Insolvency 2020 Comparisons

Last Updated November 19, 2020

Law and Practice


Thomaz Bastos, Waisberg, Kurzweil Advogados is a Brazilian law firm known for its undisputed experience in domestic and cross-border financial transactions, procedures before the regulatory agencies for the banking sector, such as the Brazilian Central Bank, and commercial disputes involving complex issues related to banking and finance before judicial and arbitral courts. The firm represents creditors and debtors in corporate finance transactions, syndicated loans, pre-export financing and other negotiations involving trade finance. In addition, Thomaz Bastos, Waisberg, Kurzweil Advogados counsels its clients on financing transactions related to securitisation, structured finance and debt restructuring (including judicial and extrajudicial reorganisation and bankruptcy). The firm is also specialised in advising investors in conducting risk analysis and developing frameworks for the acquisition of assets or past-due receivables (single names or portfolios) in the secondary market.

Since the enactment of the Brazilian Bankruptcy Law in 2005, the debt restructuring market in Brazil has remained heated, with peak periods due to the economic and political crises of 2008 and 2014, the effects of which remained until 2016 where 1863 judicial restructuring cases were filed (a record of filings in a single year since the Bankruptcy Law was enacted).

A further increase in the number of insolvency proceedings is expected due to the COVID-19 pandemic, but as of June, there were fewer bankruptcy filings in 2020 than in 2019. The expectation is that cases will increase next year, when the economic effects of the pandemic are better understood by companies which may decide if filing for bankruptcy or other insolvency proceedings will help their businesses.

There have been legislative bill proposals aimed at modifying the Bankruptcy Law due to the COVID-19 pandemic effects, but none of these proposals have been approved by Brazilian legislative bodies to date.

Concurrently, a new bill of law aiming to significantly modify the Bankruptcy Law is still under analysis by the Brazilian legislative bodies. It focuses on changing the rules for liquidation proceedings so they are expedited, and on fully regulating issues that the current law does not address, such as DIP financing and transnational insolvency. Although the expectation is that the new law will provide better tools for insolvency proceedings, many specialists are sceptical about the practical results it may entail.

Brazilian insolvency proceedings are regulated by Law No 11,101, enacted on 9 February 2005, which encompasses three different insolvency judicial proceedings. Only entities and individuals enrolled with the relevant Board of Trade may use these proceedings. Financial institutions, insurance companies, and other especially regulated activities, in addition to government owned companies are subject to specific insolvency regimes.

The Brazilian Civil Code (Law 10,406/2002) and Corporate Law (Law 6,404/1976) also establish the proceedings for out-of-court wind downs, which solely demands shareholder’s approval. In these cases, if assets are not sufficient to pay off all debts, a liquidator is appointed and may recommend for the shareholders to approve filing for bankruptcy.

Any financial restructuring outside the context of insolvency is regulated under general civil and commercial laws.

Brazilian insolvency legislation encompass three different proceedings:

  • liquidation (falência), the equivalent in Brazil to a Chapter 7 of the US Bankruptcy Code;
  • judicial reorganisation (recuperação judicial), a judicial proceedings for debt restructuring similar to Chapter 11 of the US Bankruptcy Code; and
  • out-of-court reorganisation (recuperação extrajudicial), a mix between an out-of-court workout with a prepacked Chapter 11 of the US Bankruptcy Code.

Both the judicial and the out-of-court reorganisations are voluntary proceedings, whereas liquidation may be either voluntary or involuntary.

Brazilian law does not provide for any circumstances in which an entity is obligated to commence a formal insolvency proceeding except for liquidation, which may be filed against the debtor by creditors in certain conditions.

As per Brazilian Bankruptcy Law, creditors and other specific third parties (as listed below) may file for liquidation, but not a judicial or out-of-court reorganisation, which may be filed solely by and at the discretion of the debtors.

The liquidation of a debtor may be filed by:

  • the debtor themselves (autofalência);
  • the surviving spouse, any heir or the decedent’s estate trustee;
  • the shareholder pursuant to the articles of association or by-laws; and
  • any creditor in certain circumstances.

Creditors may file for liquidation if the debtor:

  • fails to pay any debt when due, without cause, that could be demanded through an execution for a payment of money sum of roughly the equivalent of USD10,000;
  • is sued for the payment of money and fails to pay or secure the payment of the debt within the legal term; or
  • performs any of the acts deemed as “acts of liquidation” (sale of relevant assets, fraudulent transfer of assets, etc) pursuant to the Brazilian Bankruptcy Law.

Insolvency, for the Brazilian insolvency proceedings purposes, is not a financial or business concept, but a legal one, and is characterised by either by:

  • defaulting on a payment, without a relevant legal reason, which sums more than the equivalent of 40 minimum wages (approximately BRL40,000);
  • fails to deposit or does not provide security for such attachment within the legal term provided for; or
  • performing any of the acts deemed a “act of liquidation”, unless they are part of a judicial reorganisation plan.

Even if the company’s liabilities exceed its assets, which may result in a financial insolvency, the debtor would only be insolvent, in the legal sense, if it incurred in one of the items mentioned above.

