Since the enactment of the Brazilian Bankruptcy Law (the "Bankruptcy Law") in 2005, the debt restructuring market in Brazil has remained heated, with peak periods occurring to the economic and political crises of 2008 and 2014, the effects of which remained until 2016 when 1,863 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 was expected in 2021 due to the COVID-19 pandemic; however, as of August 2021, there were fewer bankruptcy filings in 2021 than in 2020. The expectation is that cases will increase next year as a high percentage of vaccine uptake in Brazil has reduced the impacts of the pandemic and companies are in a more stable environment, able to decide if filing for bankruptcy or other insolvency proceedings will help their businesses.
The recent enactment of Law 14,112/2020 of law brought significant modifications to the Bankruptcy Law, which are expected to make insolvency proceedings more attractive for businesses. Among other amendments, the new law changed the rules for liquidation proceedings so they are expedited, and regulated issues that were not addressed yet in the Bankruptcy Law, such as DIP financing, substantive consolidation and transnational insolvency, providing tools that can assure more certainty as well speed up the insolvency proceedings.
Brazilian insolvency proceedings are regulated by Law No 11,101, enacted on 9 February 2005, as amended, 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. Recent amendments to the Bankruptcy Law allow healthcare co-operatives (cooperativas médicas) and rural producers to file for bankruptcy.
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 encompasses three different proceedings:
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:
Creditors may file for liquidation if the debtor:
Insolvency, for the Brazilian insolvency proceedings purposes, is not a financial or business concept, but a legal one, and is characterised by either by:
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.
Public or private financial institutions, as well as credit cooperatives and consortia, are subject to Law 6.024/1974, which establishes:
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 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. Recent changes in the Bankruptcy Law allow co-operatives which operate hospitals and healthcare plans to file for corporate restructure under the Bankruptcy Law.
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 among 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 recommendable 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, labour practices, tax indebtedness etc, retaining experts and advisors, often at the debtor’s expense.
Usually, these renegotiations lead to new and additional guarantees and collateral 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 relevant creditors priority over the proceeds. Likewise, the release of collateral is usually allowed if they are being sold to facilitate the repayment of creditors or as a mean to increment the company’s cash flow.
In Brazil, it is neither common nor there is regulation regarding the creditors' committees for consensual restructuring, so negotiations happen individually among 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. A recent amendment to the Brazilian Bankruptcy Law consolidated previous case law understanding that strategic suppliers which continue to do business with the debtor are entitled to beneficial treatment).
There is no legal provision indicating any special duty for creditors, other than ordinary duties to negotiate in good faith. Creditors are prohibited from some practices, such as assisting the debtor in practicing fraudulent acts or giving preferential privilege to a creditor. 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. Recent amendments to the Bankruptcy Law legally recognise the possibility that a vote is disregarded under such circumstances.
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 court 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 an 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 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 more than half of the claims 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 constitute 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 creditors are not entitled to retaining ownership of the collateral for the payment of a debt without a prior selling attempt.
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 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.
Due to the frequent need of releasing liens over collateral and the fact that in a potential liquidation proceeding 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 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.
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 among classes of creditors in a judicial reorganisation or an out-of-court reorganisation, provided the rights the secured creditors have over their collateral are 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, extendable for another year if of the debtor posts collateral to secure the payment and claims are paid in full.
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:
In an out-of-court reorganisation (recuperação extrajudicial), the plan of reorganisation must be adhered to by more than half of the claims of each class encompassed by it, 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, unsecured, and labour creditors may be subject to an out-of-court reorganisation and solely the debtor may decide if the proceeding will include all the classes or just a group of creditors in the same situation (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:
As one of the requirements is the simple majority credit approval of the reorganisation plan, it is common that these procedures involve long discussions of the claims’ amount.
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.
The recent amendment to the Brazilian Bankruptcy Law brought introduced the possibility for the creditors to present their own plan of reorganisation in case the plan the debtor presented is rejected or not voted within the stay period.
Upon filing a judicial reorganisation and once the court has ascertained that the company has presented the documents required by law, the following main effects occur:
Brazilian bankruptcy law establishes some safe harbours against 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. However, the law also establishes that the judicial reorganisation court has jurisdiction over the assets of the debtor, having powers to stay a freezing or seizure order rendered by another court if the related assets are essential to the activities of the debtor.
Debtors remain in possession of assets as a rule. The debtor may manage its affairs freely, except for 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 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.
