In the past few years, Brazil has experienced a substantial increase in the number of reorganisation and liquidation filings. Partially because of the macroeconomic environment, reorganisation filings have become more frequent in Brazilian courts. Specific industries such as agribusiness, oil and gas, energy and engineering and construction have been particularly affected by these macroeconomic conditions, which also contributed for the increase in the number of filings.
According to recent studies, the majority of cases have a successful outcome, at least from a legal perspective. Sub-optimal reorganisations plans are often approved, particularly because liquidation usually results in reduced recovery rates for creditors. However, lack of effective business turnarounds, combined with restructuring proceedings, leads to a significant number of companies not emerging from the financial crisis even after having approved a reorganisation plan.
These recent developments also triggered a discussion about potential modifications to the Brazilian Bankruptcy Law. Currently under congressional analysis is a bill of law intended to partially reform the Brazilian Bankruptcy Law, including addressing the issue of cross-border insolvency by incorporating certain provisions of the Uncitral Model Law. There is no timeframe of approval of such partial reform.
Following the reform of the Bankruptcy Law in 2005, which profoundly changed the restructuring landscape in Brazil, the economic crisis the country has experienced in recent years has further impacted the restructuring market. Filings by large corporate groups with complex capital structures and truly cross border cases have tested concepts of the Bankruptcy Law and challenged traditional forms of restructuring. As a result, the restructuring market has become more sophisticated and distressed investment potentially more attractive, particularly the sale of assets in reorganisation proceedings. Likewise, the secondary market of claims against distressed companies has experienced substantial growth, which has allowed for creative solutions in a variety of cases.
Brazilian Federal Law 11,101/2005 (the Brazilian Bankruptcy Law – “BRL”) provides the general framework for reorganisation and bankruptcy in Brazil. The BRL governs formal insolvency and reorganisation proceeding available for one to deal with financial distress.
The BRL applies to businessmen and business entities only. It does not apply to public companies, semi-public companies, ie, government-controlled companies, (sociedades de economia mista), public or private financial institutions, credit unions, consortiums, private pension entities, health care companies, insurance companies, special savings companies and other entities held equivalent to those under Brazilian Law. Specific legislation governs insolvency proceedings of excluded parties (see 2.6 Requirement for Insolvency).
As a general rule, Brazilian Law allows for private and out-of-court restructuring arrangements, which have contractual nature and bind the corresponding contracting parties. The Brazilian Civil Code (Federal Law 10,406/2002) provides for the general rules about contracts in Brazil.
There are three types of formal proceedings available to deal with insolvency and bankruptcy in Brazil:
Judicial reorganisation intends to allow distressed companies to reorganise their capital structure and preserve their activities as a going concern through approval and confirmation of a reorganisation plan. The extrajudicial reorganisation seeks to confirm a reorganisation plan negotiated and executed by and among debtor and certain creditors prior to the filing of a court proceeding. In certain circumstances, the extrajudicial reorganisation also allows the imposing of the reorganisation plan on dissenting creditors and/or creditors who did not participate in or execute the reorganisation plan prior to the court filing.
The bankruptcy proceeding has the purpose of liquidating the debtor’s assets under a court-supervised environment, in which the bankruptcy estate shall pay off claims with the proceeds of the sale of its assets in accordance with statutory credit priority rules.
The judicial reorganisation and the extrajudicial reorganisation are voluntary proceedings. Only the debtor has standing to commence judicial and extrajudicial reorganisation proceedings. There is no duty to commence a judicial reorganisation or an extrajudicial reorganisation. Consequently, there are no liabilities or penalties for the company and/or its officers arising from not filing one of such proceedings.
With respect to liquidation, Brazilian Bankruptcy Law provides that a debtor undergoing economic and financial crisis must request a voluntary bankruptcy when the debtor considers it does not meet the requirements for commencing a judicial reorganisation. However, there are no liabilities or penalties if the debtor does not file a voluntary bankruptcy proceeding.
Please refer to 2.3 Obligation to Commence Formal Insolvency Proceedings with respect to the obligation of filing insolvency proceedings. If an eligible debtor elects to file for reorganisation, it may, upon meeting certain legal requirements, file for judicial reorganisation or extrajudicial reorganisation. If an eligible debtor requires to move forward with liquidation, it may file a voluntary bankruptcy proceeding (see 2.1 Overview of Laws and Statutory Regimes and 2.6 Requirement for Insolvency for eligibility).
Only the debtor has standing to commence a judicial reorganisation or an extrajudicial reorganisation since these are voluntary proceedings.
A bankruptcy proceeding may be voluntary or involuntary. Involuntary bankruptcy proceedings may be filed by
Any eligible party may file a specific bankruptcy proceeding with state courts to request the liquidation of the debtor. The bankruptcy proceeding must be filed with the local state courts of the place where the debtor has its main establishment (principal place of business).
An involuntary bankruptcy filing must be based on either of the following causes of action:
Bankruptcy conducts are defined as follows:
Although a judicial reorganisation has the purpose of make it possible for a debtor to overcome its economic and financial crisis, the Brazilian Bankruptcy Law does not specifically require that the debtor demonstrate insolvency when filing for a voluntary proceeding. However, a debtor must outline in the reorganisation filing the reasons of its economic and financial crisis and the causes of its current patrimonial situation.
With respect to voluntary bankruptcy (liquidation) filings, there is no specific requirement for demonstration of insolvency, even though the language of the law suggests that the debtor must state that it is unable to meet the requirements for filing for reorganisation and that it no longer is able to carry on the business enterprise.
On the other hand, as outlined in 2.5 Requirement for Insolvency, as long as the requirements for a voluntary bankruptcy are met, the court will likely accept the request for liquidation. A plaintiff is not required to demonstrate insolvency in addition to proving either the default on certain credit instruments or failure to pay or secure payment of court judgements or the occurrence of bankruptcy conducts. In this sense, a debtor may avoid liquidation based on default on credit instruments, or failure to pay or secure payment of a court judgement, by making a deposit of the defaulted amount which, at least with respect to that specific obligation, would demonstrate the debtors’ ability to pay off its creditors.