The Brazilian Bankruptcy Law, as a rule, is not fully or partially applicable to government-owned entities, financial institutions, credit cooperatives, consortiums, pension funds, healthcare and other insurance companies and special savings companies.

The insolvency regimes of such entities are regulated by specific laws. Regarding all the businesses mentioned, if the debtor goes into in-court liquidation according to the rules of the applicable specific legislation, the liquidation proceeding will be governed by the Brazilian Bankruptcy Law.

Financial Institutions

Public or private financial institutions, as well as credit cooperatives and consortia, are subject to Law 6.024/1974, which establishes:

  • an intervention regime if the entity suffers heavy losses due to mismanagement, exposing its creditors to risks, or in the event of repeated violations to banking legislation; or
  • a liquidation regime as the result of events that compromise the economic and financial condition of the entity or if management incurs in grave violations of legal and statutory rules, or at request of management or appointed intervener.

Insurance Companies

Insurance companies are subject to Decree-law 73/1966 and Regulatory Decree 60.459/1967 and may be liquidated voluntarily or compulsorily in case of violations to applicable law or regulations from the Federal Insurance Agency (SUSEP). Special savings companies are subject to Decree-law 261/1967, and also to the Decree-law 73/1966, which also regulates their out-of-court liquidation.


Pension funds are subject to Complementary Law 109/2001 and may suffer government intervention (in case of violation to applicable laws or insufficient economic and financial conditions necessary to preserve the liquidity and solvency of each benefit plan) or liquidation (when the impossibility of recovering the supplementary pension entity is recognised or in the absence of conditions for its operation).


Healthcare insurance companies are subject to Law 9.656/1998 and may suffer liquidation whenever detected economic-financial or management abnormalities that endanger the continuity or quality of healthcare.

In Brazil, it is not mandatory, prior to the commencement of insolvency proceedings, for the debtor to maintain negotiations with its creditors. In practice, however, most insolvency proceedings are preceded by extensive negotiations between the debtor, creditors, and relevant stakeholders.

Filing for bankruptcy is usually the last option taken by stakeholders due to bureaucratic and lengthy proceeding it entails, in addition to the stigma related to the involvement of a debtor in insolvency proceedings, the costs involved, the limitations on the sale of assets and the difficulty to access new funding.

Out-of-court negotiations tend to be faster, cheaper, and less burdensome not only for the debtor, but also for creditors and suppliers, since  debtors may reach different agreements with different creditors, which would be impossible under a collective proceeding, in addition to affording the debtor better access to new credit lines and funding alternatives.

In this context, there is a general perception that consensual negotiations are preferable to insolvency proceedings, but, depending on the nature and amount of the debtor's liabilities, the number of creditors and the willingness of all relevant creditors to reach an amicable solution, the proceedings provided for in the Brazilian Bankruptcy Law are recommended to allow a more comprehensive debt or business restructuring.

Debt restructuring negotiations typically involve the concession of waivers and formal or informal standstills throughout the negotiations, while some restrictions to the debtor may also be imposed. It is common that creditors perform extensive diligence during the negotiations, requesting the disclosure of information related to indebtedness, regularity before the public authorities, assets, labor practices, tax indebtedness, etc, in additional the retaining experts and advisors, often at the debtor’s expense.

Usually these renegotiations lead to new and additional guarantees being offered to creditors, if feasible, in compensation for extensions or longer and better payment terms. In many circumstances the debtor is allowed to sell relevant assets while giving the relevant creditors priority with regards to the proceeds. Likewise, the release of collateral is usually only allowed if they are being sold to repay creditors or as a means to increment the company’s cash flow, but creditors usually demands new assets as collateral in compensation.

In Brazil, it is neither common nor is there is no regulation regarding the creditors' committees for consensual restructuring, so negotiations happen individually between debtor and creditor or collectively as a result of the debtor and relevant creditors’ efforts in reaching common terms or in view of common features, such as syndicated loans or shared collateral.

There is no special regulation for granting new money to distressed or nearly insolvent companies outside insolvency statutory proceedings in Brazil, although regular rules for fraudulent transfer would apply (which means that any collateral or priority granted to the new lender would be subject to court scrutiny if the company ends up in liquidation).

The Brazilian Bankruptcy Law is based on the principle of parity among creditors subject to an insolvency proceeding, that is, creditors in the same class or group must be treated equally. There is no legal provision indicating any special duty for creditors, other than ordinary duties to negotiate in good faith. In addition, creditors are prohibited from some practices, such as assisting the debtor in practicing fraudulent acts or privileging one or more creditors.

Furthermore, case law has admitted, in specific situations, the imposition of restrictions over some creditors rights to ensure the prevalence of the common and majority interest, aiming to preserve the value of the ongoing business. This is the case, for example, of the vote exercised at a general meeting of creditors exclusively for the purpose of harming the business or obtaining personal advantages at the expense of the company or other creditors, which, once recognised as abusive, can be disregarded by the court. Some courts have considered abusive votes that rejected a reorganisation plan if the credit recovery’s expectation under a liquidation would be lower than under judicial reorganisation.