Creditors may present their own plan of reorganisation if the debtor’s plan is not approved by the general meeting of creditors.
If the debtor is unable to approve a reorganisation plan or if the debtor defaults its obligations under the approved plan within the supervision period (which is fixed by the court and may last for two years from the confirmation of the plan), the judicial reorganisation is converted into 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 an 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 both judicial and out-of-court reorganisations, 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 The stay period may be extended for another 180 days period if the debtor is not responsible for the delay of the case.
The creditors in judicial or out-of-court reorganisations are separated into classes, according to the nature of their claims.
In a judicial reorganisation, there are four classes of creditors, defined by law and that may not be changed in debtors nor creditors discretion:
All classes of creditors mentioned above will be submitted to the proceeding.
In an out-of-court reorganisation holders of secured, unsecured, labour-related claims and claims held by small business may be subject to the proceeding, and solely the debtor may decide if it will include all four classes 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:
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:
Credits subject to insolvency proceedings can ordinarily be assigned or traded in accordance with general civil and commercial law. Other than the duty to inform the claim assignment to the court, 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 its claim. In general, the debtor shall be notified about the transfer, so it is effective against them. Claims assigned remain under their previous classification in the insolvency proceeding.
Brazilian Bankruptcy Law, as recently amended, expressly provides for the possibility that debtors of the same economic group file for bankruptcy under procedural consolidation (one bankruptcy case for all debtors) and under substantive consolidation (one plan of reorganisation for multiple debtors under the same bankruptcy case). The court shall decide whether a case shall proceed to procedural consolidation, and both the court and creditors may decide if substantive consolidation is acceptable. Creditors may authorise substantive consolidation in any case, but the court may do so if the debtors presenting a unified plan of reorganisation meet at least two out of the legal requirements – ie, the existence of cross guarantees, control/dependency relationship, similarity of corporate structure or joint operations.
If substantive consolidation is to be a decision of the creditors, they shall vote, each debtor separately, in a general meeting of creditors, whether the plan of reorganisation shall be consolidated for all or part of the debtors (as substantive consolidation may be approved for only some 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, or even the debtor itself (as long legal requirements are met), 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.
As per the 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. Any person or entity, including creditors, debtor’s relatives, partners, and companies of the same group, may grant new money to the debtor. And any person or entity may guarantee the new money granted to the debtor. The granting of security interests on non-current assets, however, must be previously authorised by the court 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 new money granted to the debtor under judicial reorganisation qualifies as post-petition claim an in case the proceeding is converted into liquidation the grantor will have priority in payment.
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 claim verification process occurs according to the following steps:
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 plan of reorganisation, 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 mean 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 binding 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, the court may set a supervision period for the debtor, during which it continues under judicial reorganisation. This supervision period may last until all obligations established in the plan that fall due in the two years following the concession of the judicial restructuring have been performed, regardless grace period. During such period, the non-performance of any obligation established in the plan will entail conversion of the restructuring into liquidation.
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. For this, the recent amendment to Bankruptcy Law established the possibility to sell equity stake as an isolated production unit, which permits transferring equity participation to investors/creditors without risk of being held successor in liabilities.
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 one another.
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:
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
Upon issuing the liquidation decree, the bankruptcy court shall appoint a bankruptcy trustee, 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 the 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 several 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 for the benefit of the estate and its creditors. Upon decree of liquidation, the bankruptcy trustee must present a plan for the collection and sale of the assets. 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. A bankruptcy trustee must sell the assets within 180 days from their collection.
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.
The Brazilian Bankruptcy Law was recently amended to include a new chapter regarding transnational insolvency, which aims at promoting cooperation between Brazilian authorities and foreign authorities in insolvency cases, following the rules and principles of the UNCITRAL Model Law on Cross-border Insolvency.
The Brazilian Bankruptcy Law, as amended, now provides for regulation of cross-border cases. Brazilian courts shall co-operate, directly or through a bankruptcy trustee, with the foreign authority and/or foreign representatives in order to promote, to the maximum extent possible, co-operation among jurisdictions in cross-border insolvency cases, legal certainty, fairness and efficiency to protect creditors and debtor’s interests, best value of the debtor’s assets, protection to investments, and preservation of jobs. Brazilian law provides for recognition of foreign insolvency and, if foreign proceeding is recognised as the principal proceeding, actions, executions, freezing and seizing orders against the debtor are stayed in Brazil, and any act of disposition of debtor’s assets is considered null and void.