It is worth noting that the Brazilian Bankruptcy Law does not provide for a specific definition of insolvency.
Specific pieces of legislation govern insolvency proceedings of parties to which the Brazilian Bankruptcy Law does not apply.
Federal Law n. 6,024/1974 and Decree-Law n. 2,321/1987 govern insolvency of public and private financial institutions (except for federal institutions), consortiums and credit unions. In these cases, the Brazilian Central Bank may decree intervention, extrajudicial liquidation or a Temporary Special Administration Regime (“RAET”) of the company, as well as its bankruptcy in specific circumstances.
Federal Law n. 9.656/1998 governs the activities of healthcare companies and remedies available in the event of financing distress, including intervention by the regulator (ANS) and extrajudicial liquidation. In certain specific circumstances a liquidator may, upon approval of the regulator, request the bankruptcy (liquidation) of healthcare companies.
Complementary-Law n. 109/2001 governs private pension entities; Decree-Law 73/1966 governs insurance companies; and Decree-Law n. 261/1967 governs special savings companies. In these cases, the regulator - the Brazilian Superintendence of Private Insurance (Superintendência de Seguros Privados, “SUSEP”) - may intervene in the debtor, declare its liquidation and authorise the liquidator to request bankruptcy in specific circumstances.
Electric utility concessionaries cannot resort to judicial or extrajudicial reorganisation while the concession is in force due to restrictions imposed by Federal Law n. 12,767/2012. The same piece of legislation provides for specific rules for intervention in such companies.
Restructuring market participants often support, and resort to, consensual frameworks, including during the negotiation process and/or while it is pending a full assessment of the financial position of the debtor.
Consensual restructurings are implemented out of court and based on contractual arrangements, eg, restructuring agreements, amendments to bilateral contracts, creation or amendment to security interest agreements, etc.
Given their contractual nature, consensual restructuring arrangements are binding and observed by the relevant parties. However, these arrangements and/or related negotiations are not mandatory and there is no legal obligation on a debtor to seek a consensual path before filing for an insolvency proceeding.
Sophisticated players usually perceive out-of-court workouts as preferable to in-court restructuring proceedings since they tend to preserve value for all stakeholders and maximise recovery. Likewise, the analysis of potential recoveries and timing for implementation of an out-of-court restructuring vis a vis a formal reorganisation proceeding tends to influence the decision of stakeholders to engage in such transactions.
Standstill and/or forbearance agreements are often used as an initial step of consensual restructuring arrangements, particularly in cases involving multiple creditors. Parties tend to limit the standstill for a specific period of time and/or establish certain level of discretion for creditors to unilaterally terminate the agreement.
Debtors are usually required to co-operate with the process and provide full access to information requested by creditors during the negotiation process. Further, standstill arrangements also prevent debtors from commencing legal disputes as to validity or enforceability of debt agreements while the standstill is in force.
With respect to information, the debtor is usually requested to provide a business plan, financial statements, cash flow projections and projections of future business and/or incomes, valuation of assets, market projections and other documents that could support creditors’ assessment of the viability of the restructuring. Depending on the nature of this information, standard non-disclosure agreements are executed by the relevant parties.
Given the contractual nature of these arrangements, parties have discretion to negotiate waterfalls, other types of priority, subordination and restriction on rights of equity holders.
New money can be injected in a variety of ways, including loan agreements, issuance of bonds, structured finance, etc. Although is not very common, pre-existing lenders and providers of new money can establish priority rules, among themselves, related to payments and/or enforcement of collateral, particularly collateral that is shared among different creditors.
The Brazilian Civil Code provides for a general duty of good faith in contractual dealings, including preceding negotiations and after performance. Likewise, the Civil Code also categorises abuse of rights as a wrongdoing for the purposes of civil liability. Both the duty of good faith and the prohibition of abuse of rights are considered general standards of conduct, which applies to restructuring arrangements and to negotiations of a reorganisation plan in statutory proceedings. In addition, Brazilian Federal Law 6,404/76 (Corporations Law) provides that a shareholder must exercise voting rights in the interest of the company and it shall be considered an abuse of the vote if it is made with the purpose of harming the company and/or other shareholders or securing unfair advantage to the shareholder. As outlined below, this specific provision of the Corporations Law is often applied analogically to scrutinise the voting process of reorganisation proceedings.
Based on the legal framework and policy underlying reorganisation proceedings, courts have, on a case by case scenario, scrutinised the vote of certain creditors, particularly those who are instrumental to the approval of ta plan. This scrutiny seeks to avoid any abusive behaviour of the creditor based solely on the creditors’ individual interests, to the detriment of the overall restructuring. Despite this, recognition of an abuse of voting power is extraordinary and depends on proof of the abusive behaviour.
Please refer to sections 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership and 6.1 Statutory Process for a Financial Restructuring/Reorganisation. As a rule, formal statutory proceedings are necessary to bind dissenters. Certain agreements, particularly indentures of local bonds, may allow for specific majority quorums for approval of contractual changes.
The most common type of securities interest in property are mortgages, pledges, fiduciary liens and fiduciary assignments. Mortgages apply to real estate and pledges to movable property, including intangible property, rights, accounts, etc. Both entail in rem guarantees and, in specific cases (particularly in pledges), may result in the transfer of possession, even though they do not result in transfer of property to creditor.
Fiduciary liens and fiduciary assignments involve the transfer of property of the asset in guarantee for the debt. Upon payment, the fiduciary guarantee is extinguished and property returns to the debtor. Fiduciary liens may be created over real estate and movable property not fungible. There is no subjective restriction for creation of fiduciary liens. A fiduciary lien over fungible movable property and fiduciary assignment of rights (including receivables) is generally restricted to financial institutions.
