The New Public Procurement Law: public law disregarding legal personality and its effects

Monday 1 November 2021

Monique Guzzo
Lefosse Advogados, Sao Paulo

Juliana Maia Daniel
Lefosse Advogados, Sao Paulo

After nearly 28 years of Law 8666/93, the New Public Procurement Law (Law 14133) was enacted on 1 April 2021, bringing crucial innovations and changes in public bidding and contracting. Some innovations, however, have received criticism, making private entities (contractors and bidders) uneasy about, among others, the new law expanding the list of people who may be affected by the disregard of legal personality theory (Article 160) within an administrative proceeding.

In the Brazilian legal system, the Civil Code (Article 50), the Consumer Defence Code (Article 28), the Antitrust Law (Article 34), the Anti-Corruption Law (Article 14), and Law 9605/98 (Article 4, which provides for criminal and administrative sanctions for environmental violations) deal with the disregard of the legal personality. Although there is no legal provision on a federal level, audit courts and higher courts have applied the disregard of the legal personality on a case-by-case analysis. This fact, however, has caused legal uncertainty and the need to follow the doctrinal and jurisprudential construction on the incidence of administrative disregard of the legal personality.

Considering the Federal Court of Accounts,[1] for example, case law evolved with the theory of disregarding the legal personality of private entities based on some important aspects. These include authorising requirements for its application, such as evidence of fraud (specifically in bidding procedures) and cases of legal personality abuse (characterised by the misuse of purpose), or the confusion of assets. Conversely, the Superior Court of Justice[2] considered the abuse of form (constitution of a new company with the same corporate purpose, with the same partners and with the same address) and fraud to Law 8666/1993, based on the principles of administrative morality and the protected public interest, in the absence of a specific provision.[3]

Therefore, on a federal level, the New Public Procurement Law Article 160[4] is innovative as it has established the essential requirement to apply the theory of disregard of the legal personality, and who may be affected by it.

The first part of said legal provision defines the evidence of abuse of rights as authorisations of the application of the 'disregard of legal personality'. These are (1) facilitating, covering up or disguising the practice of unlawful acts under this Law; or (2) causing equity confusion. So far, there have been no innovations because this legal provision is identical to Article 14 of the Anti-Corruption Law.

The second part of Article 160, which has been controversial, establishes that:

‘[...] all the effects of the sanctions applied to the legal entity will extend to its administrators and partners with administrative powers, the successor legal entity or company in the same industry with a coalition or control relationship, in fact or under the law, with the ​​sanctioned entity, so long as the right to full defense and the obligation of prior legal analysis prevail (in administrative proceedings)’.

The Anti-Corruption Law itself had already defined a kind of ‘automatic’ disregard of the legal entity when establishing strict liability and solidarity among the group’s companies. Even though this same Law also establishes the possible extension of the other sanctions (such as blacklisting and disbarment), this possibility is stated as an exception, as construed under Article 4, item 1 of the Law, and could only happen after a due process in a judicial proceeding. This limits the succession to obligations of a pecuniary nature (ie, fines and disgorgement), ‘except in case of simulation or evident intent to commit fraud, duly proven’.

Unlike the Anti-Corruption Law, however, the New Public Procurement Law did not limit, at first, the successor legal entity’s liability only to pecuniary obligations, nor did it refer to the limit of the transferred assets, as occurred with Article 4, item 1 of that Law.[5] Therefore, according to the New Public Procurement Law’s wording, theoretically, the successor company could ‘inherit’ the pecuniary obligations, the disbarment and the blacklisting sanctions applied to the succeeded company. For this, it is enough that there is a contradictory and ‘prior legal analysis’.

In addition, Article 160, by providing that the extension of the sanctions may occur against managers and partners ‘with administrative powers’ of the bidding or contracted legal entity, did not limit the sanction to managers and partners who effectively contributed to the irregularity or abuse of right. The legislator opted for a purely formal, generic criterion, which means that any partner or manager (with administrative powers), without any specific criterion, could, in theory, suffer the effects of a possible disregarding decision of legal personality.

