Statistics have shown a sharp increase in the number of filings for restructuring and bankruptcy liquidation proceedings in 2023, compared to 2022. In May 2023, judicial restructuring filings increased 105.2% and filings for bankruptcy liquidations rose by 61.3%.

In August 2023, a specialised research study showed an increase of 82.4% in the number of judicial reorganisation proceedings filed, when compared to the same period of the previous year.

There are many factors related to the Brazilian economy that have certainly contributed to the substantial increase in the number of rescue and liquidation proceedings. Brazil still has average interest rates well above other emerging markets (the Selic rate stands at 12.75%), the annual inflation rate in Brazil increased to 5.19% in September of 2023 and the local debt markets have been restrictive since the pandemic.

Also as a consequence of the pandemic and successive cycles of economic crisis, many companies have increased their indebtedness, extending the maturity of their debt and granting new collateral, affecting a major part of their assets (if not all).

In parallel, the major reform in the Brazilian Bankruptcy Law that came into effect in early 2021 has brought relevant changes to the Brazilian regime of restructuring and insolvency, such as (i) the admissibility of the creditors’ alternative plan, which has afforded them with more leverage in the negotiations; (ii) new tax-related provisions, that have allowed a more relevant participation of the tax authority in the restructuring proceedings; (iii) a set of new rules on DIP financing and sale of assets, that have granted more legal certainty to stakeholders, aiming to foster the stabilisation of transactions of this nature, among others.

The main Brazilian insolvency statutory regime is provided by Federal Law No 11,101/2005, as amended (the “Brazilian Bankruptcy Law”). It governs court-supervised restructuring proceedings, such as judicial reorganisation (recuperação judicial, in Portuguese) and extrajudicial reorganisation (recuperação extrajudicial), as well as the bankruptcy liquidation proceeding (falência).

The Brazilian Bankruptcy Law expressly excludes certain entities from its regime. Public companies, mixed-capital companies, financial institutions, credit unions, consortiums, insurance companies, supplementary pension companies and natural persons, which are subject to specific insolvency regimes.

The Brazilian Bankruptcy Law adopts five formal insolvency procedures and acknowledges other forms of private agreements between the debtor and its creditors, as provided by Article 167, therefore authorising the use of out-of-court workouts and restructurings.

The five forms of in-court insolvency procedures are (i) mediation for the renegotiation of debts, (ii) extrajudicial reorganisation; (iii) judicial reorganisation; (iv) small- and medium-sized enterprises’ (SMEs) special restructuring plan; and (v) bankruptcy liquidation.

Reorganisation proceedings are exclusively proposed voluntarily by debtors, at their discretion. With regards to voluntary bankruptcy liquidation, the debtor or its shareholder, under certain circumstances, or its surviving spouse, heir, or estate trustee may file for the debtor’s insolvency. On the other hand, creditors may only file for the debtor’s involuntary bankruptcy liquidation.

The Brazilian insolvency system does not provide an obligation to commence insolvency proceedings.

Creditors are allowed to commence involuntary bankruptcy liquidation proceedings. The Brazilian Bankruptcy Law states that the bankruptcy will be decreed if one of the following circumstances provided by Article 94 of the Brazilian Bankruptcy Law are met:

• without relevant reason, the company defaulted on an obligation corresponding to more than 40 minimum wages at the time of the filing;
• in a collection proceeding proposed by the creditor, the company did not pay its debt or did not offer any of its assets for attachment, within the legal time frame (what is commonly known as a frustrated collection proceeding); and
• the company committed any of the following acts, among others, except in the case of judicial reorganisation: (i) a hasty liquidation of the company’s assets; (ii) the fraudulent transfer of assets to third parties; (iii) the transfer of the whole company without the consent of its creditors and without enough assets to satisfy its debts; and (iv) a default on any obligation arising from the reorganisation plan.

The creditor, when filing for the debtor’s involuntary bankruptcy liquidation, shall therefore show evidence that the debtor gave rise to one of these circumstances.

