This content is from: Local Insights

Brazil: Successor’s liability

Luis Antonio Semeghini de SouzaFabiola Cammarota de Abreu

In the prevailing Brazilian economic environment, the potential acquisition of assets without the risks resulting from successor's liability is of great value. The recovery of the enterprise and the productive unit, rather than the recovery of the entrepreneur, is one of the principles adopted by the Brazilian Judicial Recovery and Bankruptcy Act (JRB Act, law no. 11.101/2005).

As a result of this principle, the JRB Act has established that, under certain circumstances and provided that specific procedures are adopted within the judicial recovery process, the acquirer may be exempt from any and all of the seller's liabilities, regardless of their nature. The exemption from successor's liabilities, broadly confirmed by Brazilian tribunals, has solidified the sale of assets – specifically as a branch or productive unit, of companies under judicial recovery.

However, since the enactment of the Brazilian Clean Company Act (BCC Act, law no. 12.846/2013), which became effective in January 2014, there has been much debate on the issue of the exemption from successor's liability also applying to penalties and fines resulting from the BCC Act.

The main reason for this debate comes as a result of a provision of the BCC Act which states that the liability of the legal entity for any wrongdoings against the public administration will survive the cases of amendment to the articles of association/incorporation, transformation, amalgamation, merger or spinoff of the relevant entity.

Since the BCC Act was enacted after the JRB Act, doubts have been raised as to whether it would, in that particular provision – successor's liability for wrongdoings against the public administration – supersede the JRB Act. In other words, can the acquirer of a branch or productive unit of a legal entity under the judicial recovery proceeding be held liable for the civil and administrative penalties that may result from the BCC Act?

As theoretical as the argument may be, it gained relevance in the context of the investigations into potential violations of the BCC Act and related regulations carried out by Brazilian authorities. For various economic conglomerates involved in wrongdoings against the public administration, the sale of a productive unit may be the only viable solution to continue in business – both for the unit to be sold, and the remaining companies belonging to the conglomerate. Moreover, it can be an alternative for raising funds and enabling the legal entity to pay the penalties that may be imposed by the authorities.

To the extent that the BCC Act is still recent, and discussions regarding its provisions have not reached Brazilian tribunals yet, it seems that an interpretation that preserves the principles of the JRB Act, without harming the principles of the BCC Act, should prevail. However, until the matter is decided by the tribunals, to avoid the risk of successor's liability, a cautionary approach is recommended – both to understanding in detail the potential risks resulting from violations of the BCC Act, and to fully comply with the procedures of the JRB Act.

Luis Antonio Semeghini de Souza and Fabíola CL Cammarota de Abreu

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