Equal treatment among creditors presupposes a transparent process based on good faith. All acts that are contrary to equal treatment or that have been practiced in a manner that would induce creditors or the judge to be in error are prohibited, such as favouring a specific creditor over others of the same class or group and providing false information. Such acts constitute bankruptcy crimes and liability may be imposed not only to the debtor, but also to the creditors and third parties which took part and abided by such acts.

In order to ensure the applicability of its basic principles, the Brazilian Insolvency Law imposes certain obligations and conditions on the debtor, such as presentation of an economic and financial report attesting the feasibility of the plan of reorganisation, the obligation to add to the corporate name the expression "in judicial reorganisation", the need for prior authorisation for the sale or encumbrance of any non-current assets and the sale of a isolated production units mandatorily through a judicial sale.

Outside the insolvency proceedings provided by the Brazilian Bankruptcy Law, there is no mechanism to drag dissident creditors into an out-of-court financial restructuring, nor do credit agreements typically contain terms permitting a majority or super majority of lenders to bind dissenting lenders to changed credit agreement terms.

Informal consensual collective negotiations are common and requires voluntary adherence of involved creditors. These processes are perceived to work well for financial debt restructuring , since usually few financial creditors hold the major part of the debtor’s indebtedness and can organise themselves collectively.

For dragging dissenting creditors into an out-of-court renegotiation, the debtor may file for out-of-court reorganisation (recuperação extrajudicial), in which case the plan of reorganisation may be imposed to dissenting creditors, provided that at least three fifths of the credits  of such class have already adhered to the plan. A cram-down of dissenting creditors requires that the bankruptcy court ratifies the reorganisation plan.

As per Brazilian law, there are four different types of in rem security interests: pledges (penhor), antichreses (anticrese), mortgages (hipoteca) and fiduciary liens (propriedade fiduciária).

Mortgages and antichreses (the latter being very uncommon) are established over real estate property. Pledges are established over movable property.

Fiduciary liens constitutes a type of security that involves the temporary of ownership relative to the asset to the creditor solely to secure the debt. Within the financial system, fiduciary liens may be established over all kinds of assets, movable or immovable, tangible or intangible, fungible or not. Outside the financial system, some restrictions for imposing fiduciary liens over fungible assets, such as receivables and crops, may apply.

Outside a formal insolvency proceeding, secured creditors may take all legally available measures for the purposes of executing and foreclosing assets, including forced sale of assets judicially or extrajudicially (allowed for some types of security interests). The security agreements may provide for different rights and limitations on creditor legal rights, with the general rule that the creditors is not entitled to retaing ownership of the collateral for the payment of a debt without a prior selling attempts.


In a formal insolvency proceeding, the possible measures to enforce a lien/security will depend on the nature of the security. Certain claims and types of security interest, such as fiduciary liens, are not subject to the effects of a judicial or out-of-court reorganisation and, therefore, in principle, may be enforced in accordance with the terms of the security agreements. Please note Brazilian Bankruptcy Law provides that, during the stay period (inherent to judicial reorganisation and commonly applied in cases of out-of-court reorganisation), it is not permitted to sell or remove from the debtor’s establishment any asset essential to its business.

Case law has admitted that, even after the stay period ends, assets considered essential to the debtor's activities shall not be constrained. The essentiality or not of the asset should be discussed on a case-by-case basis.

Judicial and Out-of-Court Restructuring

The claims subject to the effects of a judicial or out-of-court reorganisation, regardless of the nature of any collateral they hold, can only be paid in accordance with the terms of the respective approved and confirmed plan of reorganisation, that is, no act of enforcement, foreclosure and expropriation is permitted during the bankruptcy proceeding outside of the plan. In addition, the Brazilian Bankruptcy Law does not establish any mandatory payment order among the classes of creditors (ie, there is no absolute priority rule) in a judicial or out-of-court reorganisation, leaving it to the debtor’s discretion as long as the creditors approve the plan of reorganisation. Release of liens over the collateral is allowed only after payment of the secured claim, in accordance with the terms provided for in the plan of reorganisation.

Releasing Liens

Due to the frequent need of releasing liens over collateral and the fact that in a potential liquidation proceedings such secured creditors will be privileged in relation to unsecured creditors, secured claims usually enjoy better payment terms than those provided for unsecured creditors.

In a liquidation, creditors secured by fiduciary liens may seek direct restitution at any time during the proceeding, while creditors holding other types of security interests will be subject to the payment order established by Brazilian Bankruptcy Law, which gives them priority in relation to unsecured credits, but not in relation to labour claims, for example. This means that, in a liquidation, the secured creditor may not necessarily be entitled to receive the collateral or the proceedings of its sale for their payment.

Disrupting Proceedings

Regardless of the insolvency proceeding and the nature of the security interest the creditor holds, they may not disrupt or block a formal voluntary or involuntary insolvency proceeding, but only vote against a plan of reorganisation, which has to be approved also within the secured creditors class.

As per Brazilian Bankruptcy Law, there is no privileged treatment of secured creditors that are subject to a judicial reorganisation or an out-of-court reorganisation, observing that, in the sale of the encumbered asset, the withdrawal of the collateral or its replacement will only be allowed with the express approval of the secured creditor.