Outside restructuring or insolvency proceedings, holders of mortgage and pledges must resort to court proceedings to enforce their rights and foreclosure on collateral in order to auction it off to amortise the debt. Expropriation is entirely court-supervised. In restructuring or insolvency, holders of mortgage and pledges are subject to the reorganisation plan and to the stay resulting from a processing order or a bankruptcy decree. Although secured creditors integrate a separate class of creditors, they are prevented from enforcing their contracts while the proceeding is ongoing. As a rule, approval of a reorganisation proceeding depends on approval of all classes of creditors.
Fiduciary liens, on the other hand, are supposed to work as self-help guarantees so that foreclosure does not require court proceedings. Creditors, however, may elect to file court proceedings to collect on the debt and foreclosure on collateral. As a rule, credits collateralised by fiduciary liens and/or assignments are not subject to reorganisation or insolvency proceedings and should not be impaired by reorganisation plans. In view of this, holders of fiduciary liens should be able to enforce their rights regardless of the reorganisation proceeding, even though capital goods essential to the debtors’ activities must not be taken out of debtors’ premises during the stay period.
Please refer to item 4.2 Rights and Remedies with respect to inability of holders of mortgage and pledges to enforce their guarantees in formal insolvency or reorganisation proceedings.
As a rule, there is no special procedure for foreign creditors to hold security interest in Brazilian assets. Restrictions may apply for fiduciary liens over fungible movable property and fiduciary assignment of rights, to the extent foreign creditors may not characterise as financial institutions. There is a general restriction for foreign-controlled companies to own rural properties and property located in border areas.
Although secured creditors are allocated in a specific class of creditors, they are not entitled to special procedural protections and rights in statutory insolvency and restructuring proceedings. However, in restructuring proceedings, release of security following the sale of the asset depends on consent of the holder of the guarantee. Further, in bankruptcy proceedings secured creditors rank higher than tax and unsecured claims.
There is only one class of secured and unsecured creditors. Therefore, as a rule, there are no differing rights and priorities among classes of secured and unsecured creditors. Since no absolute priority rule applies, there is no specific priority between secured and unsecured creditors in reorganisation proceedings. In bankruptcy proceedings, secured creditors have priority over unsecured creditors.
Trade creditors are impaired in the same manner as other unsecured creditors. No specific protections for trade creditors are available. Case law, however, has authorised debtors to include, in reorganisation plans, specific and more favourable payment conditions for trade creditors who continue doing business with the debtor.
Although no specific rights or remedies are available, unsecured creditors may actively participate in statutory proceedings and commence litigation, including with respect of challenges to other creditors and secured creditors, eg, litigation over validity and enforceability of security interest, challenges to the list of creditors, etc.
Outside reorganisation and liquidation, pre-judgement attachments are available as preliminary injunctions. Granting of preliminary injunctions depends on the demonstration that the plaintiff is likely to return to a path of success and will suffer irreparable harm should the relief not be granted.
Outside reorganisation and liquidation, the timeline of court proceedings seeking to enforce unsecured claims usually ranges from three to seven years.
Lease payments matured prior to the filing of a reorganisation proceeding are subject to the reorganisation plan. Therefore, during the stay period, landlords are not entitled to evict tenants based on pre-petition claims. However, eviction is generally allowed if the debtor fails to pay post-petition obligations, including rents.
Lease agreements are not automatically terminated as a result of liquidation of the debtor. If the debtor is the tenant, the trustee may unilaterally terminate the contract to avoid further expenses. On the other hand, if the debtor is the landlord, the tenant will be required to make payments to the bankruptcy estate.
There are no special procedures, impediments or protections that apply to foreign unsecured creditors.
The waterfall of claims takes into consideration the following order:
Restitution of assets in possession of the estate, including assets given as collateral under fiduciary liens, and restitution in cash of advances on foreign exchange contracts, and amounts that a good-faith buyer delivered to the estate in the event the contract is considered ineffective.
Bankruptcy remote claims include:
General claims include:
There is no specific priority rule in reorganisation proceedings, although labour claims must be paid within one year of the confirmation of the reorganisation plan. Post-petition claims (including trustee’s fees) are not impaired by the proceeding. See 5.8 Statutory Waterfall of Claims for priority in liquidation.
This can be divided into two categories: rules related to judicial reorganisation; and rules related to extrajudicial reorganisation.
The following requirements apply for commencing a judicial reorganisation:
Upon receiving a judicial reorganisation filing and as long as such requirements are met, the court enters a Processing Order. The Processing Order, inter alia, triggers a 180-day stay period, which is usually subject to extensions based on case law, triggers 60-day deadline for the debtor to file a reorganisation plan and appoints a trustee to oversee the proceeding and monitor the debtors’ activities (see 6.2 Position of the Company).
Court records are publicly-available information. No confidentiality applies, even though certain documents related to shareholders and officers’ personal assets, list of employees and current wages may, under certain circumstances, be filed under seal.
In theory, a judicial reorganisation should be concluded 180 days from the initial filing. However, the proceeding typically takes longer. Although the language of the Brazilian Bankruptcy Law indicates that the 180-day automatic stay is not subject to extensions, case law has taken a flexible approach to the issue and allowed for extensions under certain circumstances.
The backbone of a judicial reorganisation proceeding is the reorganisation plan, which may provide several alternatives for the restructuring of the debtor, including mergers, drop-downs, sale of assets, grace periods, haircuts, extension of maturity, replacement of officers and directors, increase of the capital stock and DIP Financing (see 6.10 Priority New Money), among others. Debtors and creditors have the discretion to agree on the terms of the reorganisation plan, although this is limited by compliance with the Law.
To the extent that no statutory absolute priority rule applies, the reorganisation plan should provide for the criteria of recovery to creditors. Labour credits, however, must be paid within one year of the confirmation of the plan by the court.
Creditors have the ability to object the reorganisation plan and/or other legal issues raised during the proceeding. If no creditor files an objection to the reorganisation plan – which is unusual – the court automatically confirms the reorganisation plan, subject to court’s scrutiny of accompanying legal issues. If an objection is filed, the court must call a creditors meeting designed to put the reorganisation plan to a vote. At the creditors’ meeting, creditors may approve, reject or propose amendments to the reorganisation plan. Creditors are not allowed to propose an alternative plan or impose changes to the plan without debtors’ consent.