According to the Brazilian legislation about territorial applicability of law, the Brazilian Bankruptcy Law is the relevant legal rule 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 or a foreign bankruptcy case is recognised within the Brazilian territory.
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.
In Brazil, the Federal Constitution states that the recognition of foreign judgments or rulings is made through a confirmation proceeding before the Superior Court of Justice, which analyses whether the legal requirements for recognition are met. Upon recognition, the enforcement of the foreign decision shall be requested before the competent lower federal court, according to the same rules established for the enforcement of the national orders.
In addition to this process, considering the adoption of the UNCITRAL Model Law on Cross-border Insolvency in 2021, foreign representatives may seek recognition of foreign bankruptcy proceedings directly in the lower court where the centre of main interest of debtor in Brazil is located. Upon recognition of the foreign bankruptcy proceeding as the main bankruptcy proceeding of the debtor, the Brazilian bankruptcy court shall grant commit to the foreign bankruptcy orders directly.
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 court 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 court 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 there is 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, specifically through 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 to the bankrupt estate, regardless the knowledge of the contracting party about the financial condition of the debtor and regardless the intent of the debtor to defraud creditors:
Advances in the Brazilian Insolvency System
On 23 January 2021, Law 14,112/2020 came into effect in Brazil, providing for numerous modifications to the Brazilian Bankruptcy Law ("Law 11,101/2005" or simply "the Law").
Although it could be argued that the new law has not encompassed all the changes that the Brazilian Bankruptcy Law needed, its enactment did represent significant advances in the Brazilian insolvency system, addressing important issues which have not been regulated before.
Existing and new procedures
The Bankruptcy Law, as amended, maintained the three already existing bankruptcy proceedings: judicial reorganisation proceeding (recuperação judicial), liquidation (falência), and out-of-court reorganisation proceeding (recuperação extrajudicial – a mix between an out-of-court workout with a prepacked Chapter 11 set forth in the US Bankruptcy Code).
A new proceeding was created for dealing with cross-border insolvency, which aims at promoting co-operation between Brazilian authorities and foreign authorities in insolvency cases following the rules and principles of the UNCITRAL Model Law on Cross-border Insolvency.
The judicial reorganisation proceeding
Relevant changes in judicial reorganisation proceedings include:
Law 14,112/2020 also turned most of the case law constructed over the past 16 years since the Brazilian Bankruptcy Law was enacted into code law, such as:
Jurisdiction over and sale of debtor assets
The bankruptcy court was established as the only court with jurisdiction over the assets of the debtor, with powers to suspend the sale of assets considered essential to the activities of the debtor during the stay period, even if the sale would take place in a suit involving claims not subject to the bankruptcy proceeding (bankruptcy safe harbours), such as tax claims. Not only might the sale of assets be suspended by the bankruptcy court, but also attachments, freezing and seizing orders may be hindered if these orders impact essential assets of the debtor.
With respect to tax claims, the bankruptcy court has the powers to replace the assets subject to any attachment related to tax claims, in co-operation with the tax court. Such provisions may be understood as a strengthening of the powers of the bankruptcy court, aiming to enhance the chances of a successful restructuring of viable companies, as the bankruptcy judge would be the best equipped to decide on matters involving the assets of debtor.
As for the sale of assets in judicial reorganisation proceedings, the recent amendment to the Law aimed at easing the sale of the debtor’s assets and ensuring more certainty to the sales made. Sale of non-current assets of the debtor continue to be permitted only if authorised in the plan of reorganisation or by the bankruptcy court, but now creditors who desire to challenge a court authorised sale must meet certain requirements. Upon court authorisation for the sale of an asset, only creditors representing more than 15% of the total claims subject to the reorganisation proceeding may object the sale, and objection is only allowed if the creditors opposing the sale present a bond in the amount equivalent to the whole price of the sale.
If the opposition meets these requirements, a general meeting of creditors shall be called to decide whether the sale shall be authorised. Additionally, the sale of assets and the constitution of security interests over assets of the debtor – which are authorised by the bankruptcy court or provided for in the plan of reorganisation – shall not be nullified or made ineffective after closing of the transaction and payment of price to the debtor, unless the buyer acted in bad faith. Assets of the debtor may be sold directly to third parties without succession in liabilities of the debtor if the sale is carried out under a competitive process or made in accordance with the provisions of an approved and confirmed plan of reorganisation.
