Brazil: Brazilian Bank Credit Note ("CCB") And Security Therefor

On August 2, 2014 Brazilian Law No. 10,931/04 ("CCB Law") completed its tenth anniversary. Among other matters, it brought significant improvement to financial and capital markets in the country. Amongst them are (i) the creation of the so-called Bank Credit Note (Cédula de Crédito Bancário - "CCB") and important changes in laws regarding the fiduciary assignment as a way of security, especially provisions of Law No. 4,728/65 ("Capital Markets Law"), which essentially regulates local capital markets.

During the last decade, the use of the CCB and the extension of loans secured by fiduciary types of security consolidated in Brazil. Both are legal institutes of relevance for the evolution and sophistication of credit transactions in the country, that clearly gained the preference of credit institutions. Interestingly enough, however, one can affirm that their practicality and functionality have not yet been fully tested.

The CCB is a long-form flexible credit note that allows the debtor to specify in the document the terms and conditions agreed upon with the lender, similarly to promissory notes in most Common Law jurisdictions. Article 26 of the CCB Law defines the CCB as "a title of credit issued by individuals or legal entities in favor of a financial institution or equivalent entity representing a promise to pay in cash arising from a credit transaction of any kind".

The CCB Law also created the possibility of financial institutions issuing certificates representing CCB's held by them in deposit, subject to conditions defined by the National Monetary Council (the so-called CCCB - Certificate of Bank Credit Notes or, in Portuguese, Certificado de Cédulas de Crédito Bancário).

Brazilian Superior Court of Justice ruled that the CCB may be issued to formalize current account transactions, such as revolving loans and overdrafts, provided that the note meets certain requirements set out in the CCB Law (such as, amongst others, inclusion of clear, precise and easy-to-understand calculations of the amount of the debt, charges, expenses and installments, including legal fees and penalties, issuance of the CCB for the total amount of credit extended and discrimination of amounts actually drew by the borrower, as well as applicable charges.

It is important to note, the CCB Law provided substantial comfort to the Brazilian financial community in the realm of the then existing polemic regarding the possibility of capitalization of bank interest (i.e. the accrual of compound interest rates). The statute provided a specific paragraph to set the matter in stone.

As far as the rights of the general public while investing in CCB's are concerned, the Brazilian Securities and Exchange Commission ("CVM") expressed the understanding that the CCB should be treated as a security (therefore subject to capital markets laws and CVM regulations) whenever it is distributed through a public offering and without the co-obligation of the financial institution should a default occur.

In respect of the domicile of the creditor of a CCB, the first paragraph of Article 26 of the CCB Law states that the CCB can be issued in favor of a creditor domiciled outside of Brazil, provided that the obligations thereunder are subject to Brazilian courts (on an exclusive basis) and law. In other words, the CCB Law equaled creditors domiciled outside of Brazil to those domiciled in Brazil (i.e. entities within the Brazilian National Financial System) in the sense that foreigners also can formalize their credit transaction through a CCB. This proves to be relevant for transactions in which foreign law and jurisdiction (e.g. the Laws and Courts of England and Whales, or the Laws and Courts of the State of New York, in the United States of America) are not essential or have no connection, or when the borrower does not have material assets in those Common Law jurisdictions. This leads to simplification of the paperwork, cost and enforcement effectiveness, in addition to the advantage of possibly assigning the CCB on local negotiation and settlement platforms such as the CETIP. Should a Credit Agreement be subject to the Courts of London or New York, any foreign judgment or ruling issued thereupon should first be validated by the Brazilian Superior Court of Justice before commencement of the relevant foreclosure proceeding.

Another aspect of interest is provided for in Article 31 of the CCB Law, that enables the creation of any kind of security for the obligations assumed by a borrower in the CCB, personal guarantees or consisting of assets of any kind, movable, immovable, material or immaterial, fungible or not, present or future, consumable or not, held by the borrower himself or by third parties.

We draw special attention to the fiduciary assignment of receivables. That type of lien is usually formalized as follows: the borrower (i) offers certain receivables to the lender as security; (ii) notifies its debtors (buyers, customers, etc) to request payment of those relevant receivables upon transfer into a specific controlled collection account opened for the purposes of the secured credit transaction and subject to an Account Control Agreement; and (iii) in addition, the borrower subjects said controlled collection account to a lien (pledge or fiduciary transfer - similar to a chattel mortgage) to the benefit of the lender.

The differential of the fiduciary assignment of receivables is that essentially cash is transferred to the lender as a way of security, which provides the lender with significant liquidity and effectiveness upon foreclosure. In this case, Articles 6 and 49 of Law No. 11,101/2005 (Brazilian Bankruptcy Law) apply to grant to the lender the privilege of not being subject to the effects of a judicial recovery or bankruptcy of the borrower. In the latter case, the lender shall have the right to claim restitution of the asset in possession of the bankrupt borrower (subject only to a still period of six months in case the bankruptcy court interprets that the asset is essential for the operation of the borrower). Such understanding has been applied by the Third Chamber of the Brazilian Superior Court of Justice, which in Special Appeal No. 1202918/SP, in 2013 ensured that "the fiduciary transfer of fungible assets and the fiduciary assignment of rights over movable assets, as well as titles of credit have the legal nature of fiduciary ownership, thus not subject to the effects of the judicial recovery, as provided in Article 49, §3, of Law No. 11,101/2005".

With the enhanced credit availability in Brazil the need for speed, certainty and simplicity in banking and financial transaction is crucial. Since the enactment of the CCB Law in 2004, the circulation of credit and the creation of security rights have gone through significant improvement and progress. The CCB should be seen as an investment vehicle of great interest to domestic and foreign investors willing to access the Brazilian debt markets. It provides liquidity and certainty in the formalization of credit transactions, as well as effectiveness upon foreclosure directly before the courts of the jurisdiction where the operations and assets of the borrower are located. In addition, effective and liquid security mechanisms conferring significant comfort to lenders and investors can be created in the body of a CCB, such as the fiduciary assignment of receivables and bank accounts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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