Showing the debtor’s insolvency is not a requirement for the commencement of voluntary rescue proceedings, such as judicial reorganisation and extrajudicial reorganisation.

For involuntary bankruptcy liquidation, if the circumstances of Article 94 of the Brazilian Bankruptcy Law are present, if the debtor does not (i) pay the amount due or (ii) file for judicial reorganisation in the deadline for the submission of their defence, then the debtor is considered insolvent.

Certain entities are not entitled to file a rescue proceeding or are not subject to bankruptcy liquidation under the regimes provided by the Brazilian Bankruptcy Law.

Insurance companies are subject to the regime provided by Federal Decree-Law No 66/1973, that governs the extrajudicial liquidation of these entities. The liquidation may be voluntary or mandatory. In the latter, the occurrence of certain mismanagement acts or the economic and financial insolvency of the company would lead to its liquidation under the supervision of the Private Insurance Agency (SUSEP).

Financial institutions, as well as insurance companies, are subject to extrajudicial intervention and liquidation proceedings undertaken by the Brazilian Central Bank and are regulated by Federal Law No 6,024/1974. However, the trustee appointed by the Brazilian Central Bank, with its authorisation, may commence a bankruptcy liquidation proceeding that is governed by the Brazilian Bankruptcy Law.

Electrical power companies, as public service providers, are governed by a special regime introduced by Federal Law No 12,767/2012. The National Electrical Power Agency intervenes in the company in distress, and its shareholders propose a reorganisation plan for the Agency’s approval. This special regime is not applicable to the holding companies, which are still subject to the Brazilian Bankruptcy Law.

As is the case in various other jurisdictions, Brazilian companies resort to an out-of-court or informal restructuring mainly when they are pursuing more flexibility, control over the process and protection against the reputational hazards that formal rescue proceedings represent to the company and that, ultimately, may put its survival at risk.

It is usually the preferable and primary option of debtors and advisers, unless the debtor is prompted by a non-remediated event of default, or by an urgent liquidity crisis that requires immediate court protection. The Brazilian credit market is still dominated by a few traditional domestic financial institutions that may refrain from renegotiating their credits and make compromises if the debtor fails to comply with rigid rules of transparency.

If, for any cause, the Brazilian debtor is seeking a broader protection or to bind holdouts, it will lean on the legal framework of the judicial reorganisation proceeding and deviate from an informal workout.

The court protection comes in various forms:

• the Brazilian Bankruptcy Law provides an automatic standstill for 180 days following the filing date, staying proceedings against the debtor, which may be extended for another 180 days;
• the restructuring court, as a general rule, concentrates all relevant matters regarding the debtor’s business and the creditors’ claims. In practice, it means that proceedings that might affect the debtor’s recovery may be subject to a resolution by a specialised court which is engaged in the rescue process and, therefore, is in the best position to decide on matters involving the debtor through the lens of the rescue proceeding; and
• when an out-of-court workout is not able to achieve a full consensual deal, the judicial reorganisation or the extrajudicial reorganisation proceedings are able to bind dissenting creditors when a certain threshold of consensus is met.

Notwithstanding, consensual restructuring negotiations are not a requirement to file for a formal rescue proceeding in accordance with the Brazilian Bankruptcy Law.

Informal workout processes in Brazil usually begin with a consensual agreement among the stakeholders providing for the timeframe of the standstill, waivers and/or extension of debt maturities.

In informal workouts, many obligations are imposed on debtors, such as the duty to a broad disclosure of financial, contractual, and operational information, as well as covenants and restrictions, such as new debts, collateralisation, sale of assets or agreements with shareholders. More complex workouts will also involve the obligation to engage legal and financial advisers and due diligence over the documentation made available by the debtors.

The installation of creditors’ committees among the Brazilian traditional financial institutions is uncommon. However, when the company has debt obligations issued by the international capital markets, ad hoc group committees usually take the lead in the renegotiation process.

