1. INTRODUCTION
In order to provide greater security to creditors and ensure the fulfillment of contractual obligations, Brazilian law provides for the constitution of guarantees, whether in rem or personal guarantees.
Personal guarantees are those in which a third party guarantees the fulfillment of a specific obligation entered into by the debtor before the creditor. In Brazilian law, personal guarantees are divided into suretyship (‘aval’ guarantee) and sureties.
In rem guarantees are those in which an asset is offered to ensure the fulfillment of a specific obligation entered into by the debtor before the creditor. The main in rem guarantees used in the Brazilian market are pledge, mortgage, and the modalities of fiduciary ownership, such as fiduciary sale of assets and fiduciary assignment of rights.
Depending on each modality, Brazilian law regulates certain formalities that must be complied with by the parties for the effective establishment of guarantees and to produce effects before third parties.
2. PERSONAL GUARANTEES
Personal guarantees are those in which a third party guarantees the fulfillment of a specific obligation entered into by the debtor before the creditor, putting forward their personal assets to guarantee the satisfaction of the obligation. Thus, the third-party guarantor assumes the obligation in case of breach by the debtor.
Surety constitutes a subsidiary obligation of the guarantor in the contractual relationship between the debtor and the creditor, affecting the guarantor’s assets only after it is determined that the debtor cannot comply with the obligation by means of their own assets. Therefore, the debtor’s assets are primarily executed before there is any impact on the guarantor’s assets, except in cases of: (i) explicit waiver by the guarantor; (ii) the guarantor’s constitution as main or joint debtor; and (iii) the debtor’s insolvency or bankruptcy.
Since it is an accessory obligation to the main one, by law, a surety does not have autonomy and is subject to any impact undergone by the main obligation. Therefore, any instances of nullity, voidability, or termination of the main obligation affect the surety as a consequence.
Suretyship (‘aval’ guarantee), as the second type of personal guarantee, is considered a negotiable instrument that binds the guarantor to the obligation specified in a bond (título de crédito), under the same conditions stipulated for the debtor. In these terms, the suretyship (‘aval’ guarantee) can be granted as a guarantee for the full or partial amount of the obligation.
Unlike the subsidiary and accessory impact on the guaranteed assets in the form of a surety, the guarantor is personally liable for the bond (título de crédito) independently, except in cases of nullity due to formal defects. In other words, the guarantor can be directly affected by the creditor of the bond’s (título de crédito) debt against the debtor under the same terms, and the guarantor’s obligation remains unaffected by any impact on the obligation that originated it.
In both cases when the guarantor’s assets are affected, they are entitled to reimbursement of the amount expended, known as the right of recourse (direito de regresso).
For the purpose of demanding compliance with the obligation by the guarantor of the surety, the rules established by Brazilian procedural law regarding the enforcement proceedings are applied. Furthermore, when enforced, the guarantor has the right to demand that the debtor’s unencumbered and free assets be enforced first, specifying them in detail. The guarantor of the suretyship (‘aval’ guarantee), on the other hand, is subject to the same enforcement formalities as the debtor and can be indicated as a defendant in the enforcement proceedings in an equivalent manner.
3. IN REM GUARANTEES
In rem guarantees, in turn, are those in which an asset is offered as collateral for the fulfillment of a specific obligation entered into by the debtor before the creditor and are usually constituted in order to strengthen the creditor’s position regarding the obligation, in a subsidiary or accessory manner. In other words, regarding in rem guarantees, they are considered a qualitative reinforcement in favor of the creditor because, even if the value and list of secured assets are the same, the creditor will have an additional specific asset meant to secure the enforcement of their credit.
The main in rem guarantees used in the Brazilian market are pledges, mortgages, and the modalities of fiduciary ownership, such as fiduciary sale of property and fiduciary assignment of rights.
3.1. MORTGAGE
A mortgage is an in rem guarantee that applies to real estate, rights, and other assets specified in Brazilian law, such as ships and aircraft, whose enforcement is granted by the registration of the instrument in the relevant registry office, depending on the object of the guarantee.
A mortgage can be constituted by means of a private instrument or a public deed, with the latter being required in cases where the real estate assets used as the guarantee are worth over thirty times the highest minimum wage in the country, in both cases based on an agreement between the parties.