Creditors are divided into four classes:
A straightforward approval of the plan requires approval by majority of all class of creditors according to the following criteria: at Labour and Micro and Small Business classes, a majority of number of creditors; and at the secured and unsecured classes, a majority of both number of creditors and credit amount. An approval quorum is based on creditors and corresponding credit amounts of those who attend the meeting of creditors scheduled to vote on the plan.
If a debtor does not secure straightforward approval, an RJ Court may still approve an RJ Plan as long as the following requisites are met:
Following the voting process, the court must decide on confirmation of the plan. As a rule, in case creditors have not approved the reorganisation plan and the cram-down requirements are not met, the court shall convert the reorganisation proceeding into a bankruptcy proceeding. If the plan has been approved, confirmation should be limited to a scrutiny on the legality of the plan (ie, the court should not interfere in the economics of the plan).
Upon court confirmation, all creditors subject to the reorganisation proceeding become bound by the reorganisation plan, including dissenting creditors, creditors who did not vote on the plan and creditors who had not had their credits recognised and/or liquidated, such as litigation claims. The confirmation decision kicks-off a two-year supervision period of the debtor by the court, in which any default on the plan may entail a conversion of the judicial reorganisation into a bankruptcy proceeding. As a rule, after the supervision period the court shall close the reorganisation proceeding.
In addition, creditors are entitled to challenge the amount and classification of their credits through specific administrative and court proof of claim proceedings. Litigation over amount and classification of creditors should not adversely impact the creditors’ meeting and corresponding approval of the reorganisation plan.
A debtor who meets the eligibility criteria for commencing a judicial reorganisation proceeding may negotiate with certain creditors an extrajudicial reorganisation plan. Tax credits, labour claims, credits collateralised by fiduciary liens and advance on foreign exchange agreements are not subject to an extrajudicial reorganisation plan.
The debtor may request that the court confirm an extrajudicial reorganisation plan through an extrajudicial reorganisation proceeding as long as the debtor has not commenced and it is still pending a judicial reorganisation proceeding, or the debtor has been granted judicial reorganisation protection or confirmation of an extrajudicial reorganisation plan in the past two years.
A debtor, by means of an extrajudicial reorganisation proceeding, is allowed to impose an extrajudicial reorganisation plan on creditors of the same class of creditors, eg, secured and unsecured, or of a certain group of creditors whose claims have the same nature and that are subject to similar payment terms within a same class, eg, creditors that hold unsecured notes, suppliers.
Imposition of a reorganisation plan on dissenting or non-adherent creditors depends on a court ruling. In essence, for a debtor to file an extrajudicial reorganisation seeking to cram down the plan on the remaining creditors of a same class or group, it must prove in the extrajudicial reorganisation filing the previous adherence of creditors representing 60% of more of the credits to be restructured by the plan.
Dissenting creditors may challenge the reorganisation plan within 30 days of the release of a public notice informing of the filing. During this period, creditors may also adhere to the plan.
Challenges are limited to the following defences:
The court is required to decide on these challenges. Acceptance of the challenge and/or refusal to confirm the reorganisation plan do not trigger the conversion of the extrajudicial reorganisation proceeding into a bankruptcy proceeding and, therefore, do not result in the liquidation of the debtor.
In both the judicial reorganisation proceeding and in the extrajudicial reorganisation proceeding, interested parties may appeal court decisions. With respect to the extrajudicial reorganisation, as a general rule, appeals against the decisions confirming the reorganisation plan do not stay the proceeding or prevent the implementation of the reorganisation plan.
As with the judicial reorganisation plan, case records are public, and key commercial and economic issues related to the debtor are disclosed.
The Processing Order of a judicial reorganisation entails a 180-day stay of claims asserted against the debtor. With respect to the extrajudicial reorganisation, the filing does not suspend the rights and/or claims of creditors not subject to the extrajudicial reorganisation plan. Consequently, there is a stay of claims related to credits to be restructured under the extrajudicial reorganisation plan.
During reorganisation proceedings, the debtor continues to operate subject to certain restrictions related to payment of credits subject to the proceedings and the sale or encumbrance of fixed assets (see 6.7 Restrictions on a Company's Use of or Sale of its Assets).
Debtor’s management continues to manage the company. Although in judicial reorganisations a trustee is appointed to supervise the proceeding and monitor the debtors’ activities, such trustee does not manage or interfere with the management of the debtor.
The court, however, has powers to remove management upon request of interested parties, usually after review of pleadings and gathering of evidence.
Removal of debtor’s officers and/or managers requires proof that any of statutory managers:
The debtor is entitled to borrow money and/or incur in new obligations during the course of judicial or extrajudicial reorganisation proceedings. If a debtor is under a judicial reorganisation proceeding, creation of security interest over the debtors’ assets to collateralise such new debt is subject to court approval. If the borrowing is unsecured, no specific formality or requirement related to the judicial reorganisation proceeding apply.
In judicial reorganisation proceedings, creditors are divided into four classes. See item 6.1 Statutory Process for a Financial Restructuring/Reorganisation. This division is relevant for the purposes of plan approval.
Since reorganisation proceedings are court proceedings, creditors are represented by counsel appointed through power of attorney and creditors have the ability to file motions and appeals throughout the proceeding.
A Creditor Committee can be appointed. Creation of the Creditor Committee depends on favourable vote of any class at a creditors’ meeting. If there is a decision to create a Creditor Committee, each class must vote separately on its representative. The Creditor Committee may be formed even if one class decides not to appoint any representative. As a rule, each class is entitled to appoint one effective representative and two deputies. Among other duties, the Creditor Committee shall:
It is important to note that, although creditors are entitled to sit on a Creditors Committee, they usually choose not to do so, mainly to avoid any risk of liability arising from its activities a a member of the Creditor Committee.