The recent amendment also explicitly specifies that the purchaser of an isolated production unit of the debtor is not liable for tax, labour, regulatory, environmental, criminal, antitrust and administrative liabilities, while the former law only provided for a general rule of non-succession. Also, the amended law states that the isolated production unit may encompass tangible or intangible assets and even shareholders’ corporate stake in the debtor. By amplifying the concept of an isolated production unit, specifying that the investor who acquires the isolated production unit and/or other assets is free of any debtor’s liabilities, and allowing for the sale of the corporate stake or even full sale of debtor as an isolated production unit, the amendment encourages the development and continuation of the business activities of the debtor.
In the same direction of ensuring no succession in liabilities to those dealing with the debtor and its assets, the new law provides there is no succession in liability for those creditors who accept to convert their claims into equity, for new investors who capitalise the debtor, nor for the new managers and directors that assume positions in the debtor after bankruptcy.
Modification of the supervision period
The provisions about the supervision period – the period during which the bankruptcy court oversees the fulfilment of the obligations provided for in the plan of reorganisation – was completely modified. Upon confirmation of the plan of reorganisation, the debtor had to be kept under judicial reorganisation until all the obligations fallen due within two years as from the judicial confirmation were complied with. Under the current regulation, the debtor may (or may not) be kept under supervision period, which may last a maximum of two years. In this respect, some bankruptcy courts have already determined the closing of the reorganisation proceeding in the same decision that confirmed the plan of reorganisation.
For out-of-court reorganisation, there are some relevant new rules which will allow more companies to access an expedited restructuring proceeding, such as:
The new bill also established that stay period applies to claims subject to the plan of reorganisation – some precedents had already granted stay periods to debtors in out-of-court reorganisations, but now that those precedents have been turned into law, there is no room for the discretion of the bankruptcy court about whether to grant the stay.
Despite the improvements and changes made to the restructuring proceedings, the greatest changes were made to the rules of liquidation.
Law 14,112/2020 brought important new rules for liquidation. A maximum period of 180 days was established for the complete sale of assets of the estate, which may be sold at any price after a certain number of attempts to sell them, and even the possibility of donating assets that are not sold. If the estate has not assets enough to secure payment of administrative fees and court expenses, the case shall be closed unless creditors who desire to continue the liquidation process pay the related costs. Opposition to the sale of assets is only possible if the creditor making the challenge presents a better offer, securing at least 10% of the payment for the future acquisition.
Amendments to the law also addressed an old issue under Brazilian liquidation, establishing that corporations shall be extinguished after the liquidation proceeding is closed, which avoids that non-operational companies would be kept open only for bureaucratic reasons.
Enhancing the prospect of a fresh start
New rules also try to enhance the possibilities of fresh start, by reducing the timeframe for presentation of proofs of claim in liquidation cases (which had no deadlines) and reducing the time necessary for forgiveness of obligations of the debtor.
Additional relevant change to liquidation proceedings is the explicit prohibition of extension of the liquidation effects to directors, officers, shareholders, or parent companies – a practice that became common under bankruptcy case law – admitting, however, the possibility of piercing the corporate veil to be analysed in a lawsuit dedicated to the issue.
Changes to the liquidation proceeding aimed to make it faster and more effective, allowing a better credit recovery for creditors, while limiting the risks to entrepreneurs, encouraging investments, the opening of new business, and the granting of credit lines.
Practice has already shown that lengthy and bureaucratic liquidation proceedings end up consuming most of the estate or the assets of the debtor in administrative costs and letting the creditors with little or no recovery. This situation brings consequences even for the effectiveness of restructuring procedures, as creditors were willing to accept any plan of reorganisation only to avoid liquidation at any cost. The assumption behind the new provisions is that an expedited proceeding, in the absence of any evidence of fraud, is much better than a long proceeding that leads to no recovery at all for most creditors and the imprisonment of the debtor in the proceeding.
The amendments to the Bankruptcy Law have been in force for more than six months – quite a short period for understanding the real impacts of the new rules.
Notwithstanding, the new rules provide more tools for enhancing the chances of successful restructuring for viable debtors, for reaching greater recoveries for the creditors in any insolvency procedure, for assuring more certainty for the investors, and for allowing unsuccessful debtors to gain a fresh start. This assumption may be verified by the increase of credit lines available to debtors in bankruptcy and the increase of investors interested in acquiring assets from companies in bankruptcy that practitioners experienced in the past few months.