What steps should foreign creditors and investors take to collect on defaulted debts owed by companies in Brazil?
The annual volume of non-performing loans and other credits held by foreign creditors and investors, such as financial institutions, funds, individual investors, and corporations, against Brazilian companies far exceeds the nine-figure mark.
These debts can arise from various sources, including credit transactions (direct lending, export prepayments, bond issuances), as well as commercial, and investments (distressed assets and special situations).
Recent experience demonstrates that (i) possessing the necessary legal documentation, (ii) leveraging technology and AI to gather strategic data on debtors, guarantors, and their assets, and (iii) proactively utilizing both extrajudicial and judicial collection procedures significantly impact the feasibility and timeframe of debt recovery in Brazil.
Below are 3 legal insights regarding debt recovery in the country for foreign creditors and investors:
1. Foreign Creditors and Investors Must Ensure They Hold the Necessary Documentation to Collect the Debt: To collect a debt in any jurisdiction, and especially in Brazil, foreign creditors and investors must ensure they possess the legal documentation required to substantiate and enforce the debt and any associated guarantees.
To this end, they must consider, among other factors, whether the legal instruments underpinning the enforcement or collection in Brazil, such as contracts, promissory notes, or other documents, (i) are valid and enforceable (whether as instruments for summary execution or standard collection actions), (ii) were properly executed by the debtors and guarantors, (iii) involve any specific legal nuances regarding the nature of the guarantees, and (iv) determine which collection procedures, judicial (summary execution or ordinary collection lawsuits) or extrajudicial, are available to the creditors or investors.
2. Foreign Creditors and Investors Should Use Data and AI Technology to Collect from Debtors and Guarantors and to Target Assets: Debt collection in Brazil has been positively impacted in recent years by the use of technologies combined with AI. These tools have enhanced access to data and information regarding debtors, guarantors, and assets, enabling creditors and investors to define strategies and execute action plans more efficiently.
Data analysis and AI technologies make it possible, among other things, to: (i) cross-reference strategic information on debtors, guarantors, and assets to determine the appropriate judicial and extrajudicial measures, such as asset seizure or encumbrance (utilizing systems like SISBAJUD, CONSTRIJUD, RENAJUD, INFOJUD, CENSEC, CNIB, and SNIPER, among others); and (ii) in the case of investors acquiring receivables arising from individual lawsuits or portfolios of cases, to screen, price, and prioritize those with the highest recovery potential.
3. Foreign Creditors and Investors Should Use the Appropriate Collection Procedure Against Debtors, Guarantors, and Assets: The documentation evidencing the credit and the status of the debtor and guarantor will determine the method of debt collection in Brazil.
For defaulting debtors and guarantors who are not undergoing judicial reorganization or bankruptcy, foreign creditors and investors may employ both extrajudicial and judicial means of credit recovery. In judicial proceedings, the validity and enforceability of the debt documentation, along with the liquidity of the credit, will determine whether it is possible to file an enforcement action (an expedited procedure applicable when the debt is liquid and certain) or a standard collection action (an ordinary procedure that takes longer). Concurrently, asset seizure or encumbrance measures may be considered, depending on their feasibility.
In cases involving defaulting debtors and guarantors undergoing judicial reorganization or bankruptcy, foreign creditors and investors can assess whether their claims and established guarantees are classified as *concursais* (subject to the proceedings) or *extraconcursais* (exempt from the proceedings’ impact). Based on this assessment, an action plan must be defined and implemented to actively protect the claim.
The fact remains that a large number of foreign creditors and investors need to collect on claims in Brazil, whether arising from default or investment. Taking care to secure the necessary documentation, gathering strategic data, and acting proactively positively impacts the viability and timeframe of asset recovery.