Although the debtor shall not pay fees to members of the Creditors Committee, the expenses incurred by them in performing their duties shall be reimbursed, in accordance with the available cash funds, provided that the expenses are duly evidenced and authorised by the court.
With respect to information made available to creditors, the debtor is required to present certain documents in support of the filing, particularly financial statements, accounting documents, a list of creditors, a list of ongoing lawsuits, bank statements, certificates of court proceedings and claims on credit bills. Further, the reorganisation plan must be accompanied by a demonstration of the feasibility of the plan, a financial and economic report and a valuation report of the assets of the debtor, prepared by a specialised third party.
Creditors should also have access to any subsequent document filed by debtor. Further, the trustee is required to file a monthly report on the debtor’s activities, which is made available to all parties to the proceeding.
Both in judicial reorganisation and extrajudicial reorganisation, claims of dissenting creditors may be modified without their consent upon the approval and confirmation of the reorganisation plan. See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
As a rule, absent any contractual or legal restriction, creditors are entitled to trade their claims against a company under reorganisation without the need of court or debtor’s approval or consent. The Brazilian Bankruptcy Law does not provide any restriction on trading of claims either.
There is not a specific proceeding related to the disclosure of transfer of claims. Interested parties may file motions with the court informing the transfer and requesting the proper annotations in the list of creditors. This is particularly relevant with respect to voting rights related to the assigned credit.
The Brazilian Bankruptcy Law is silent on joint filing and/or substantive consolidation. The issue is still controversial; courts have allowed joint filings by multiple debtors depending on the factual circumstances of the case, most notably in cases of debtors of a same economic group whose businesses, debt obligations and activities are heavily co-ordinated and/or interconnected.
A debtor undergoing a judicial reorganisation is not allowed to dispose of or encumber fixed assets without court approval unless the reorganisation plan provides for the sale or encumbrance of such assets.
With respect to sale of assets, there are essentially two mechanisms:
There is no statutory concept of isolated business units. Therefore, there is no specific form according to which assets must be sold for an investor to benefit from the non-successor liability provision. Debtors have the discretion to propose, in their reorganisation plans, sales of isolated business units in the form of asset purchase transactions, or even to group the assets in a specific vehicle to transfer to the purchaser through a share purchase transaction.
Provided that the relevant transaction is approved by the court, officers of the debtor have the ability to execute the documents reflecting the sale of assets or business during a judicial reorganisation proceeding.
The property title to is duly transferred to the purchaser. However, with respect to judicial reorganisation proceedings, only sales of isolated business units are ring fenced against successor liability. Sales of isolated business units require specific provision in the reorganisation plan and a court-supervised competitive process in the form of either an auction, a sealed bid process or a pregao (a hybrid form of sealed bids and auction). Sales of isolated business units (or other sale of assets included in the plan) provide safe harbour against claw-back claims in case the reorganisation proceeding is converted into liquidation.
Brazilian Bankruptcy Law does not impose restrictions on or rules for credit bids. However, the possibility of creditors using their claims to bid on assets must be expressly provided for in the sale documents, particularly the public notice that triggers the competitive sale process.
Likewise, there are no statutory rules or provisions dealing with a stalking horse bidder in the sale processes. Although the issue has not been widely tested by Brazilian courts, being relatively new practice, courts have allowed certain protections to a stalking horse bidder, such as the right to top competing offers. Stalking horse protections must be properly disclosed in the sale documents, particularly the public notice that triggers the competitive process.
Reorganisation proceedings may be used to implement transactions negotiated prior to the filing of the proceeding. However, depending on the type of sale, a competitive process may be required.
Pursuant to the Brazilian Civil Code and the Brazilian Bankruptcy Law, release of a security interest depends on express consent of the creditor holder of the lien. The issue, however, has been widely litigated since approval and confirmation of a reorganisation plan results in the replacement of the original conditions of the debt (made in the reorganisation proceeding) with the new provisions detailed in the reorganisation plan, which will usually contain release clauses.
Brazilian Courts, in general, have ruled that reorganisation plan clauses providing a release of guarantees are not enforceable on the holder of the guarantee without the holder’s consent. A few decisions, however, have allowed releases of personal guarantees and security interest in property upon approval of the plan by the majority of creditors, regardless of the secured creditor’s specific consent.
Any new financing incurred by the debtor after the filing of a judicial reorganisation proceeding will be considered a post-petition obligation not subject to the reorganisation plan. As mentioned in 6.7 Restrictions on a Company's Use or Sale of its Assets, court approval is required for the creation of security interest to secure new debt obligations, but there is no rule that allows for lien priming in Brazilian Law. Therefore, absent consent of the holder of the pre-existing lien, no security interest should be created or put ahead of the pre-existing lien. Parties have discretion to negotiate the terms and conditions of the credit facility, including payment schedule, interest rate and positive and negative covenants.
In the event the judicial reorganisation proceeding is converted into liquidation, the new financing will rank senior to and have priority over pre-existing credits, alongside with other credits to which the Brazilian Bankruptcy Law grants priority.
Although judicial reorganisations usually involve substantial portion of the debt, as a rule it should not serve as a forum for determining the value of all claims against the debtor, to the extent that the debtor may owe bankruptcy-remote claims which are not impaired by the proceeding such as tax claims, credits collateralised by fiduciary liens, retention of titles and advance on foreign exchange agreements. These claims, particularly fiduciary lien-backed creditors, might be substantial and are not necessarily disclosed in the reorganisation filing.
Reorganisation plans must be confirmed by the court in charge of the reorganisation proceeding to produce effects. The scrutiny of the court is limited to legal aspects of the plan; therefore, courts perform an assessment of the validity and enforceability of the plan’s provisions, even though courts are not supposed to interfere in the economic conditions on which debtor and creditors have agreed. In the event the court finds any provision invalid or illegal, it has the discretion to declare it void and unenforceable.
The debtor does not have the ability to assume or reject contracts in reorganisation proceedings. Assumption or rejection of bilateral contracts is limited to bankruptcy (liquidation) proceedings.
