Security and enforcement
Finance providers in domestic financings may require a security package including mortgage, fiduciary assignment (title-retention instrument), assignment of earnings and insurances, assignment of receivables, step-in rights under existing long-term charter contracts (typical for high-value offshore units), pledge over bank accounts, pledge over shares of special purpose companies and bank guarantees.i Financing of contracts
For ships under construction in Brazil, finance providers may require a mortgage apart from other collateral typically required in ship finances. This type of mortgage is possible in Brazil only when the construction has started, and will affect the parts of the ship as they are built. It is not possible under Brazilian law to create the mortgage over the entire ship prior to or during its construction. Brazilian mortgages cannot be created over future assets.
It is, however, much more likely for ships under construction in Brazil that financiers require a fiduciary assignment over the ship instead of a ship mortgage. The fiduciary assignment has a number of benefits in Brazil compared to a ship mortgage. This includes better protection for the security holder in the event of insolvency of the borrower, given that the ship's title is held by the security holder until the discharge of the secured obligations. In an insolvency of the borrower, the ship is not subject to priority rules among the creditors of the borrower. Another benefit of the fiduciary assignment is that the borrower, for not having ownership but only possession of the ship, has no right to dispose of or place an encumbrance on the ship in any form except for maritime liens arising from regular trade.
Finance providers may also require the assignment of the buyer's right under the shipbuilding contract and any associated guarantee or security provided to the buyer for the obligations of the shipbuilder.
As to aircraft financing, only registered aircraft in Brazil are subject to Brazilian mortgages. An aircraft that has never been registered in Brazil may not be subject to a Brazilian mortgage. Brazilian mortgages, after being fully perfected by registration with the RAB, will afford a first priority security interest in rem over an aircraft in favour of a mortgagee. Considering the recent accession and ratification of the CTC, there is a lack of precedents in judicial and administrative levels to ensure, at this point, the immediate and literal application of all terms and conditions thereof. However, we are of the view that there are legal grounds to defend that such treaty should prevail, in accordance with its terms and the declarations deposited by Brazil, in respect thereof. After registration with the International Registry, Brazilian mortgages and leases in relation to registered aircraft in Brazil should be effective to create international interests.ii Enforcement
Generally, Brazilian courts are expected to enforce consensual security interests perfected in accordance with applicable law. State courts have jurisdiction over foreclosure actions based on valid security interests. The usual procedure includes seizure of the collateral, official appraisal and judicial sale of the collateral.
On 18 March 2016, a new Code of Civil Procedure became effective. The statutory changes made through the Code of Civil Procedure are primarily intended to improve the speed and the effectiveness of civil court proceedings. One provision of the Code of Civil Procedure that could be particularly relevant refers to foreclosure actions, which can now be filed directly against the owner of the collateralised asset, and not only against the principal debtor, its assignors or successors, which was required under the revoked Code of Civil Procedure.
The change consolidates an understanding that was already largely accepted by Brazilian scholars and courts. According to such understanding, a beneficiary of a security interest may take action directly against the owner of the property in cases where the principal debtor and the owner are different individuals or entities.
This provision may also be relevant if a collateral is transferred and the relevant secured party needs to enforce its in rem rights against the new owner. This is particularly important in relation to Brazilian mortgages, as the principal debtor is not required by law to obtain a consent from the beneficiary of the security interest before transferring title to the collateral. A contractual provision demanding such consent may be held invalid. However, Brazilian law would allow for a provision under the financing documents to establish that a transfer of title without the consent of the security holder represents an event of default.
Ship finance providers in a default or insolvency context will typically consider enforcing mortgagee's rights to secure the payment of the debt. Because self-help remedies are not recognised under Brazilian law, a mortgagee in such a case has to seek court intervention to enforce its rights.
A mortgagee cannot request in court to take possession of a mortgaged ship. Under Brazilian law, the mortgagee's main right is to request the court to seize and auction the mortgaged asset. The security holder of a fiduciary assignment is, however, the legal owner of the collaterised asset and can thus repossess it from a defaulting borrower. Recent practice in insolvency cases has also proven that controlling the movement or effectively taking possession of a collateralised ship in Brazil is often achievable more efficiently by a combination of out-of-court negotiations and other alternatives, such as taking control of the borrower through an existing share pledge.
In a default context involving securities over vessels, maritime liens created by operation of law also have to be considered when assessing the rank of priority of security interests deriving from the finance documentation.
