Credit transactions between Brazilian borrowers and local and foreign lenders are commonly entered into through a Loan Agreement, whose credit is also represented by a Promissory Note.
Although widely used by financial institutions, fintechs, funds and financiers in general, it is common to see formatting and substance errors in Promissory Notes, which may jeopardize the judicial enforcement of the credit in case of payment default.
See below 5 key points that foreign creditors should pay attention to when using Promissory Notes:
1. What is a Promissory Note Under Brazilian Law? Promissory note is not a guarantee. It is an extrajudicial executive title that represents a debt. Through the PN, the Brazilian borrower promises to pay the creditor an amount by a specific date.
The legal requirements under Brazilian Law are set by Decree No. 57,663 (so-called Uniform Law of Geneva) and must be carefully met to avoid the risk of legal challenge by the debtor and guarantors.
2. Can a Promissory Note Contain a Guarantee? Yes. A Promissory Note may provide the guarantee (known as “aval”) of individuals or companies, whereby the guarantor undertakes, as principal debtor, individually and jointly with the debtor and other guarantors, the punctual payment of the amount expressed in the Promissory note.
3. Can a Promissory Note be Electronically Signed Under the Brazilian Law? Yes. To avoid legal challenges by debtors of the authenticity of electronic signatures of NPs, it is recommended that lenders/creditors demand that borrowers and guarantors sign the Promissory Note by means of a qualified electronic signature, using a digital certificate issued by ICP-Brasil, under the terms of Provisional Law (Medida Provisória) 2.200-2.
4. What is the Payment Term for Promissory Notes Under Brazilian Law? PNs issued in domestic and foreign loan transactions are issued for payment at sight. That is, in case of default, it can be demanded by the creditor from the debtor immediately.
Attention should be paid to Annex I to Decree No. 57,663, which provides for a one-year statute of limitations for the PN to be presented for payment. It is possible to establish a longer period, but it must be expressed in the instrument.
5. What Applicable Law Should Creditors Use on Promissory Notes? PNs issued in domestic loan transactions in Brazilian reais (domestic) must be governed, of course, by Brazilian law.
Care is taken in Promissory Notes issued as a result of international loan transactions. We still see foreign financial institutions and funds use Promissory Notes governed by foreign law (typically New York State law) to represent debt under a Loan Agreement governed by foreign law. This is not the most suitable structure for transactions with Brazil.
For international credit operations with Brazilian borrowers and guarantors, the PN must be governed by Brazilian law, which will allow the foreign creditor to use an autonomous credit instrument to enforce the defaulted debt in Brazil, increasing the chances of credit recovery.
Given the high volume of domestic and foreign credit transactions that use Promissory Notes, it is important for financial institutions, fintechs, funds and financiers in general to keep the above points in mind.