As a rule, judicial reorganisation and extrajudicial reorganisation proceedings should not directly affect non-debtor parties and/or allow for releases in benefit of these non-debtor parties.
The Brazilian Bankruptcy Law is silent on the enforceability of set-off rights in reorganisation proceedings, even though set-off rights are expressly allowed in bankruptcy (liquidation). Likewise, courts have not yet consolidated an understanding on the issue, which remains controversial.
Practitioners who defend the unenforceable nature of offset rights argue, in general, that these rights violate the equal treatment of the creditors that should govern reorganisation proceedings. On the other hand, those who support enforceability of set-off rights claim that, as long as the general legal requirements for offsetting credits and debts under civil law are met and the credits and debts were originated prior to the filing of the reorganisation proceeding, set-off rights would apply.
With respect to the moment and procedure of exercise of set-off rights, there is no statutory guidance. Creditors usually request that the court acknowledge set-off rights either by filing a motion during the course of the reorganisation proceeding or through ancillary proceedings filed to challenge the credit listed in favour of the creditor.
After confirmation of the reorganisation plan, the debtor will be under the supervision of the court for a period of two years. Should the debtor fails to comply with the reorganisation plan in the course of the supervision period, the reorganisation will, generally, be converted into a bankruptcy proceeding.
At the end of the supervision period, the reorganisation proceeding should be closed. Default on the reorganisation plan after the closing of the proceeding allows creditors to seek enforcement of the reorganisation plan with respect to their individual credits.
No absolute priority rule, whereby junior creditors only receive payment and/or distributions after senior creditors have been fully paid, applies to reorganisation proceedings. In these proceedings, the reorganisation plan governs recovery of pre-petition creditors. As a consequence, existing equity owners can, ultimately, retain ownership even if creditors have not fully recovered their credits.
See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership, 2.3 Obligation to Commence Formal Insolvency Proceedings, 2.4 Procedural Obligations and 2.5 Commencing Involuntary Proceedings for types of liquidation proceeding, commencement of a case and insolvency requirements.
The court-appointed trustee (see 9 Trustees/Receivers/Statutory Officers) is required to prepare a list of creditors based on their assessment of the company’s books and any challenges and proof of claims filed by creditors. As a rule, the bankruptcy decree entails a stay of all collection and enforcement proceedings against the debtor. However, such stay does not affect litigation related to contingent claims, therefore, parties shall continue litigation until there is a final determination on the amount of the claim. Upon this determination, the claim will be allowed in the liquidation proceeding.
Absent contractual restrictions, claims can be traded during a bankruptcy proceeding. Trading is usually materialised by private contracts for the assignment of rights. As a rule, a transfer of claims does not require the consent of the debtor, even though the transfer will only be opposable by the debtor upon delivery of a notice informing the transfer.
Except for cases where the court may rule that the bankrupt debtor remains operational for a specific period, generally the bankruptcy decree results in the debtor being shut down and management being removed. A trustee is appointed to represent the estate and liquidate the assets to distribute the sale proceeds to creditors (see 9 Trustees/Receivers/Statutory Officers for powers, duties and responsibilities of the trustee). The trustee is also responsible for providing the creditors and all stakeholders involved in the process with all information available about the debtor, the assets and the proceeding.
The trustee has the ability to assume or reject bilateral contracts in liquidation proceedings. Assumption is allowed if it reduces or avoids any increase of indebtedness or if the contract is necessary for preservation of assets. As a rule, rejection gives rise to the compensation to the contracting party, the amount of which should be assessed through a court proceeding and result in an unsecured claim against the estate.
As a rule, creditors can enforce set-off rights as long as the debt was due on the date of the bankruptcy and the general requirements for exercise of set-off rights are met, ie, both the credit and debt must have a determined amount, be already due and have a fungible nature. Further, set-off rights are also allowed in the context of financial transactions subject to specific clearing rules.
Set-off rights do not apply to credits that have been transferred after the bankruptcy decree, that have been transferred when the insolvency status of the debtor was already known, or where the transfer was fraudulent.
As a rule, all asset sales in the context of liquidation proceedings are subject to court-supervised competitive processes intended to maximise the value of the assets. Although the trustee may provide information and interact with prospective buyers, conclusion of the sale depends on the competitive process and court confirmation. In extraordinary circumstances, the court may authorise alternative mechanisms for asset sales.
The purchaser acquires the goods title and the sale is considered free and clear, and insulated from successor liability risk, with respect to the seller’s obligations. Successor liability protection does not apply to certain related parties of the debtor.
See 6.8 Asset Disposition and Related Procedures for credit bid and stalking horse considerations.
With respect to reorganisation proceedings, debtors’ default on a reorganisation plan during the supervision period results, as rule, in the conversion of the proceeding into bankruptcy (liquidation).
Although not usual, it is technically possible for an investor to provide new money to a bankruptcy estate, particularly in cases where the court temporarily extends the business activities of the debtor. A loan of new money would be subject to court approval. In this case, any new money would have priority over general claims, alongside other bankruptcy-remote claims, as it would qualify as “amounts provided to the estate by creditors” (see 5.8 Statutory Waterfall of Claims).
See 6.6 Use of a Restructuring Procedure to Reorganise a Corporate Group, which also applies to liquidation.
See 6.3 Roles of Creditors with respect to the Committee of Creditors.
Except for the cases where the court temporarily extends the debtors’ business activities, upon a bankruptcy decree the debtor loses management and control over its assets. The trustee is responsible for managing the assets while they are liquidated. Any transaction involving the assets (eg, leases, sales, etc) is subject to court approval.
Brazilian Bankruptcy Law does not provide specific proceedings for recognition or other relief in Brazil in connection with restructuring or insolvency proceedings commenced in foreign countries. Brazil has not incorporated the Uncitral Model Law on Cross Border Insolvency or any treaty related to cross-border insolvency proceedings, therefore, Brazil does not have confirmation proceedings available with respect to international cases.
