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Law No. 13.986 of April 7th, 2020, previously known as the Agribusiness Provisional Measure, enters in force on this Wednesday (April 8th, 2020) after it was signed into law by President Jair Bolsonaro. The set of rules aims at improving the business environment in the agribusiness production chain and inaugurates a new regulatory mark for this segment’s private financing.
The new Law amends several uncodified laws, improving credit mechanisms that were already consolidated. In addition, such changes make the rules more flexible and more transparent for the representation of credit operations and constitution of collaterals.
Among the main progresses provided by the new regulatory mark we highlight the following:
The Joint Guarantor Fund (“FGS”) – The FGS shall work as a complementary guarantee for financial institutions and shall be constituted by at least two debtors (without maximum limit), one creditor and one guarantor, if applicable. The fund shall be constituted with the participants’ resources, according to a division of quotas, whereas, at least 4% of the amount of the renegotiated debt for which debtors are liable, 4% of the amount of renegotiated debt for which creditors are liable and 2% of the amount of the renegotiated debt for the guarantor financial institution. In addition to the amount collected with the fund and the joint liability from all the participants of the fund, debtors may also offer other guaranties to creditors.
Rural Assets in Appropriation – This institute, which is a celebrated progress, enables the rural land owner to divide its properties into small parts so that he may offer them as a guarantee in different credit transactions. The encumbrance shall fall only within the land, accessions and improvements, expressly excluding the plantations and movable properties existing on it, enabling the possibility to include concurrent guarantees in the same transaction.
The Rural Asset in Appropriation shall be represented by the Rural Real Estate Credit Note (“CIR”) for financial transactions, which shall be contracted not only with financial institutions but also with investment funds. For transactions done with cooperatives, cereal producers or any other creditors, the transaction shall be represented by the Rural Product Credit Note.
Another relevant matter of the institute is that all obligations bonded to it shall not be used to perform or guarantee the performance of any other obligation assumed by the owner and unlinked to the obligation from which he is bound, including cases of judicial reorganization, with the exception of labor, social-security and tax obligations from the land owner.
Update of the Rural Product Credit Note – Law No. 8.929, as of August 22, 1994, which enacted the Rural Product Credit Note (“CPR”) has received several changes with the purpose to modernize the security issuance and make it safer, whereas, the following changes must be emphasized:
- – Greater clarity in the definition of rural products that can be the subject to the CPR: There was an increase in the list of products that can be the subject to the CPR, expressing the possibility to issue the CPR for agricultural products, planted forest and fishing products, also becoming valid for its derivatives, by products and residues of economic value subjected to processing or to first industrialization process. In addition, another major progress is to enable the issuance of CPR for products related to the conservation and management of native or planted forests.
- – Eligibility to issue the CPR: The new wording allowed a clearer interpretation in relation to those who are entitled to issue a CPR. Now, the rural producer may be a natural or legal person, whose purpose might not be exclusively rural production. In addition to these, the agricultural and livestock cooperative as well as the association of rural producers, whose purpose is the production, commercialization and industrialization of rural products, are eligible, in addition to natural or legal persons, who explore native or planted forests or who benefit or promote the first industrialization of rural products that can be subject to the CPR.
- – Exchange rate change: The financial CPR may now be issued with an exchange rate change clause to be used for the security redemption, whether in favor of a national or foreign non-resident investor.
- – Form of debt update: The financial CPR may contain clauses establishing the necessary standards for the clear identification of the interest rate, whether fixed or floating, inflation adjustment index and also stating the schedule for the performance of the obligations;
- – Book-entry or Instrument Form: The CPR may now be issued in a book-entry or instrument form, by means of an electronic bookkeeping system to be managed by an entity authorized by the Brazilian Central Bank. This will facilitate and give greater safety for the issuance of CPRs used as guarantees in structured transactions.
- – Expansion of the list of guarantees: There was an expansion of the list and greater clarity regarding the collaterals that may be constituted by a CPR, bringing more safety and transparency for the transactions. The fiduciary sale of agricultural products and their by-products may fall on present or future assets, fungible or noninterchangeable, consumable or not, whose ownership belongs to the settlor, debtor or third guarantor. Moreover, the search and seizure or auction promoted by the creditor for the fiduciary sold asset does not eliminate its subsequent execution, including the mortgage and the pledge constituted on the same note, to satisfy the remaining credit of the debt, providing more certainty in the satisfaction of the credit.
