Directors’ Liability in Brazil

In general terms, the Directors shall not be personally liable for the obligations assumed in name of the Company during its regular management; however, they can be deemed liable (on a civil liability basis ) for damages and losses arising from either transgression of Articles of Association/Bylaws or the law, or in cases they have wilfully or culpably used their powers.

Also, a Director may be held liable for other Director’s illegal acts should he consent with such illegal acts, neglects to detect them, or, once aware of them, fails to prevent them.

In this sense, Directors are not liable for acts performed by their predecessors, unless it is proven that such acts continued to be performed during their new mandate. In such cases, the liability would be for the period of their new mandate, and not for the previous period.

There may be an exception when labour liability is concerned. As Brazilian Labour Courts are highly protective of employees, in case the Company, its shareholders and prior Directors do not have assets that could be pledged to cover the debt, then the current Directors may have their assets pledged. In such case, they would be able to claim back from the Company and/or Ecolab any losses suffered.

Furthermore, specific events of liability might come up depending on the area of law to which the action or omission is subject:

• civil: fraud against creditors and abuse of powers (precedents), which may also lead to the disregard of legal entity;
• corporate: corporate purposes deflection, asset mix up;
• tax: abuse of power or transgression of law/ articles of association; irregular winding up;
• social security: social security contributions embezzlement (in Brazil a part of the social security is deducted from the employee’s salary and must be paid to the government) or evasion;
• labor: directors may be held liable in case of willful or culpable behavior. Also, should the company not pay the debt judicially recognized or no company’s assets be found for attachment the judge is likely to disregard the legal entity (precedents) and, in case the shareholders are not resident in Brazil, the Directors’ assets may be attached;
• environmental: damages to the environment with consent with actions, negligence to detect actions, or in case of failure to prevent them once aware;
• antitrust: transgression of economic order (either by the company or its Directors), and abuse of power or transgression of law/ articles of association (it may lead to the disregard of legal entity);
• bankruptcy: officers may be treated as debtor or as bankrupt entity for criminal purposes provided they are culpable;
• corruption: the practice of acts considered harmful to the Public Administration (national or international), such as to promise, offer or give, directly or indirectly, undue advantage to a public servant or a related third party; proven finance, bear costs, sponsor or in any other way support the practice of any illegal acts foreseen in the law;
• other criminal issues: please see answer to question 3 below.
  

According to article 158 of The Corporations Law (Federal Law 6404/1976), directors may be sued in Court for damages deriving from actions or omission, within the regular set of affairs, with fault or intent during the term of their appointment. Item II of said article also establishes the possibility of judicial prosecution if the director acts in breach of the statutes of the company or the law.

The main and most common plaintiff in Civil Damages Indemnification Lawsuits is the Company employing the director for damages suffered due to fraud, negligence, or breach of fiduciary duties. Before brought to Court, the lawsuit must be approved by the general assembly of the Corporation, according to article 159 of the Corporations Law.

In addition, the Federal Tax Code (Federal Law 5.172/1966) under articles 134 and 135, establishes that the tax authorities may also include the director as jointly and severally responsible for taxes due and penalties.

Main sources of criminal liability are financial crimes (tax evasion, money laundering, etc.), social security evasion, labour crimes, environmental, antitrust, bankruptcy and corruption. For more details, please check the answer to question 1 above.

Since Brazil has both Federal and State level legal systems, criminal proceedings may be initiated by State or Federal Prosecutors depending on the alleged breach of the law.

Statute of limitations for civil cases is fixed in the Civil Code in 10 years as of the date of the fact giving rise to the right, as long as the law does not provide for shorter terms.

In case of claims by the shareholders against the Directors, the statute of limitations is 3 years as of the date of presentation of the balance sheet referring to the fiscal year in which the violation was committed, or of the general meeting where the violation was known.

For criminal cases, the statute of limitation depends on the punishment imposed for the crime in abstract or on the punishment specifically applied by the judge in the verdict. Therefore, it varies depending on the offense, or the outcome of the process, from 3 to 20 years. Here is an example:

the crime of tax evasion (art. 1 of Law 8,137/90) is punishable with from 2 to 5 years of imprisonment. Before and during the criminal proceeding the statute of limitation is calculated considering the maximum of 5 years of imprisonment. Therefore, the Prosecutors have 12 years to file the criminal proceeding or the Court has 12 years as of that filing of the procedure to publish the unappealable decision. However, if the verdict sentences the Defendant to the minimum punishment of 2 years, the statute of limitation would be 4 years as of the start of the proceeding.

Directors and Officers insurance policies are available in Brazil and regulated by Susep – Federal Insurance Regulator. The most important aspect to consider is on a regulation of Susep – Circular 553/2017 where in its article 5º establishes that the insurance company must insure the directors only in cases of faulty action or omission within the scope of the director´s attribution. Intentional action or omission will not be covered according to article 3º. Therefore, when it comes to the fiduciary duty of loyalty, if breached, the insurance policy will not cover eventual damages for the actions or omissions of the director.

Directors, for the purpose of this work, refers to anyone appointed/elected in the official corporate documents (Articles of Association for limited liability companies or Bylaws for corporations or General Shareholders Meetings), whether independent or not.

Non-executive Directors may also be held liable even without representation powers when they instructed the illegal conduct, agreed with it or did not take action to impede it.

Controlling holding companies are liable for the abuse of the controlling power where damages arise from actions that benefit the controlling parent in disfavour of the interests of the company and other shareholders (articles 115, 116 and 117 of the Corporations Law).

Also, the Courts may deem the controlling holding liable for deeds in breach of the law or with the abuse of controlling powers. One good example is Taxes, where the controlled company is liable for filing and paying its own taxes. However, if the tax authorities show to the Courts that the controlling holding directed actions to avoid disclosure and payment of taxes, then the controlling holding will be jointly and severally liable for the taxes of the controlled company.