Therefore, it is clear that the New Public Procurement Law has greatly expanded the list of persons (individuals and legal entities) potentially affected by the theory of disregard of legal personality. It has not brought sufficiently clear criteria (and restricted, as they should be) for the extent of such severe sanctions. Under this new Law, the effects of previously attached administrative sanctions to the entity (or entities) directly related to proven fraud – such as banning on bid and contract with the public administration – may extend to other legal entities, successors, or of the same branch with a relationship of coalition or control with the sanctioned entity. It is worth highlighting that, under the law for the application of the disregard, this coalition or control relationship could be either factual or theoretical.

The final part of Article 160 refers expressly to the possibility of disregard only when the right of full defence (due process) and the obligation of ‘prior legal analysis’ are observed. Although not detailed in the new law, the latter implies that it would consist of the legal opinion of a respective administrative body with jurisdiction over the case. However, such a broad legal provision causes concern and criticism because it increases legal uncertainty about its application, at least while there is no reasonably settled case law on the matter.

The disregard of legal personality theory was created to curb abuse and injustices in the use of the legal entities to avoid accountability. However, it is an exceptional provision that could only be applicable after a due process in a judicial proceeding, not administrative. Establishing it as a rule – and applied by governmental bodies – is unreasonable, for it could extend serious sanctions to legal entities that have not taken part in any illegal activity or that have not directly or indirectly benefited from them. Decisions in this regard would be abusive because they would violate the principles of non-transcendence of administrative sanctions and restrictive legal measures. In addition, such decisions would hurt the right to free enterprise of autonomous individuals and legal entities distinct from the condemned company and its respective partners and administrators.

In addition, the effects of Article 160 may impact M&A transactions, as the risk of an administrative body applying severe sanctions may contribute to the decision not to complete a given corporate transaction. In this context, a thorough audit procedure becomes even more vital for these operations. In addition, companies with a coalition or control relationship in the same industry should establish or implement preventive governance and integrity mechanisms over the others. This is especially relevant to those participating in public tenders and contracts with the government.

The phrasing of Article 160 of the New Public Procurement Law is expected to deliver improvements when compared to previous legislation on the subject, and aims to enhance state enforcement in tackling proven fraud. However, forgetting that the disregard should be an exceptional measure and, as such, clear criteria must be observed, interpreting the law narrowly risks unduly punishing third parties acquiring businesses in good faith.



[1] Decision 914/2004-FCA-Plenary; Decision 976/2004-FCA-Plenary; Ruling 873/2007-FCA- Plenary , Ruling 928/2008-FCA- Plenary .

[2] RMS 15.166/BA, Reporting Justice Castro Meira, Second Panel, judged on 8 July 2003, DJ 09/08/2003, p 262.

[3] Very recently, the Superior Court of Justice decided that the Federal Court of Accounts has jurisdiction to determine the disregard of legal personality. However, by the submission date of this paper, the decision has not yet been published. Therefore, we are unable to assess how this decision may impact the interpretation of New Public Procurement Law Art 160.

[4] Art 160. The legal personality may be disregarded whenever used with abuse of law to facilitate, cover up or disguise the practice of unlawful acts provided for in this Law or to cause confusion of assets. […] in this case, all the effects of the sanctions applied to the legal entity will extend to its administrators and partners with administrative powers, the successor legal entity or company in the same industry with a coalition or control relationship, in fact or under the law, with the sanctioned entity, so long as the right to full defence and the obligation of prior legal analysis prevail.

[5] Pursuant to Art 40, s 1 of Law 12.846: ‘In the event of merger and incorporation, the responsibility of the successor will be limited to the obligation to pay a fine and full compensation for the damage caused, up to the limit of the transferred assets, not being applicable to the other sanctions provided for in this Law arising from acts and facts that occurred before the date of the merger or incorporation, except in the case of simulation or evident intent of fraud, duly proven.’