Brazilian Law does provide for mechanisms for recognition and enforcement of foreign decisions. In a nutshell, recognition must be sought through the filing of a proceeding before the Brazilian Superior Court of Justice and must meet certain formal requirements. Although the Brazilian Superior Court of Justice is not supposed to review the merits of foreign awards, recognition may be denied in a case where the decision violates Brazilian national sovereignty, Brazilian public policy/order and/or human dignity.
As mentioned, there are no statutory co-operation mechanisms with respect to cross-border insolvency proceedings.
The court local to the primary place of business of the debtor has jurisdiction to adjudicate a reorganisation or insolvency proceeding. Therefore, as a rule, only companies incorporated in Brazil are allowed to resort to insolvency or reorganisation proceedings in Brazil. Brazilian courts, however, have allowed foreign entities of an economic group based in Brazil to join judicial reorganisation as debtors in a few cases, notably in cases of non-operational foreign vehicles incorporated to access international capital markets (for capital raising purposes to the benefit of the parent company) and/or other companies of their economic group.
As a rule, Brazilian courts do not treat foreign creditors differently from Brazilian creditors in insolvency proceedings. Foreign creditors must, however, comply with formal procedures to enable their procedural representation. In this sense, all documents filed in court records shall be translated by a sworn translator, as well as notarised and apostilled (in case the creditor is a signatory of the Hague Apostille Convention) or consularised.
Under Brazilian Bankruptcy Law, one statutory officer - the trustee – shall be appointed, both in reorganisation and reorganisation proceedings. Other court officers may be appointed in certain circumstances, such as auctioneers, appraisers and experts, even though they do not serve as statutory officers to the proceeding or of the debtor.
In judicial reorganisation proceedings, the trustee is required to:
In bankruptcy proceedings, the trustee is the legal representative of the bankruptcy estate. Among the trustee’s main responsibilities, we highlight:
Trustees are officers of the court. They do not represent a specific party, but perform their duties in the benefit of all stakeholders involved in the process. Brazilian Bankruptcy Law provides that trustees may be held liable for losses caused to the estate, and to the debtor or to creditor for voluntary breach of their responsibilities.
Trustees are appointed by the court in charge of the reorganisation or bankruptcy proceedings.
Usually, upon granting a processing order in judicial reorganisations or decreeing the liquidation of the debtor in bankruptcy proceedings, the court appoints a trustee. There is no central body or entities of trustees in Brazil.
Trustees may be removed or replaced. Removal requires proof of voluntary breach of Law, failure to perform responsibilities, omission, negligence or performance of acts harmful to the debtor or third parties. If a trustee is removed from a case, they may be barred from appointment to new case and eventually be held liable for losses arising from any misconduct.
Trustees must supervise the debtor’s activities and provide periodic reports to the court. In order to perform this supervision, trustees usually perform on-site visits, hold meetings with management, request and analyse documentation prepared and provide by management, etc. There is no need to disclose to court any communications between the trustee and management. Despite this role, and constant interactions with the debtors’ officers, trustees do not interfere in the management of the debtor.
The trustee must be a reputable professional, ideally an attorney, economist, business manager, accountant or a specialised company. There is no specific requirement for one of the professions listed to be appointed a trustee, however, knowledge of the Brazilian Bankruptcy Law and capabilities to perform the duties and responsibilities of a trustee are required.
Restructuring professionals, attorneys, accounts or other professionals may serve as trustees in reorganisation and liquidation proceedings.
Typically, the debtor employs attorneys, financial advisors and accountant/valuation experts to provide advisory work in reorganisation proceedings. Creditors often rely on attorneys and financial advisors. If the reorganisation proceeding involves sale of assets, new financing and/or issuance of securities, investment bankers are also involved.
The court-appointed trustee may also hire, upon court approval, specialised advisors to assist with the fulfilment of the trustee’s duties and obligations.
As a rule, the party who hires an advisor has the obligation to pay the corresponding compensation. Debtors and creditors may enter into contractual arrangements whereby the debtor reimburses the advisors compensation. There is no legal obligation for this reimbursement.
In the event of retention of advisors by the trustee, in reorganisation proceedings the compensation of advisors to the trustee should be paid by the debtor. As to liquidation proceedings, compensation of the trustee and its advisors is paid by the bankruptcy estate with available funds.
Employment of advisors to the debtor or creditors in reorganisation proceedings do not require court approval. Likewise, in liquidation proceedings creditors do not need court approval to hire independent advisors.
The court-appointed trustee, however, needs court approval to employ advisors to help the trustee perform their duties and obligations.
Advisors owe professional duties and responsibilities to the parties for whom they render services, despite the fact that a third party may be responsible for paying their compensation.
Attorneys and financial advisors usually help the debtor design strategies for dealing with its distressed situation, navigate the proceeding and interact with the various stakeholders involved in the process. Attorneys perform all court-related work, particularly preparing and submitting court filings, attending hearings and creditor’s meetings, and other procedural developments. Financial advisors prepare all the economic and financial modelling of the reorganisation plan and/or restructuring proposal, as well prepare valuation reports in support of these proposals.
Further, due to certain legal requirements, accountants and other specialised third parties may be employed to prepare a feasibility report and valuation of the debtors’ assets in support of a reorganisation plan.
Brazilian Bankruptcy Law does not provide for any specific statutory arbitration or mediation proceedings in restructuring, liquidation or insolvency matters. Some courts, however, have incentivised informal mediation processes to settle disputes that arise in the course of reorganisation or liquidation proceedings, such as disputes related to the classification and/or amount of credits.
Parties rarely agree to arbitrate their disputes in restructuring and insolvency situations. Mediation has become more typical in reorganisation proceedings, based on court decisions that allow for such mediation. Absent court decisions incentivising the parties to mediate, mediation is occasionally agreed as a mechanism to settle disputes in restructuring and insolvency proceedings.
Unless a specific dispute is based on a contract that provides for mandatory mediation or arbitration, courts either in restructuring or insolvency proceedings.
