fix the legal term of the bankruptcy ("suspect period"), provided that it cannot retroact for more than 90 days from the request for bankruptcy or judicial recovery or from the first protest by lack of payment. Furthermore, the acts performed with the intention to harm the creditors may be revoked, provided that there is fraudulent conspiracy between the debtor and the third parties and the actual damage suffered by the bankrupt estate is evidenced. At the judicial recovery the priority is the one set forth in the plan, however certain credits are not bound by the judicial recovery plan including any stand-still or rescheduling agreement. Those are fiduciary transfer, ownership retention, financial leases and advances under foreign exchange agreements. As per the bankruptcy law the preference of the credits are generally: labor, in rem guarantees, tax credits, credits with special privilege, etc. 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? According to article 83 of Brazilian Bankruptcy Law, the last credits to be paid are the subordinated credits; such credits are either defined in law or agreements or are the credits from the partners or managers without employment relationship with the debtors. The subordinated credits can only be paid after the full discharge of the bankrupt's creditors, including interest related to the bankrupt estate. One can stipulate a limited subordination, to certain creditor or creditors. It should be respected by the bankruptcy court. One can also stipulate priority in pledge and mortgage agreements, among certain creditors. Please note that partners' credits resulting from their interest on the bankrupt's capital stock are excluded from the bankrupt estate. 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.) The assignment of a credit covered by collateral or a guarantee requires the notification of the debtor and the registry of the assignment with the public registrar. The novation

5 extinguishes the guarantees and collateral except as provided otherwise by the grantor of the guarantee or collateral. 10. Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? The owner of the real estate may grant another mortgage over the same real estate, in favor of the same creditor or another one (mortgage of 2nd degree). Brazilian doctrine understands that is possible to have a second degree guarantee over a pledge, however there are doubts regarding the possibility of having a second degree guarantee over a Fiduciary Transfer ("Chattel Mortgage ). 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? The step-in rights are lawful, according to Brazilian legislation, for Public-Private Partnerships (PPPs) and other types of public concessions, where the banks that financed the transaction are allowed to step-in and take control in case the utilities concessionaire does not comply with the financing agreement (Article 127, 2, Law 8987/95) Additionally, the step-in and in rights can be established by contract.. Please note, however, that banks have regulatory restrictions on controlling a debtor company, while remaining as lender.