In liquidation, there is no privileged treatment as well, but creditors with fiduciary liens may claim restitution prior to the payment of the creditors with the proceeds of the bankrupt estate. Any other type of security interest will be subjected to the payment order established by Brazilian Bankruptcy Law.

As per Brazilian Bankruptcy Law, there are no distinct rights and priorities between classes of creditors in a judicial reorganisation or an out-of-court reorganisation, provided the rights the secured creditors have over their collateral is respected. The only obligation to be observed is in relation to the payment of labour claims in a judicial reorganisation, which must occur within one year as of the confirmation of the judicial reorganisation plan.

In a liquidation, on the other hand, the payment priority order is established by law. Claims considered vital for the continuation of the liquidation procedure are paid first in priority and creditors owners of fiduciary liens or creditors of special types of foreign exchange agreements (ACC) may seek their underlying collateral or direct restitution, as applicable, at any time during the procedure. Payments are made in a waterfall manner, insofar as one class is only paid if the previous one has already been paid in full.

Unsecured claims generally suffer discounts (it is more common for smaller claims to be kept whole) and are paid within the timeframe debtor and creditors agree upon.

Unsecured creditors are bound by the reorganisation plan and have the same rights as any other creditor subject to the insolvency proceeding.

Any decisions rendered in the insolvency proceeding – including the confirmation of a reorganisation plan – may be challenged by the unsecured creditors (and by any other creditor) in accordance with the applicable appeal procedure, but there is no specific mechanism for the purpose of postponing or suspending any act, even liquidation.

Pre-judgment attachments are available in Brazil and recent case law has admitted that creditors which are able to access assets of the debtor in this manner are treated as secured creditors in a bankruptcy proceeding.

Brazilian Bankruptcy Law establishes priority claims in liquidation proceedings (falência), but not in judicial reorganisation (recuperação judicial) or out-of-court reorganisation (recuperação extrajudicial).

The priority claims are restitution in cash, fees payable to the bankruptcy trustee in charge of the estate, court costs, sums provided to the estate by the creditors and expenses of the estate with recovery of assets, asset realisation and distribution of the proceeds. Such claims have priority over secured creditor claims, as they are considered vital for the continuation of the liquidation procedure.

Brazilian bankruptcy Law provides for two different judicial procedures for debt restructuring:

  • judicial reorganisation, a judicial procedure for debt restructuring similar to Chapter 11 (recuperação judicial); and
  • out-of-court reorganisation (recuperação extrajudicial), a mix between an out-of-court workout with a prepacked Chapter 11.

Out-of-Court Reorganisation

In the out-of-court reorganisation (recuperação extrajudicial), there is an out-of-court restructuring in which at least three fifths of the subjected class of creditors adhere to a reorganisation plan, which is then brought to court for ratification, so the debtor may impose it to dissenting creditors of the same class. Solely the debtor, represented by its directors and officers, with shareholder approval, may file for out-of-court reorganisation. The debtor may choose which class or classes of creditors will be subject to the proceedings and is free to include just part of its unsecured or secured creditors, provided that they have the same characteristics among them (for example, all unsecured financial creditors). There is no change in the debtor’s management.

Secured and unsecured creditors may be subject to an out-of-court reorganisation and solely the debtor may decide if the proceeding will include both or just a group of creditors in the same situation (labour and tax creditors may not be included).

Upon ratification of the out-of-court reorganisation plan, its effects are binding on all creditors of the relevant class. To oppose ratification of the plan of reorganisation, creditors may only argue:

  • failure to complete the minimum percentage of signing creditors;
  • the practice of fraudulent acts or any of the acts deemed as a bankruptcy act; and
  • noncompliance with any other requirement of law.

As one of the requirements is the three fifths credit approval of the reorganisation plan, it is common that these procedures involve long discussions of the claims’ amount.

Judicial Reorganisation

Judicial reorganisation (recuperação judicial) can only be filed by the debtor, represented by its directors and officers, with shareholder approval, in the court jurisdiction where the company has its principal place of business. It involves submitting to its creditors a reorganisation plan to be voted in a general meeting of creditors, which shall detail the conditions for the debt restructuring, sale of assets and other restructuring measures the debtor may take.

Upon filing a judicial reorganisation and once the judge has ascertained that the company has presented the documents required by law, the following main effects occur:

  • the company is granted a stay period of 180 days, during which time foreclosures, freezing and seizure of assets against the debtor are suspended;
  • the order for the company to submit monthly statements throughout the judicial restructuring term; and
  • the appointment of a bankruptcy trustee that does not manage the company or replace management, but is an assistant to the court.

Brazilian bankruptcy law establishes some safe harbours for the automatic stay, which are credits secured by fiduciary liens, claims arising from advance of foreign exchange agreements, claims subject to compensation in clearing houses and tax claims.

Debtors remain in possession of assets as a rule. The debtor may manage its affairs freely, except he may not sell or incumber assets classified as non-current in its accounting without prior authorisation from the bankruptcy court or the general meeting of creditors.


The creditors are organised in four different classes established by law (ie, the debtor is not free to establish the classes of creditors) to vote on the judicial reorganisation plan:

  • labour claims;
  • secured claims (mortgage or pledge);
  • unsecured claims; and
  • claims held by small businesses.

