After Brazil’s judiciary signed a cooperation agreement with the Central Bank a few years ago, judges gained a powerful instrument that enables them to freeze bank account funds online. Unfortunately, that power has become a dangerous instrument for attorneys that represent foreign clients, as they may be held liable for their clients’ tax and labor debts.
Originally used by labor courts to coerce companies to pay their labor debts, the online freezing of bank accounts now is being used by state and federal judges to collect taxes owed by corporate taxpayers. The problem is that this powerful instrument has been used without criteria, and attorneys often see their personal accounts frozen to guarantee the payment of taxes owed by the clients they represent, and even clients that are no longer with their law firms.
An attorney in São Paulo almost had BRL 300,000 (approximately $171,000) in his personal bank account frozen as a result of a court order issued by a federal judge in a tax execution filed by the social security administration against the attorney’s former client. The attorney found out about the court order after requesting a court certificate in his name to enable his law firm to participate in a public bid. The law firm filed a formal request with the social security administration explaining that the attorney should not be held liable for the former client’s debt and, fortunately, the social security administration accepted the attorney’s arguments and asked the court to exclude the attorney as a liable party.
Not all attorneys, however, have had the same luck. The number of attorneys held liable for clients’ debts, particularly tax and labor debts, is growing daily. And this concerns the legal profession and the Brazilian Bar Association, particularly at a time when foreign investments are flooding into the country and attorneys are constantly being called to represent foreign clients before Brazilian authorities (a local legal requirement). The concerns are justified, as courts frequently adopt the manifest disregard doctrine (for manifest disregard of the law) to reach companies owners’ and representatives’ bank accounts to satisfy pending tax and labor debts.
According to the Law Firm Study Center (Centro de Estudos das Sociedades de Advogados, or CESA) every major Brazilian law firm has at least one partner who has had his or her bank account frozen to guarantee payment of the labor or tax debt of a client for whom the attorney has acted as a legal representative or attorney-in-fact. The freezing of an attorney’s bank accounts is not only a professional problem, it also may become a personal problem, as it may affect the attorney’s credit history and impair the sale of personal assets, such as real estate.
Time is another problem because a decision revoking a frozen bank account may take months or even a year. To free up the accounts, attorneys may be required to obtain a bank guarantee and often bear the costs if the problem was caused by a former client.
To minimize potential future problems, some attorneys have started asking potential clients to provide a bank guarantee upfront. However, that costs money, and clients usually are not fond of the idea of providing that type of guarantee.
One solution would be a law regulating when an attorney can be held liable for a client’s debt, but that is not likely in the near future, even though CESA, the Brazilian Bar Association, and the legal profession have mobilized their forces to lobby in Congress.
David Roberto R. Soares da Silva
Originally published in the November 8 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)