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Court recognises that fraud in sale of LLC property rules out guarantee

by Luciana Gonçalves Bassani

May 20, 2013

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Along with corporations, limited liability companies (LLCs) are the most common form of corporate entity in Brazil. LLCs are governed by the Civil Code and may be supplementarily governed by the Corporations Law. An LLC’s capital is divided into quotas, representing its equity.

The Third Chamber of the Superior Court of Justice recently recognised that fraud had occurred during the sale of property of an LLC whose quotas were partially attached in the enforcement proceedings against its partners.

Although the property was 50% owned by the company, the entire purchase price was paid directly to its partners. As a result, the court held that the sale resulted in the defalcation of the company’s assets, thereby rendering the creditor’s guarantee ineffective. The referred amount – which also comprised part of the company’s assets and (indirectly) matched the actual value of the quotas – was not received by the company itself; instead, the partners had received such funds by means of a cheque endorsed to their benefit.

As the creditor was aware of the sale of the property and feared that this sale could render the guarantee ineffective (in relation to the attached quotas), it requested that the lower court recognise the occurrence of fraud in the enforcement proceedings. The court agreed with this argument and declared the sale ineffective.

The property’s buyer appealed the lower court’s decision before the Sao Paulo Court of Justice, which stated that the sale of the property should not be cancelled or declared ineffective, as the harm to the creditor was not caused by the sale itself, but resulted merely from the destination of the purchase price.

However, following a further appeal by the creditor, the Superior Court of Justice affirmed that the Sao Paulo court’s argument did not make the disposal of the property lawful, as sale of the property and receipt of the corresponding payment constituted one and the same transaction.

According to the Superior Court of Justice, a given asset was attached as a guarantee to satisfy a debt in these proceedings; however, when the referred asset was otherwise sold, the guarantee was ruled out. The result was the defalcation of the LLC’s assets and a decrease in the value of the attached quotas. The court also noted that the company was used as a tool to disguise the unlawful liquidation of the property.

In this particular case, the sale did not directly involve the attached quotas. However, the Superior Court of Justice warned that due to its relative legality, the lower court’s position allowed for the sale even of goods directly affected by the attachment (which would contravene the Brazilian guarantee mechanism in enforcement proceedings via attachment).

According to the Superior Court of Justice, the sale of the company’s main property constituted an indirect disposal of a significant proportion of the value of the company’s equity (corresponding to the sale payment embezzled from the LLC). The court argued that ignoring the relevance of this matter would go against the facts presented in the proceedings.

An LLC’s quota represents a portion of the company’s total equity; therefore, any reduction or elimination of assets for which the corresponding purchase price is not received constitutes a direct reduction in the value of the LLC’s quota.

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Luciana Gonçalves Bassani

Advogada

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