Labour and small business classes approve the plan by a simple head count majority of creditors present at the meeting, while secured and unsecured claims require a majority of head count and of the claim amount also present at the meeting. An approved plan of reorganisation is subject to court confirmation, which happens without a hearing. Cram-down rules are also applicable in special circumstances.

If the debtor is unable to approve a reorganisation plan or if the debtor defaults its obligations under the approved and on the approved plan within two years as of its approval, the judicial reorganisation is converted to a liquidation proceeding.

The debtor under judicial reorganisation (recuperação judicial) or out-of-court reorganisation (recuperação extrajudicial) remains in possession of all its assets, continues to operate its business and the fiduciary duties of the directors and officers continue to be direct to the company.

In a judicial reorganisation, a bankruptcy trustee is appointed as an assistant to the court for the main purpose of helping the court with financial and economic issues, being also responsible for reporting to the court the fulfillment of all obligations by the debtor, as well as for coordinating the acts of the proceeding, such as presiding the general  meeting of creditors. The trustee does not take any part in the debtor’s management. In a out-of-court reorganisation, although not mandatory, a trustee may also be appointed for the same purpose as in the judicial reorganisation, respected the particularities of each proceeding.

A stay period of 180 days as from the acceptance of the case is mandatorily granted in judicial reorganisation, during which all actions and executions against the debtor, including those of private creditors of the jointly liable partner, as well as the course of the statute of limitation of each action, will be suspended. Such stay period may also be granted by court in an out-of-court reorganisation, with the same effects.

The creditors in judicial or out-of-court reorganisations are separated into classes, according to the nature of their claims.

Judicial Reorganisation

In a judicial reorganisation, there are four classes of creditors, defined by law and that may not be changed in debtors nor creditors discretion:

  • holders of labour-related claims;
  • holders of secured claims (mortgage or pledge, but not fiduciary liens);
  • holders of unsecured claims, with special privilege, with general privilege, or subordinated; and
  • claims held by small business.

All classes of creditors mentioned above will be submitted to the proceeding.

Out-of-Court Proceedings

In an out-of-court reorganisation only holders of secured and unsecured claims may be subject to the proceeding, and solely the debtor may decide if it will include both or just a group of creditors in similar situations within such classes. Tax claims, fiduciary liens and any other credit that does not fit the above classifications are not subject to the proceeding.

For classification purposes, the debtor will present a list of creditors when filing for bankruptcy. Creditors and even the debtor may present proofs of claim. In judicial reorganisations, the proofs of claim are filed administratively to the bankruptcy trustee, which presents its own list of creditors. Creditors, debtor and interested third parties may oppose this list through proofs of claim filed to the bankruptcy court. In out-of-court cases, the creditor may file proofs of claim directly to the bankruptcy court, if no trustee is appointed.

Similarities across Proceedings

In both proceedings, creditors may be represented by an attorney or by its legal representative (except for exclusively legal procedural acts, which require an attorney). Only in a judicial reorganisation a creditors' committee may be formed by resolution of any of the classes of creditors at the general meeting of creditors, and each class of creditors will be entitled to appoint one representative with two alternates.

It is important to note that:

  • the creditors' committee does not represent creditors for the purpose of voting on any matter but acts only for purpose of monitoring the proceeding and the debtor's obligations; and
  • the committee member’s fees shall not be defrayed by the debtor, but the expenses incurred to perform any act provided for in the Brazilian Bankruptcy Law, if duly evidenced and authorised by the judge, shall be reimbursed in accordance with available cash funds.

In judicial reorganisations, the debtor shall present its monthly financial reports. The bankruptcy trustee shall analyse them and oversee the continuation of the debtor’s operations, including through site visits.

In the judicial reorganisation and in the out-of-court reorganisation proceedings, the approved and confirmed plan of reorganisation binds the dissident creditors to its terms, which means claims of dissenting creditors may be modified without the consent of such creditors, as per the plan.

In the judicial reorganisation, as a rule, the plan of reorganisation shall be approved by all classes of creditors to the judicial restructuring to be granted and to effectively novate and bind all subject claims. Nevertheless, the Brazilian Bankruptcy Law does provide for a cram-down mechanism by which judicial restructuring may be granted even if the plan that has not been approved by all classes of creditors, obtained, cumulatively, at the same general meeting:

  • the favourable vote of creditors representing majority of the claim amount represented at the general meeting, regardless of their classes;
  • the approval of two (out of three or four) of the classes of creditors, or if there are only two classes with voting creditors, the approval of at least one of them; and
  • in the class that rejected the plan, the favourable vote of at least one-third of the creditors.

Credits subject to insolvency proceedings can ordinarily be assigned or traded in accordance with general civil and commercial law. The Brazilian Bankruptcy Law does not impose any additional obligations, but the assignee will be subject to all terms and conditions of the insolvency proceeding in relation to his claim.

In general, the debtor shall be notified about the transfer, so it is effective against them. For exercising its rights in the bankruptcy case, the new creditor shall also notify the court and the bankruptcy trustee about the assignment of credits.