When informal workouts succeed, it results in a global agreement usually with a broad reorganisation of the company’s capital structure and its indebtedness. The most common changes are seen in the granting of new collaterals, roll-ups, rearrangement of the priorities (mainly if there is a new money commitment), extension of maturities, haircuts and imposition of more restrictive financial covenants.

The recent reform of the Brazilian Bankruptcy Law by Federal Law No 14,112/2020, which came into force in early 2021, brought a group of new provisions on DIP financing that afford investors and financiers with new protections.

Ultimately, filing a judicial reorganisation proceeding has become a more attractive ecosystem when the debtor requires substantial funding, either because of the statutory protections or because the Brazilian Bankruptcy Law allows creditors that wish to provide DIP funding to be treated differently. So, creditors who are seeking a roll-up on their original claims are encouraged to provide DIP financing.

In contrast, funding of distressed companies may attract the risk of allegations of fraudulent or privileged transactions if liens or collaterals are granted in exchange for the new money, which may end up discouraging financing operations in the context of workouts.

The Brazilian Bankruptcy Law does not contain any specific rules on informal rescue proceedings. However, the Brazilian legal system imposes the duty to parties undergoing a contractual relationship to act and negotiate in good faith.

The duty of good faith encompasses an ample set of annex obligations of fairness, transparency, co-operation, collaboration, loyalty, among others. These duties are owed among all the stakeholders involved in the company’s reorganisation effort.

Out-of-court restructurings are not binding on dissenting creditors. Intercreditor agreements, however, could contain terms to bind holdouts subject to the loan syndicate, even though it is not a typical provision of agreements of this nature.

Informal workouts are not perceived as inefficient, absent a cram-down feature, but they can be perceived as more challenging if a full consensus is not feasible to achieve.

In any case, frequently the debtor decides to pursue an informal workout process to obtain the maximum level of consensus within a certain group of creditors, reach a pre-packaged agreement and subsequently implement it through a court-supervised proceeding (that could be an extrajudicial reorganisation proceeding, for example), in a more expeditious and less expensive manner.

The Brazilian Civil Code (Federal Law No 10,406/2002) provides for four types of collateral: (i) pledge (penhor, in Portuguese), constituted over movable assets, (ii) antichresis (anticrese), which is rarely used, (iii) mortgage (hipoteca), applicable to immovable property, and (iv) fiduciary collateral over movable property.

Furthermore, Federal Law No 9,514/1997 deals with fiduciary collateral over real estate, as part of the real estate financial system, Federal Law No 4,728/1965 regulates fiduciary collateral over credits and credit rights and shares, and Federal Law No 6,404/1976 governs fiduciary collateral over shares. Fiduciary collateral has become a security largely used in Brazil due to the advantages their legal framework creates for the enforcement of the guarantees.

Secured creditors may resort to individual enforcement and collection proceedings and other legal measures to seek the satisfaction of their interests.

As rule, claims secured by fiduciary collateral are not subject to rescue proceedings and enforcement measures may be undertaken, and will not be stayed by the restructuring process. However, also as a rule, restructuring courts will prevent these creditors from attaching essential capital assets of the debtor during the judicial reorganisation proceeding.

The other secured creditors are subject to rescue proceedings and the statutory stay period will stay their claims against the debtor, which hinders their ability to disrupt or block restructuring proceedings. Nonetheless, as any other creditor, they can appeal against court orders, object and vote against the judicial reorganisation and extrajudicial reorganisation plans, and file proofs of claim in judicial reorganisation proceedings, among other things.

Secured creditors that do not have fiduciary collateral may stop the sale of the underlying asset by the debtor in the judicial reorganisation proceeding if they do not agree with the sale. They may also object to the replacement of their security.

Creditors with fiduciary collateral, on the other hand, may exercise all their legal and contractual rights during the debtor’s judicial reorganisation proceeding, since they may not be restructured in the rescue process. However, as previously mentioned, if the underlying asset is considered an essential capital asset for the debtor’s business, the court may stay the creditor’s attempt to foreclose and sell the asset.