In relation to mortgages over aircraft, in case of an event of default under a Brazilian mortgage, the mortgagee may pursue foreclosure proceeding based on such Brazilian mortgage; however, the mortgagee would not be automatically entitled to seek repossession of an aircraft from a lessee.Effects of insolvency procedures
In an insolvency context, enforcements depend on the nature of the security interest. Credits secured by fiduciary assignments are generally not subject to effects of judicial recuperation or bankruptcy proceedings. Other securities will be subject to such proceedings and payment of the debts will occur insofar as higher-ranked competing creditors under the Bankruptcy and Restructuring Law (Law 11,101/2005) are paid first in a liquidation proceeding or subject to the judicial recuperation plan. Insolvency contexts also trigger stay periods, in which no legal action can be taken against the debtor to secure payment and hardening periods, which may lead to the invalidation of securities created over debtor's properties prior to bankruptcy.
The Bankruptcy and Restructuring Law allows airlines to avail themselves of insolvency protections roughly similar to the US Chapter 11. Theoretically, the stay period in the Bankruptcy and Restructuring Law is not applicable for aircraft leases. Recently, the application of the stay period for lessors and the CTC have been extensively disputed in the judicial recuperation filed by the airline Oceanair Linhas Aéreas S.A. and AVB Holding S.A. (trading as Avianca in Brazil) in state courts of São Paulo. The trial court judge ordered the suspension of all repossession actions filed by lessors, as well as de-registration requests addressed to ANAC. Although the judge recognised that aircraft leases are not subject to judicial recuperations and the applicability of the CTC, he ordered the suspension on the basis that allowing repossession of several aircraft would make a restructuring unfeasible. Initially, the suspension should apply for 30 days, based on the stay period mentioned in the CTC. After expiry of the initial 30-day term, the court extended the suspension on the principle-based argument that the provisions of the Bankruptcy and Restructuring Law and the CTC allowing lessors to repossess and export their equipment following a default should be mitigated because they are the most essential assets to an airline and the purpose of the Bankruptcy and Restructure Law is to allow the maintenance of business ventures. Lessors and ANAC have appealed the trial court decision. As of February 2019, the issue is waiting to be decided by the São Paulo Court of Appeals and the Superior Court of Justice in different appeals.iii Arrest and judicial sale
Brazil has not ratified the Conventions on the Arrest of Ships of 1952 and 1999. Ships can generally be arrested on the basis of the Brazilian Commercial Code and the Brazilian Civil Procedure Code. Arrest can also occur on the basis of the 1926 Brussels Convention, the Bustamante Code, the International Convention on Civil Liability for Oil Pollution Damage and the Assistance and Salvage Law (Law 7,203/84).
Under Brazilian law, there is one category of maritime claim that can be brought by way of arrest of a ship. This category is described in the Brazilian Commercial Code and provides that as long as maritime privileged credits existing against the ship continue to exist (the law actually refers to 'privileged' claims), the arrest may be granted. Privileged obligations have in rem effects and constitute a maritime lien over the ship.
The list of maritime privileged credits that gives rise to a maritime lien on the vessel includes mortgagee's rights. The entire list is found in the Brazilian Commercial Code and is amended and complemented by the 1926 Brussels Convention.
In addition to maritime liens, which is the main category that can give rise to the arrest of a vessel, there is a second type of claim that might cause the start of a judicial arrest of the vessel not as consequence of an in rem obligation but as a consequence of an in personam obligation.
By way of a right of attachment, the Code of Civil Procedure allows a party to seek conservatory detention of the vessel through an ex parte order seizing a vessel based on elements capable of proving the probability of the alleged claim (fumus boni iuris) and the risk of loss or damages to the useful outcome of the lawsuit (periculum in mora).
The arrest, or embargo, of a ship is a provisional remedy in Brazil, adopted to secure an underlying claim that is subject to the Brazilian jurisdiction. Generally, a claim is subject to the Brazilian jurisdiction if the defendant is domiciled in Brazil, if the obligation is performed in Brazil, or if the event giving rise to the claim has taken place in Brazil.
The arrest of a ship based on a foreign decision or arbitral award is also permitted. If the arrest order is granted as an urgent interlocutory decision, according to the Code of Civil Procedure, the arrest order would be recognised and accepted by Brazilian courts without examination of the merits upon ratification by the Superior Court of Justice.
The condition to ratify an urgent interlocutory decision is that:
- it must comply with formalities necessary for its enforcement under the laws of the place where it was rendered;
- it must have been given by a competent court after proper service of process on the parties or after sufficient evidence of the parties' absence, as established pursuant to applicable law;
- it must not be contrary to Brazilian sovereignty, public policy and good morals;
- it must be duly apostilled pursuant to the Hague Apostille Convention or authenticated by the competent Brazilian consulate and be accompanied by a sworn translation into the Portuguese language; and
- it must not be a decision on any matter over which the Brazilian Judiciary has exclusive jurisdiction.