Although the Brazilian Bankruptcy Law does not expressly provide for this possibility, debtors of a same group may file for bankruptcy in the same procedure (ie, a procedural consolidation is allowed). It is also possible that those debtors present a unified plan of reorganisation under substantive consolidation. Case law has been evolving to allow the creditors to vote, separately by each debtor, in a general meeting of creditors, whether the plan of reorganisation may or may not be consolidated for all or part of the debtors.

If the debtor files for a judicial reorganisation, it shall not dispose or encumber any non-current assets or rights, unless these transactions are allowed under the reorganisation plan or useful to the debtor and the bankruptcy case, as recognised by the court, after having the opinion of the creditors' committee (if existent). Such restriction has been applicable analogously to out-of-court reorganisation as well.

In practice, the debtor is expected to demonstrate the need to sell or encumber the asset, as well as the destination of the proceeds obtained. Some courts have determined the disposal through a competitive judicial process, to maximise the value of the asset.

The Brazilian Bankruptcy Law does not restrict the sale of assets by the debtor but imposes the need for prior judicial authorisation or authorisation under the plan of reorganisation if the assets being sold are non-current assets under debtors accounting.

The debtor may set forth in the reorganisation plan the sale of assets individually or organised in an isolated productive unit, which consists of a block of tangible and/or intangible assets that, acquired by a third party, allows it to maintain the development of the business. If all the legal requirements for the sale are met, the investor who acquires the productive unit is not a successor of any of the debtor’s liabilities.

Among the conditions for the characterisation of an isolated productive unit – and not merely the ordinary sale of a set of assets – is the obligation that all rules for its constitution and sale are provided for in an approved and confirmed reorganisation plan. The sale shall respect one of the options provided for in the Brazilian Bankruptcy Law (auction by oral bidding, sealed bidding, etc) and shall be preceded by the publication of the necessary notices. The sale procedures and criteria shall be established in such a way that participation in the competition is not and unfoundedly restricted to only one interested party.

As per Brazilian Bankruptcy Law, secured in rem interests and liens may not be released within the scope of an insolvency proceeding without express approval of the creditor holding the respective right over the collateral.

The Brazilian Bankruptcy Law does not impose restrictions on the borrowing of new money. The granting of guarantees on non-current assets, however, must be previously authorised by the judge or provided for in the judicial reorganisation plan. In case the asset to be encumbered is already encumbered in favour of another creditor, the original creditor, as a rule, will have priority in receiving any proceeds or foreclosure relative to the collateral, under the terms of applicable law.

The credit verification process in insolvency proceedings is carried out by the court appointed trustee and aims to verify the correct amount and classification of the claims, in accordance with the contractual terms or as determined in an autonomous judicial process.

In general, the credit verification process occurs according to the following steps:

  • presentation of the initial list of creditors by the debtor when initiating the insolvency proceeding, detailing, among other aspects, the origin of each claim and the respective amount on the date of the filing;
  • administrative verification of claims by the bankruptcy trustee, after the interested parties file administrative proofs of claim;
  • publication of a new list of creditors, prepared by the trustee; and
  • possibility of any interested party filing proof of claims to the bankruptcy court. Creditors may file proofs of claim throughout the whole bankruptcy procedure, provided that creditors may lose some of their rights if filing is not within the legal deadlines.

In judicial and out-of-court reorganisations, the claim verification process will only consider claims subject to such procedures, excluding non-subject claims from the assessment.

Both in judicial reorganisation and out-of-court reorganisation, the restructuring plan will be subject to court confirmation. The court will analyse only compliance with the legal rules, but not economic or financial aspects of the reorganisation plan, nor its feasibility. The legality control can be exercised in whole or in part, which means the court may annul a certain clause considered illegal while maintaining the validity of the others and confirming the plan.

In Brazil, the reorganisation procedures are a means to deal with debt restructuring, mainly through refinancing, discounts and grace periods, the sale of assets or a combination of all the aforementioned. Debtors are not entitled to assume or reject executory contracts, nor renegotiate the terms of its commercial agreements.

The Brazilian Bankruptcy Law provides that the reorganisation plan shall have no effect over third party guarantees or guarantors. Other than that, there is no clear disposition about the possibility of releasing non-debtor parties from liabilities and this is a controversial topic.

The release of non-debtor parties can be provided for in the reorganisation plan (under the assumption this is a right creditors may waive), but such provision, if approved by majority of creditors, will still be submitted to legality control of the bankruptcy court. Such provision used to be considered valid only for those creditors who voted in favour of the plan of reorganisation without reserves to this kind of disposition.

The Superior Court of Justice, however, has recently changed this understanding, under the premise that it is inappropriate to restrict the suppression of guarantees only to creditors who have voted in favour of the plan of reorganisation – as a rule, the dispositions of a plan of reorganisation are bind to all creditors, regardless of their vote and admitting the contrary would characterise different treatment among creditors in the same situation.

According to the Brazilian Civil Code, set-off occurs automatically if two people are both creditor and debtor of money claims at the same time. If debts and credits existed prior to the case commencement, they should have been automatically compensated and any balance in favour of the creditor, if existing, would be submitted to the insolvency proceeding.