The Brazilian Bankruptcy Law does not assign a ranking between the four classes of creditors provided by the law, whether they are secured or unsecured creditors, or different rights are substantially related to the nature of their claims.

In fact, companies undergoing rescue proceedings have reasonable leeway to restructure their debts. Certain relevant standards must be observed, such as affording the same treatment for creditors within the same class, as a rule, paying the labour claims within a specific timeframe and preserving the collateral (if the holders of the guarantees do not authorise otherwise). There is no absolute priority rule in judicial reorganisation or extrajudicial reorganisation proceedings, like in the US Chapter 11.

In bankruptcy liquidation, on the other hand, the Brazilian Bankruptcy Law provides a payment priority, and the different classes of creditors are paid in accordance with their ranking – a notion similar to the absolute priority rule.

Unsecured trade creditors do not have any priority, but the invoices of services performed after the filing (common when there is a continuous contractual relationship) are regularly due.

It is very common to apply a haircut to claims of this nature, and it is also common to assign a different and better treatment to this type of claim, by creating a subclass of collaborative creditors that maintain a continuous contractual and essential relationship with the debtor.

Like the secured creditors, holders of an unsecured claim will have their appeals and objections heard by the restructuring court or appellate court, where applicable. They do not have legal instruments to illegitimately disrupt or block the proceedings, but they can object and/or vote against the plan of reorganisation.

Similar procedural tools are available to creditors during a bankruptcy liquidation proceeding.

Pre-judgment attachments (penhora, in Portuguese) are available in Brazil, but if the debtor files for judicial reorganisation or for extrajudicial reorganisation, or is declared bankrupt, before the creditor can satisfy their claim with the attached assets, then such assets must be returned to the debtor, or the estate, and the creditor shall have no preference over the assets.

Creditors who are able to access the debtor’s assets and constitute a judicial mortgage before the filing, as confirmed by recent case law, are considered as secured creditors in a rescue and bankruptcy liquidation proceeding.

Certain claims are unimpaired in restructuring and have priority in bankruptcy liquidation, such as administrative expenses, DIP loans, post-petition claims, advances on foreign exchange contracts and certain bank loans relating to export finance.

In judicial reorganisation proceedings, since there is no ranking of priority between claims, and considering that the above-mentioned claims are not subject to the proceeding, then such creditors may continue to collect on their claims during the rescue proceeding and may receive their dues before other secured creditors that are subject to the restructuring.

In bankruptcy liquidation proceedings, in light of the ranking of claims and the structure of the Brazilian Bankruptcy Law, the above-mentioned claims have priority over secured creditor claims, such as mortgages, pledges and antichresis.

Extrajudicial Reorganisation Proceedings

Considering its transactional nature, extrajudicial reorganisation proceedings begin with the company submitting a reorganisation plan to the court for validation. Alongside the plan, the company must present a commitment form for each creditor that approves the plan. If all creditors encompassed by the plan approve it, the court may confirm the plan, if it fulfils the other legal requirements. The plan may also be confirmed if more than 50% of the encompassed claims approve the plan, in which case it shall bind the remaining creditors that did not agree to its terms, according to the new threshold provided by Federal Law No 14,112/2020; previously, confirmation of the plan required approval of three-fifths of the value of claims.

Once the plan is submitted to the court, the judge shall order the release of a public notice so that all creditors may submit their objections, if any. With the resolution of any potential objection, the court may confirm the plan, after which it will begin taking effect.

Not all claims may be impaired by the extrajudicial reorganisation plan, such as tax claims, claims held by creditors with property interests that are in possession of the debtor, advances on foreign exchange contracts and certain bank loans relating to export finance. With the amendments introduced by Federal Law No 14,112/2020, labour-related claims may now be restructured by the extrajudicial reorganisation plan, with negotiations being carried out by the debtor with the workers’ unions.