If it becomes necessary to enforce in Brazil a foreign decision or arbitral award that is final and on the merits of the dispute, the party seeking the enforcement must first ratify the decision with the Superior Court of Justice to confirm that the requirements (a) to (e) above have been met, in addition to demonstrating that the decision may not be subject to appeal. Again, no examination of the merits is made. Brazil has ratified the 1958 New York Convention.
Ships can be arrested in Brazil under in rem or in personam claims. Claims in rem are possible when the creditor has a proprietary security interest over the ship. Claims in personam, on the other hand, refer to credits that the arrestor has against the shipowner and not the ship.
Under in personam claims, the arrestor is required to prove with a certain degree of certainty not only its credit in respect of the vessel owner, but also the risk of the frustration of its claim if the arrest is not granted. Typically, the risk of frustration is demonstrated when the vessel that is subject to the arrest proceeding is the only asset of the shipowner and no court bond is provided by the shipowner to secure the claim.
In the case of an in rem claim, on the other hand, it is not required that the arrestor demonstrates the risk of frustration. It should suffice to prove the mere existence of a maritime lien. Maritime liens include a consensual security interest, originating, for instance, from a mortgage instrument, and a non-consensual security interest, secured to its holder through an ex lege lien such as seamen's wages, bunker or port duties.
A foreign-domiciled arrestor with no assets in Brazil is further required to secure the payment of judicial costs and attorneys' fees corresponding to 10–20 per cent of the claim value, except if there is an applicable international treaty waiving such requirement. Additionally, a counter-guarantee may be requested in very exceptional cases, at the judge's discretion, to grant the arrest order. The amount of the counter-guarantee is generally set at 20 per cent or more over the amount of the debt in dispute. Any guarantee must be posted either in cash, bank guarantee, insurance bond or other collateral acceptable to the court. Generally, when dealing with foreign plaintiffs, courts are likely to require cash and bank guarantees.
While Brazil does not have specific legislation on wrongful arrests, a separate civil claim can be brought in tort by an arrested party against a wrongful arrestor. In such cases, the arrested party has to prove not only the damage and causation but that the wrongful arrestor acted with negligence in arresting the vessel.
The arrested party must also demonstrate that the wrongful arrestor acted in bad faith (e.g., by using false pretences or unsupported facts) when bringing the arrest proceeding. The arrested party in such a claim may seek compensation for actual damages and payment of a penalty for bad-faith litigation ranging from 1–10 per cent of the updated claim value.
As for the arrest of a sister ship or associated arrests, Brazil does not have legislation allowing these based on a maritime lien. The alternative in such cases is to enforce a right of attachment, which is an action in personam against the shipowner, and seize the sister ship to secure the main claim.Judicial sale
The judicial sales of assets can follow three different proceedings in Brazil:
- Adjudication (award) – the creditor (including secured creditors) is authorised to request the award of the asset, which transfers the title to the creditor, provided that the creditor offers an amount not lower than the value indicated in the official appraisal of the asset.
- Court-regulated private sale – the creditor can procure the sale of the asset by him or herself or through a broker registered with the court upon the judge's authorisation. The judge shall have determined all the minimum requirements (i.e., minimum price, payment method, guarantees, publicity method, etc.), following a very similar procedure to that of the public auction.
- Public auction – this is the most common method used for an asset sale. The proceeding requires the publication of an advisory notice at least five days before the auction date to inform possible interested purchasers. In view of the Code of Civil Procedure provisions, it is preferred that the auction be made online, although the court may decide in a particular case that the physical auction is more adequate. The valuation of the asset is made through an official appraisal and the court has discretionary powers to set the minimum sale price. The amount of the valuation and the minimum sale price must be included in the advisory notice of the auction. If the court does not set the minimum sale price, the minimum sale price will be no less than 50 per cent of the amount of the valuation.
In cases contemplated by law and when the assets deposited in court are subject to quick deterioration or require high custody costs, the judge can order an anticipated sale of the asset by auction. Additionally, the judicial costs involved in the legal foreclosure proceeding takes precedence over all privileged credits.
If the sale is completed through the adjudication method, the procedure may be concluded in a relatively short period (around one to three months). Any of other two methods rarely takes less than six months to a year.Governing law
Brazilian law governs arrests and judicial sales procedures of assets carried out in Brazil.