Update of provisions of Law No. 11,076, of December 30, 2004. Following what happened with the law that regulates the CPR, there was also a detailed update in the Law that regulates other agribusiness securities. Among those, it is worth to highlight the following changes:
- – Book-entry or Instrument Form: The Agriculture Deposit Certificate (CDA) and Agricultural Warrant (WA) shall be issued directly in book-entry form, which shall occur through an entry in an electronic bookkeeping system managed by an entity authorized by the Brazilian Central Bank to exercise bookkeeping activity.
- – Protection from the effects of Judicial Reorganization: In cases where the holder of the CDA and the corresponding WA are different from the depositor, the product subject to these securities shall not be confused with the depositor’s property or be subject to the effects of its judicial reorganization or bankruptcy, prevailing the ownership rights on the asset over to the final endorser who presents himself to the depositary.
- – Issuance for non-resident investors: The credit securities referred to in Law No. 11.076/04 may now be issued in favor of non-resident investors.
Establishment of in rem guarantee of rural properties by foreigners and Brazilian Entities Controlled by Foreigners as well as the receipt of rural properties for settlement of transactions: Another important progress for the private development of the agribusiness are the changes to the provisions of Laws 5.709/71 and 6.634/79 that enable that (i) rural properties can be pledge as in rem collateral to foreign legal entities as well as to Brazilian Legal entities equated to foreign legal entities (the latter being “Brazilian legal entities in which, for any reason, foreign individuals or legal entities that have the majority of the share capital and reside or are headquartered abroad”), and (ii) rural properties can be transferred to these legal entities in the cases of settlement of transactions.
Although Law 5,709/71 does not prohibit the establishment of mortgages or the chattel mortgage of rural properties to foreigners, there was controversy about such possibilities, especially regarding the chattel mortgage, which generated a scenario of legal uncertainty for foreign investors. In the case of chattel mortgage, for example, there were those who understood that it simply could not be implemented, since rural property, even if resolvable, could not be transferred to foreigners, without complying with the requirements of Law 5.709/71. Others understood that the fiduciary sale could be established, but, in case of default, the property could not be consolidated in favor of the foreigner.
Law 13,986/20 eliminates this legal uncertainty, as it includes item II, second paragraph of article first of Law 5,709/71, which excludes from the scope of the law “hypotheses of constitution of collateral, including the transfer of fiduciary property, in favor of a legal entity, national or foreign”.
Furthermore, item III was included in the same provision, which excludes from the scope of the law “cases of receipt of property in liquidation of a transaction with a legal entity, national or foreign, or national legal entity in which, for any reason, foreign individuals or legal entities that have the majority of their share capital and that reside or are headquartered abroad, participate through real guarantee, payment in kind or in any other way”.
This provision is extremely relevant, as it opens the possibility for foreign legal entities, or Brazilian legal entities equivalent to foreigners, to become owners of rural properties without observing the restrictions of Law 5.709/71. In the event of default on a chattel mortgage contract, for example, the foreigner may consolidate ownership of the rural property in his name, after complying with the legal procedures provided for in Law 9.514/97. Another possibility opened by the law is for a foreign legal entity to take out a loan and receive a rural property from the debtor.
It is also worth noting that Law No. 6,634/79 was also modified to enable both the setting up of in rem guarantees and to receive properties for settlement of transactions, involving rural properties located in frontier strips.
In addition to the amendments above described, many of other legal dispositions were improved in order to bring more transparency, agility and legal certainty for the private financing of the agribusiness chain.
We remain at your disposal to answer any questions and/or discuss opportunities for applying the new legal provisions in credit operations in the agribusiness chain.
Please find the full text of the new law by clicking here
Gilberto Deon Corrêa Junior
Juliana Pretto Stangherlin
Luis Felipe Spinelli
Otávio Augusto Dal Molin Domit
Rafaela Chemale Kern