During the effectiveness of the mortgage guarantee, the real estate remains in the possession of the debtor, while the creditor has the right to foreclosure in case of breach of the guaranteed obligation. Consequently, the debtor is responsible for bearing the liens of their property.
Under Brazilian law, mortgage instruments must necessarily contain the following information, the absence of which may render them ineffective: (i) the amount of the credit, its estimation, or maximum value; (ii) the fixed term for payment; (iii) the interest rate, if applicable; and (iv) the asset which constitutes the guarantee with its specifications.
Regarding specific characteristics of a mortgage, it is considered that the creditor does not have a right to the guaranteed asset itself, but rather to its intrinsic value, as will be discussed in item 4 below.
3.2. PLEDGE
Pledge is the in rem guarantee that applies to movable assets, involving the actual transfer of possession of such asset, the debtor remaining as the owner and indirect possessor, and the creditor being the direct possessor. There are exceptions in cases of pledge of rural, industrial and mercantile assets, and vehicles, where the assets constituted as collateral remain in the possession of the debtor.
A pledge is established by means of a private instrument that must be registered in the competent registry office, depending on the asset subject to the pledge.
During the effectiveness of the pledge, the asset remains in the possession of the creditor, who is obligated to maintain, care for, and return it to the debtor upon the fulfillment of the guaranteed obligation.
Under Brazilian law, pledge instruments must necessarily contain the following information, the absence of which may render them ineffective: (i) the amount of the credit, its estimation, or maximum value; (ii) the fixed term for payment; (iii) the interest rate, if applicable; and (iv) the description of the asset with its specifications.
Similar to a mortgage, it is considered that the creditor does not have a right to the pledged item itself, but rather to its intrinsic value, as will be discussed in item 4 below.
3.3. FIDUCIARY OWNERSHIP
Fiduciary ownership is the transfer of resoluble ownership of assets and rights over assets for the purpose of constituting a guarantee. Among its modalities, fiduciary sale of property and fiduciary assignment of rights are similar in terms of fiduciary ownership. In this regard, fiduciary sale has as its object a movable or immovable asset as collateral, while fiduciary assignment has as its object a right over an asset. In both cases, the transfer of fiduciary ownership is effective as long as the guaranteed obligation remains in effect.
3.3.1. FIDUCIARY SALE
Fiduciary sale, pursuant to law, falls under the concept of fiduciary ownership, which involves the transfer of ownership of the debtor’s asset to the creditor, making it so the debtor is the direct possessor of the asset and the creditor is the fiduciary owner. In a nutshell, these formalities allow the creditor to sell the encumbered asset to third parties, either by means of judicial or extrajudicial proceedings, and direct the amount to pay for the defaulted obligation.
The constitution of fiduciary sale is formalized by registering the instrument in the Registry Office of Deeds and Documents, for movable assets, or in the Real Estate Registry Office, for immovable assets, with specific formalities in cases of fiduciary sale of vehicles, whose instrument must be registered with the competent licensing authority.
3.3.2. FIDUCIARY ASSIGNMENT
Fiduciary assignment, in turn, aims to establish guarantees out of the fiduciary ownership of rights over assets, primarily represented by receivables, whether reflected in bonds (títulos de crédito) or not, which have been assigned by the debtor. In this case, the creditor of the obligation is entitled to receivables constituted as guarantees and can use them to enforce the guaranteed obligations.
The establishment of fiduciary assignment is formalized by registering the instrument in the Registry Office of Deeds and Documents located at any of the parties’ domicile.
4. ENFORCEMENT PROCEEDINGS FOR IN REM GUARANT
In essence, when considering the methods of enforcing in rem guarantees, the creditor has the right to enforce the guarantees by post bonding them before court for subsequent auction, having preference in payment over other creditors, and, in case of mortgages, they have registration priority.
If the amount acquired from the guarantee’s enforcement is not sufficient to cover the debt plus legal expenses, the debtor remains personally liable for the remaining amount.
In any case of granting an in rem guarantee in favor of the creditor, regardless of the modality, it does not confer the right to the asset itself, but rather to its respective value. Any agreements stipulating the permanent ownership of the asset by the creditor are considered invalid.