Once the insolvency process has started, any form of payment of the subject claims, including through set-off or offsetting, must be provided for in the approved and confirmed plan of reorganisation.

Thus, at first, if provided for in the plan, offsetting may occur between the claim as restructured in the plan and any credit the debtor holds against the creditor. Case law, however, has already voided this type of provision, as it may lead to unequal treatment among creditors.

In a judicial reorganisation (recuperação judicial), once the restructuring plan is confirmed by the judge, the debtor shall continue under judicial restructuring until all obligations established in the plan and failing due up to two years after concession of the judicial restructuring have been performed. During such period, the nonperformance of any obligation established in the plan will entail conversion of the restructuring into bankruptcy.

After the judicial supervision period in a judicial reorganisation and in any case in an out-of-court reorganisation, any unfulfilled obligation can be legally demanded, as the decision that confirms the restructuring plan constitutes a judicial enforcement instrument, pursuant the Brazilian Code of Civil Procedure.

Equity holders may keep its ownership over the debtor. This is the most common situation, as many creditors, especially financial institutions, are afraid of being held as successors in liabilities of the debtor if they gain any type of ownership or equity participation in the debtor. Additionally, in certain cases, case law has voided reorganisation plans that provided for mandatory debt/equity swap under the assumption that parties may not be required to partnership with each other.

Brazilian bankruptcy Law provides for only one liquidation procedure, which may commence voluntarily or involuntarily.

Liquidation is an in-court procedure in which the bankrupt estate, under the responsibility of a court appointed bankruptcy trustee and the supervision of the bankruptcy court and the Public Prosecutor’s Office, is collected and sold for the payment of creditors pursuant to the legally determined claim priority. It may be filed voluntarily by the debtor, in the jurisdiction of its main establishment, or by one of its creditors or other legitimate party (a far more common scenario).

There is no legal requirement for the financial or economic insolvency of the debtor be demonstrated. Creditors may file for liquidation if the debtor:

  • fails to pay any debt when due, without cause, that could be demanded through an execution for a payment of money sum of roughly USD10,000;
  • is sued for the payment of money and fails to pay or secure the payment of the debt within the legal term; or
  • performs any of the acts deemed as “acts of liquidation” (sale of relevant assets, fraudulent transfer of assets, etc).

All assets of the debtor are subject to liquidation and only the bankruptcy court may seize, attach, or allow the sale of the debtor’s assets. All lawsuits against the debtor shall proceed with the replacement of the debtor by the bankruptcy estate.

Administration of the Estate

The bankruptcy court shall appoint a bankruptcy trustee upon issuing the liquidation decree, who is responsible for managing and representing the bankruptcy estate. Management of the debtor is removed as soon as liquidation is declared, including in relation to any ongoing litigation with labour tax creditors.

It is important to note that when the bankruptcy decree is issued, the debtor is dissolved, management is removed and all assets and liabilities are transferred to the bankrupt estate. The debtor may not engage in any corporate activities until all its liabilities are deemed extinct or lifted by the bankruptcy court. The decree of liquidation subjects all creditors and claims to the procedure (even those with special priorities may file claims within he bankruptcy court).

Liquidation entails a look-back period of at least 90 days prior to the liquidation petition, the judicial reorganisation, or the initial official protest for lack of payment, during which a number of transactions may be rendered ineffective for the bankruptcy estate.

Under the liquidation proceeding, the bankruptcy trustee is responsible for the sale of assets of the estate, through competitive process as to ensure the best price is reached to the benefit of the estate and its creditors. Assets are sold free and clear of liabilities and credit bid is not usual, although not forbidden. Assets may be sold individually or productive unit.

Creditors may be represented by an attorney or by its legal representative (except for exclusively legal procedural acts, which require an attorney). No creditors' committee is formed in liquidation. The trustee in charge of the case shall provide periodical information about the financial situation of the estate.

Brazilian law does not recognise a foreign insolvency proceeding and the enforcement of a reorganisation plan within the Brazilian territory would demand the confirmation order is recognised by the Superior Court of Justice, in a rather lengthy proceeding, in which it would assess if that order does not infringe Brazilian law – this proceeding is often bureaucratic and may be even slower if related to insolvency proceedings that may have impact over assets and claims in Brazil.

Brazilian law does not recognise foreign insolvency proceedings or insolvency plans and there are no protocols or formal arrangements with foreign courts to co-ordinate proceedings in cross-border cases. Any insolvency proceeding in Brazil would move independently from the foreign proceeding.

According to the Brazilian legislation about territorial applicability of law, the Brazilian Bankruptcy Law is the relevant legal rue for all bankruptcy procedures within the Brazilian territory and foreign laws and court orders are not recognised unless the later goes through the recognition procedure within the Superior Court of Appeals.

Brazilian Bankruptcy Law states that the courts of the venue of the principal establishment of the debtor or the branch of a company headquartered outside Brazil have jurisdiction over the bankruptcy case in Brazil.

Foreign and domestic creditors shall be treated equally in insolvency proceedings. Brazilian Bankruptcy Law allows the claim to be kept in foreign currency in out-of-court and judicial reorganisations, and demands claims are converted into Brazilian reals in case of liquidation, on the date liquidation is decreed.