Judicial Reorganisation Proceedings

In judicial reorganisation proceedings, the debtor remains in possession of its business, maintaining shareholders’ powers and prerogatives, barring a few occasions when the court, its creditors and even the debtor’s shareholders may replace the company’s management. When a company is under financial duress, it may file for judicial reorganisation hoping to stay any payments to its creditors and renegotiate its debts.

At the time of filing, the debtor does not need to submit a judicial reorganisation plan, and there are usually very few ongoing negotiations with creditors. Once the petition is filed, all existing claims, except for those mentioned previously with regards to extrajudicial reorganisation, are subject to the effects of the judicial reorganisation proceeding and any payments regarding such debts are halted. These claims shall be paid in accordance with the provisions of the plan and may suffer a haircut, have reduced interest rates and longer payment schedules, for example.

The request is reviewed by the court and, if all legal requirements are fulfilled, the company is admitted into judicial reorganisation. A judicial administrator is appointed, but it does not hold managing powers; it works as a court examiner, reviews the list of creditors, provides an independent evaluation of the debtor’s accounts, and is heard on almost every subject regarding the proceedings. At the same time, legal actions and enforcement proceedings against the debtor are stayed for 180 days, renewable for another 180 days, and there is a suspension of the statute of limitations in favour of creditors.

Within 60 days of the filing, the debtor must submit its plan of reorganisation and negotiate with creditors to reach an agreement on its terms. The objective of the judicial reorganisation plan is to equalise the company’s indebtedness and create the necessary conditions for its turnaround.

When a company is under financial duress, it may file for judicial reorganisation or extrajudicial reorganisation hoping to stay any payments to its creditors and renegotiate its debts.

The admittance of a debtor into judicial reorganisation or extrajudicial reorganisation imposes a stay of legal actions and enforcement proceedings against the debtor for 180 days (stay period), except for tax claims, actions that demand an illiquid amount and judicial proceedings concerning claims that are not affected by the debtor’s restructuring, as provided by Articles 6, paragraph 4, and 163, paragraph 8.

In judicial reorganisation and extrajudicial reorganisation proceedings, the debtor remains in possession of its business, maintaining shareholders’ powers and prerogatives, barring a few occasions when the court, its creditors and even the debtor’s shareholders may replace the company’s management (Article 64). It must ask the court’s permission to sell non-current assets in judicial reorganisation proceedings but does not need any previous authorisation to run the business (Article 66).

After the company is admitted into judicial reorganisation, its management and executives negotiate the terms of the reorganisation plan with its main creditors and submit the plan for discussion and voting at the general creditors’ meeting, if necessary. The plan is filed by the debtor before the general creditors’ meeting is held (Article 53), and creditors may present objections to the plan before the vote (Articles 55 and 56).

Originally, the Brazilian Bankruptcy Law provided that only the debtor was allowed to submit a reorganisation plan, but with the modifications introduced by Federal Law No 14,112/2020, creditors may also submit alternative reorganisation plans, once the debtor’s exclusivity period expires (Article 6, paragraph 4-A) or if the general creditors’ meeting rejects the debtor’s plan (Article 56, paragraph 4).

With regards to extrajudicial reorganisation proceedings, the debtor must submit a plan of reorganisation at the time of filing with the approval of a majority of the creditors subject to such plan (Article 163). If the debtor does not meet the majority threshold for approval of the plan and submits a plan with the support of at least 1/3 of creditors, it has 90 days to obtain the approval of the remaining creditors to reach the legally required majority threshold (Article 163, paragraph 7).

Once the majority threshold is reached, the court shall allow creditors to submit challenges to the plan and shall subsequently issue an order to confirm the plan, if such challenges have no merit (Article 164).

