Brazil collection profile

 

Brazil
       

Brazil

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Complexity of collecting debt:

grading
Notable High Very High Severe


Executive summary

  • The payment behavior of domestic companies is acceptable but standard payment terms are very varied and DSO remains high.
  • Given the length and cost of legal actions in Brazil, chances of obtaining enforceable judgments in a timely manner are low and it is preferable to consider amicable arrangements and specialist debt collection methods as a means to avoid domestic courts.
  • When it comes to insolvent debtors, use of company rescue mechanisms is increasing; however in practice the chances of recovering debt remain extremely low.
 
General Information GENERAL INFORMATION arrow-transparent
 
Collection Practices COLLECTION PRACTICES arrow-transparent
Court Proceedings Court PROCEEDINGS arrow-transparent
 
Insolvency Proceedings INSOLVENCY PROCEEDINGS arrow-transparent
 
General Information 

GENERAL INFORMATION

Days Sales Outstanding (DSO)

The payment behavior of domestic companies remains acceptable but is under pressure because of the macro economic difficulties since 2014. Although the regulator in Brazil has tried to regulate payment delays, late payments are still likely to occur unless transactions are secured: the average DSO is around 70 days for 2015 whilst the average payment terms turn around is 50 to 60 days (30 days in the retail and distribution sectors, 210 days in the agro sector). It may be noted that the SERASA database is available to all companies and provides records of late payers and payment failures, thus making it difficult for bad payers to access new lines of credit.​

 

Late payment interest

Late payment interests may be claimed from the day following the due date but the law is fairly helpless on this issue. The Civil Code provides that a monthly rate of 1% of the debt may be charged by default, but the rule in practice is that interest rates must always be agreed upon as a contractual matter. Local traders are used to paying interest, however this is often considered as a negotiation tool to obtain payment more rapidly.

Collection costs may also be fully charged on the debtor but the law does not provide a uniform rule as to whether a default sum may be charged to the debtor so that negotiating this as a contractual issue is important. Courts usually consider that costs ought to represent up to twenty percent of the outstanding debt (especially in the legal action phase), but amounts may be used as a negotiation tool.

 
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collection practice 

COLLECTIONS PRACTICES

Orchestrated negotiation first

Given the length and cost of legal action in Brazil, chances of obtaining enforceable judgments in a timely manner are low and it is preferable to consider amicable arrangements (such as payment instalments) as a way out. As a matter of law, negotiation through conciliation or mediation is not mandatory but the Civil Procedure Code strongly encourages courts to give the parties additional opportunities to reach a settlement through Alternative Dispute Resolution methods before the evidence phase and before the judgment (see below). As a result, commencing collection with strong negotiation efforts is never a loss of time. Before starting legal proceedings against a debtor, assessment of assets is furthermore extremely important as it allows verification as to whether the company is still active and whether recovery chances are at best. In addition, it is essential to be aware of the debtor’s solvency status: if insolvency proceedings have been initiated, it indeed becomes impossible to enforce a debt.

 
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Court Proceeding 

COURT PROCEEDINGS

Brazil is divided into twenty-six states and has a peculiar legal environment operating at both Federal and State levels. At the Federal level, the courts (Tribunais Regionais Federais) usually deal with international claims involving the public authorities and have a geographic jurisdiction (Brasilia, Rio de Janeiro, Sao Paulo, Porto Alegre and Recife). At the State level, (each State has its own laws and judicial system), the courts rather deal with all the matters excluded from federal jurisdiction. Cases in first instance are dealt with by the Justices of the Peace, but commercial disputes are rather solved through the Magistrates' Courts by specialized judges. Federal Courts (Tribunais de Justiça) deal with appeals. In addition to difficulties in solving jurisdictional issues, the courts must also work with Civil and Common Law, which are both used in Brazil: as in Civil legal systems judges must follow codified rules (but codification is not systematic in practice) but, by contrast with Common law systems, they are not bound by precedents. As a result, the legal environment is rather complex and litigation may prove extremely lengthy and difficult, which does not help answering the various criticisms as to the lack of independence and trustworthiness of the judiciary.

It should first be noted that distances may be troublesome. On the one hand, jurisdiction depends on the debtor's geographic location and the size of the country can make proceedings complicated (however if the contract provides for another jurisdiction clause then the problem may be avoided). On the other hand and for the same reason, finding the debtor may prove difficult and would slow the proceedings down insofar as trial may only start after the debtor’s notification by a service process. Legal dunning (protesto) must otherwise start with a registered Demand Letter recalling the debtor’s obligation to pay the principal together with late payment interest (as contractually agreed or taking a legal rate as a reference). Fast track proceedings (açao monitoria) may be initiated when the creditor has written proof, signed by two witnesses and registered by a public notary (documents must be translated into Portuguese by a sworn translator and legalized before the Brazilian Consulate), that the claim is legitimate: if the debtor's obligation is deemed certain, liquid and exigible (certo, liquido e exigivel), the Municipal Courts (Justices of the Peace or Magistrates) usually render Payment Orders within fifteen days. If the debtor fails to comply within 3 days, the Order then becomes enforceable. If an appeal is lodged, however, the creditor has no choice but to commence formal ordinary legal action. Ordinary legal action would otherwise usually commence when amicable collection has failed. The claimant must serve the respondent with a registered Writ of Summons, to which the debtor must answer within fifteen days of receipt. This step is essential as Brazilian courts are very strict as to the way defendants should be summoned in court proceedings. The proceedings are inquisitive in nature and encompass an investigation phase conducted by the court, an examination phase and a hearing phase. However, the tribunal may render a default judgment (revelia) if a duly served writ is left unanswered for. In this case, the alleged claim would be considered legitimate and the decision would reflect accordingly.

 
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insolvency Proceeding 

INSOLVENCY PROCEEDINGS

Since 2005, the insolvency legislation inspired from the U.S. Chapter 11 (Law no. 111.101/05) has facilitated rescue proceedings. Greater priority has been given to creditors, thus increasingly the availability of fresh restructuring cash for companies facing temporary financial difficulties. In practice, however, the chances of recovering debt when the debtor has become insolvent are extremely low.

 
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