As per Brazilian Bankruptcy Law, a trustee is mandatory in liquidation and in judicial reorganisation and may or may not be appointed in an out-of-court reorganisation (depending on the judge and the complexity of the case).

The bankruptcy trustee in judicial or out-of-court reorganisations is considered an assistant to the court, who helps the judge to deal with financial and economic matters (as even in specialised bankruptcy courts, only legal education is mandatory to the judges). In liquidation, the bankruptcy trustee is responsible for managing the estate and the payment of creditors.

In judicial reorganisation, an administrator may be appointed for running the businesses of the debtor if the court decides to remove previous management.

In judicial reorganisation and in out-of-court reorganisation, the bankruptcy trustee is an assistant to the court and owns its fiduciary duties to the court. The trustee’s main duties are to oversee the accounting of the debtor, to prepare the list of creditors, and to preside the general creditor’s meeting.

Shareholders, directors, and officers in any case continue with their regular duties and obligations before the debtor and its shareholders.

In liquidation, the trustee assumes the representation of the bankrupt estate and performs all the acts required for realisation of assets and payment to creditors. The shareholders and directors and officers are revoked from their regular capacities and the bankruptcy estate is entirely administered by the trustee.

The trustee is appointed by the bankruptcy court at the beginning of the case. The trustee must be a reputable professional, preferably a lawyer, economist, business manager or accountant, or a specialised legal entity. Due to potential conflict of interest, creditors may not serve as a trustee.

The court, on their own initiative or at the substantiated request of any interested party, may order the dismissal of the trustee even without case. Destitution is mandatory if the trustee fails to perform its duties, especially if they fail to provide periodical reports about the business of the debtor.

As a rule, directors and officers of a company under an insolvency proceeding or approaching the zone of insolvency have the same fiduciary duties towards the company. There is no requirement for directors and officers to file for an insolvency proceeding, which ultimately is a shareholder’s decision.

Officers and directors do not owe any duty or responsibility directly to the creditors. They shall act diligently and comply with their duties before the debtor.

In liquidation, directors and officers are automatically removed from their offices. In judicial reorganisations, directors and officers may be removed by the bankruptcy court in the event of evidence of having committed a crime under bankruptcy legislation or fraud against the debtor or its creditors.

The shareholders have standing to sue directors and officers for breach of fiduciary duties, but in specific situations third parties may also seek the directors’ and officers’ liability through specific the piercing of the corporate veil doctrine.

If an insolvency proceeding has commenced, the personal liability of directors and officers may also be ascertained before the bankruptcy court.

In any liquidation proceeding, bankruptcy court may scrutinise and seek clarifications on any transactions undertaken prior to the insolvency proceeding, especially if they involve transferring assets or granting new collateral to existing claims. A transaction may be set aside or voided if in violation of law or in case of fraud, which includes granting beneficial treatment to any creditor.

a look-back period is applicable in liquidation proceedings and it is established by the bankruptcy court at the beginning of a case. It can retroact up to 90 days as from the start of the liquidation procedure, the date the company filed for judicial reorganisation or the first public protest (protesto) against the debtor for non-payment of a claim.

Once the look-back period is determined, the following transactions are ineffective with regard to the bankrupt estate, regardless the knowledge of the contracting party about the financial condition of the debtor and regardless the intend of the debtor to defraud creditors:

  • payment by the debtor within the legal term of debts prior to its due date;
  • payment made within the legal term of debts fallen due and enforceable, in any way not provided for under the agreement among the parties;
  • constitution of secured interest over the assets of the debtor, within the legal term, in the case of a debt contracted previously;
  • acts performed free of charge during the two years preceding the liquidation decree;
  • waiver of inheritance or legacy during the two years preceding the liquidation decree;
  • sale or transfer of the debtor’s establishment without the express consent of or payment to all creditors existing at the time, if the remaining assets of the debtor are not enough to allow the debtor to settle their liabilities; and
  • registration of in rem rights and of property transfer inter vivos, for a consideration or free of charge, or an annotation of real property made after the liquidation decree of bankruptcy, unless there is a previous cause for such registration.
Thomaz Bastos, Waisberg, Kurzweil Advogados

Av. Brigadeiro Faria Lima, 3311
13º andar
São Paulo/SP
Brazil | 04538-133

+55 11 3552 5000

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Thomaz Bastos, Waisberg, Kurzweil Advogados is a Brazilian law firm known for its undisputed experience in domestic and cross-border financial transactions, procedures before the regulatory agencies for the banking sector, such as the Brazilian Central Bank, and commercial disputes involving complex issues related to banking and finance before judicial and arbitral courts. The firm represents creditors and debtors in corporate finance transactions, syndicated loans, pre-export financing and other negotiations involving trade finance. In addition, Thomaz Bastos, Waisberg, Kurzweil Advogados counsels its clients on financing transactions related to securitisation, structured finance and debt restructuring (including judicial and extrajudicial reorganisation and bankruptcy). The firm is also specialised in advising investors in conducting risk analysis and developing frameworks for the acquisition of assets or past-due receivables (single names or portfolios) in the secondary market.