The Brazilian Bankruptcy Law provides specific treatment to secured and unsecured claims in judicial reorganisation proceedings. Secured claims may be divided into two categories:

• claims held by creditors with property interests that are in the possession of the debtor, such as fiduciary assignment, fiduciary collateral and capital or operating leases. These claims are not restructured by judicial reorganisation proceedings, unless the creditor explicitly agrees (Article 49, paragraph 3); and
• claims that are secured by certain assets of the debtor’s estate, such as pledges and mortgages (Article 41, item II). These claims may be restructured in reorganisation proceedings.

Unsecured claims are affected by judicial reorganisation proceedings and may be restructured by the debtor. They are classified as follows:

• claims arising from labour legislation or resulting from work-related accidents (Article 41, item I);
• claims that have no preference or privilege whatsoever, as well as claims with special and general privileges established by law (Article 41, item III); and
• claims from small and medium enterprises (Article 41, item IV).

Certain other claims are unimpaired by judicial reorganisation proceedings, such as administrative expenses, post-petition claims, advances on foreign exchange contracts and certain bank loans relating to export finance.

The Brazilian Bankruptcy Law organises creditors in judicial reorganisation proceedings in four different classes, according to Article 41: (i) labour claims, (ii) secured claims (pledges and mortgages), (iii) unsecured claims with special and general privileges, as well as claims with no preference or privilege, and (iv) claims from small and medium enterprises. Case law allows the plan of reorganisation to further subdivide these classes into subclasses, according to their specificities and characteristics.

Each class of claims has specific thresholds for voting on the plan, as provided by Article 45, and votes are considered on a class-by-class basis, and not in any subclasses that may be created.

In extrajudicial reorganisation proceedings, on the other hand, the Brazilian Bankruptcy Law does not provide the organisation of creditors into classes and allows the debtor to freely categorise creditors into groups with similar characteristics and to choose which groups of creditors will be restructured by the plan (Article 163, paragraph 1). The approval of the plan requires a majority in each group of claims created by the debtor.

If none of the creditors oppose the reorganisation plan submitted by the debtor, the court shall approve the plan and grant the company’s judicial reorganisation or extrajudicial reorganisation (Article 58).

However, in a judicial reorganisation, if at least one creditor submits a formal objection before the court, a general creditors’ meeting must be held (on-site or virtually) for creditors to discuss and vote on the plan (Article 56).

There are two possible outcomes from this: (i) if the plan is approved, the court then confirms the plan, if there are no illegalities; or (ii) if the plan is rejected, the court may confirm the plan through cross-class cram-down, allow creditors to submit an alternative plan, or declare the debtor’s bankruptcy liquidation.

There are specific requirements that need to be met for the court to confirm a reorganisation plan via cram-down in a judicial reorganisation proceeding, pursuant to Article 58, paragraphs 1 and 2:

• approval of the plan by creditors representing more than half the value of all claims present in the meeting, regardless of class;
• approval of two classes of claims, or at least one class if there are only two classes; and
• within the class that rejected the plan, the approval of more than one-third of its creditors and the absence of unequal treatment between creditors.

In extrajudicial reorganisation proceedings, on the other hand, the Brazilian Bankruptcy Law does not allow for cross-class cram-down – all groups of creditors must reach the majority threshold for the plan’s approval.

In both judicial reorganisation and extrajudicial reorganisation proceedings, the approval and confirmation of the restructuring plan binds all creditors and results in the novation of the impaired claims.

During a judicial reorganisation or extrajudicial reorganisation proceeding, claims may be traded by creditors. The Brazilian Civil Code requires the creditor to notify the debtor regarding the transfer and assignment of claims, and the Brazilian Bankruptcy Law requires the trading of claims to be immediately informed to the court in judicial reorganisation proceedings, so that the creditor may be allowed to vote in the general meeting of creditors (Article 39, paragraph 7).

The law does not provide any other requirements for the trading of claims during the restructuring proceedings, but a plan of reorganisation may have a specific procedure that must be followed when claims are traded.