Arbitration clauses and/or agreements to arbitrate are enforceable in statutory reorganisation or insolvency proceedings. Filing of a statutory proceeding does not remove the jurisdiction of arbitrators to settle disputes arising from the underlying contract. Interaction with the court in charge of the statutory proceeding may be requested, or even necessary, in certain circumstances.
Brazilian Federal Law 9,307/96 governs arbitration. Brazilian Federal Law 13,140/2015 and the Brazilian Code of Civil Procedure (Federal Law 13,105/2015) govern mediation.
Appointment of arbitrators follows the rules and mechanics of the arbitration clause and/or the rules of the arbitration centre elected by the parties to administer the proceeding. Generally, the parties have the ability to appoint arbitrators. If the arbitration is to be decided by an arbitration tribunal, each party appoints one arbitrator and the arbitrators themselves appoint the chair of the tribunal. Specific rules may apply in the event of multiparty arbitration.
Mediators are appointed by the parties or by the court.
The Brazilian Bankruptcy Law does not provide for specific duties directors of distressed companies owe to creditors and/or specific rules about liability of directors, officers and managers of companies under reorganisation or bankruptcy proceedings. The ordinary rules of liability apply to these directors, officers and managers. Under Brazilian Law, as a general rule, a director is not personally liable for losses caused by the company to third parties or that the company suffers as a result of its own activities, provided that these losses derive from acts performed within the limits of the Law and the company’s corporate documents. The filing of a reorganisation or bankruptcy proceeding does not affect these standards.
Therefore, directors, officers and managers will be held liable for damages caused to the company if there is sufficient evidence of violation of their duties, breach of the limits provided for in the company’s corporate document and/or any act performed in violation of the Law.
Measures to determine financial distress or insolvency and duties or standards of care in relation to creditors are not established features in Brazilian law.
During reorganisation proceedings, directors continue to owe their duties to the company since they retain their positions as directors.
There is no such feature in Brazilian law.
Although companies may appoint Chief Restructuring Officers, such an appointment is not typical. In any circumstance, duties and reporting obligations will follow the debtors’ internal corporate governance.
Distressed companies, however, usually appoint advisors to help them design strategies for restructuring and/or navigate formal reorganisation proceedings.
The concept of shadow directorship is not used in Brazil.
As a rule, owners and controlling shareholders are liable to the company for abuse of its controlling position. In liquidation proceedings, the trustee must perform an investigation on potential causes of action against former owners, controlling shareholders, officers and directors, which can result in the filing of claims against these entities or individuals. In these cases, the proceeds of litigation will indirectly benefit creditors subject to the liquidation proceeding.
Brazilian Bankruptcy Law provides for both ineffectiveness and avoidance of certain transactions that preceded bankruptcy (liquidation) proceedings.
Ineffectiveness does not require fraudulent intent and/or knowledge of the debtors’ distressed financial situation. Further, courts may declare ineffectiveness, regardless of any specific request made by interested parties and/or specific ancillary litigation, to discuss the issue. The following transactions are considered ineffective:
Avoidance, on the other hand, relates to transactions executed with fraudulent intent, regardless of whether the transaction as executed during or prior to the look-back period. A court may, upon request made in the context of a specific fraudulent conveyance lawsuit, void past transaction provided that there is evidence of:
A fraudulent conveyance claim may be filed by creditors, the trustee or the public prosecutor office within three years of the bankruptcy decree.
The Brazilian Bankruptcy Law does not provide for specific rules related to avoidance or ineffectiveness of transactions that preceded judicial reorganisation or extrajudicial reorganisation proceedings. In such cases, creditors may seek ineffectiveness and avoidance under the general rules of fraudulent conveyances set forth in the Brazilian Civil Code (Federal Law n. 10,406/2002) and the Brazilian Code of Civil Procedure (Federal Law n. 13,105/2015), such as fraud against creditors (fraude contra credores) and fraud against pending litigation (fraude à execução).
Upon decreeing the bankruptcy (liquidation) of the debtor, the court must set the look-back period, which covers 90 days retrospectively, counted as of:
As stated in section 13.1 Historical Transactions, certain transactions may be subject to ineffectiveness or avoidance even if executed prior to the look-back period. Further, with respect to avoidance, a three-year statute of limitations apply (see 3.1 Restructuring Market Participants).
See 13.1 Historical Transactions.
Valuations serve a variety of roles in both in-court proceedings and out-of-court restructurings. Reorganisation plans must be supported by a feasibility report and a valuation of the assets of the debtor. Likewise, specific provisions of reorganisation proceedings related to the sale of assets may be based on valuations (eg, definition of floor price). In liquidation, asset sales are preceded by valuations, which define the minimum price for potential bids.
With respect to out-of-court arrangements, valuations are used as basis for the definition of collateral value, to provide guidance on asset sale process and to help creditors understand the overall patrimonial situation of the debtor.
The initiation of a valuation depends on the context. Debtors are required to provide certain valuations in support of reorganisation filings. Trustees also take the initiative to arrange valuation for the assets to be sold in the context of liquidation proceedings. Courts may also determine valuation, particularly for the purposes of determining minimum prices for asset sales under court-supervised competitive processes.
Valuation methodologies vary according to the nature of the asset. Discounted cash flow methods are usually accepted for the valuation of business enterprises, whereas other types of analysis are used for piecemeal assets, ie, equipment, real estate, etc. Liquidation value is often a relevant factor to determine minimum prices for asset sales, for definition of collateral value or level of collateralisation in private transactions.
There are a number of valuation experts that provide valuation services both in and out of court. Courts also have retained experts that are frequently appointed to perform valuations, particularly in the context of court-supervised competitive processes for sale of assets. Parties often rely on their own experts to take their view on valuations and/or to challenge valuations presented by court-appointed experts.
Brazilian Law does not provide for marketing test requirements to validate valuations and/or mitigate challenges. However, courts tend to request that challenges are based on technical reasons and, ideally, supported by a competing valuation report.
Trustees have the duty to perform a valuation of the assets to be liquidated in liquidation proceedings. Therefore, although a valuation should be validated by the court, it is prudent for trustees to undertake their own valuation process in these cases.