Corporate groups comprised of several entities may jointly file for judicial reorganisation or extrajudicial reorganisation, in a single proceeding under procedural consolidation, as long as they are under the corporate control of the same entity or shareholder (Article 69-G). For this request to be granted, each entity must submit the required documentation and fulfil the legal standards for the filing of a restructuring proceeding.

The Brazilian Bankruptcy Law also allows for the substantive consolidation of the entities of a corporate group, with all its assets responsible for satisfying all its debts, as if it were a single company. Thus, instead of an individual reorganisation plan for each company, separate lists of creditors and separate general creditors’ meetings, there is only one reorganisation plan, one list of creditors and one general creditors’ meeting.

In extrajudicial reorganisation proceedings, creditors must approve the plan that provides for substantive consolidation of the debtor entities.

With the filing for judicial reorganisation, the Brazilian Bankruptcy Law limits the sale and encumbrance of non-current assets and requires either:

• demonstration by the debtor of why the sale or encumbrance would be useful to the company’s restructuring, what the proceeds would be used for and previous court authorisation, after hearing the Creditors’ Committee (when installed, which seldom happens in Brazil), the judicial administrator, creditors, and the Public Prosecutor’s Office (Article 66); or
• a specific authorisation in the debtor’s reorganisation plan, as approved by creditors and confirmed by the court.

In extrajudicial reorganisation proceedings, on the other hand, there is no such limitation in the Brazilian Bankruptcy Law.

In judicial reorganisation proceedings, Article 60 of the Brazilian Bankruptcy Law allows the sale of isolated production units (business units, in other words), in observance of Article 142, and the sole paragraph of Article 60 states that the sale shall be carried out free and clear of the seller’s liabilities, obligations and contingencies. This means that the buyer cannot be held liable for any claims, liabilities, debts or obligations arising from the seller’s business (and without connection to the asset sold), or from the seller’s corporate group.

Article 142 deals with the sale of assets in bankruptcy liquidation and the competitive procedures that can be adopted to sell assets. Due to the reference made by Article 60, the sale of business units in judicial reorganisation proceedings must also observe the procedure provided for in Article 142.

Recently, Federal Law No 14,112/2020 was enacted and modified several of the Brazilian Bankruptcy Law’s provisions, including those related to the sale of assets. The changes to Article 142 are as follows:

• the auction by closed proposals and the hybrid procedure, provided by items II and III of Article 142, were repealed as types of sale procedures specifically provided by the law;
• the public auction, maintained after the amendment to the law, as provided by item I of Article 142, became the standard procedure for the sale of assets, while (i) item IV was included in Article 142 to allow the implementation of an organised competitive procedure promoted by a specialised agent, with the procedure detailed in a schedule attached to the judicial reorganisation plan, and (ii) item V was included in Article 142 with the objective of authorising the sale by any other procedure, as long as it is approved under the terms of the Brazilian Bankruptcy Law; and
• according to paragraph 3-B of Article 142, the choice of the organised competitive proceeding, provided for in item IV of Article 142, or any other type of sale, provided for in item V of Article 142, depends on the necessary approvals according to the type of sale to be carried out: (i) in case of a sale of an isolated production unit or any assets, as stipulated by the judicial reorganisation plan, the option for the sale procedure must be included in the plan approved by the creditors and ratified by the court; and (ii) in case of a sale of assets by the estate in a bankruptcy liquidation, either the creditors must approve the sale in a general creditors’ meeting, or the court must approve the sale.

Moreover, with the amendments made by Federal Law No 14,112/2020, the Brazilian Bankruptcy Law now has a catch-all provision that allows the debtor and the estate to structure the sale procedure in a manner that is more conducive to competition and better fits the characteristics of the asset being sold (Article 142, item V).

Bidding procedures with stalking horse bids (whether by creditors or third parties), previously allowed by case law, are now expressly permitted, as long as the plan of reorganisation or the sale notice, as approved by creditors and confirmed by the court, provides the incentives and other rights offered to the stalking horse bidder.

The same reasoning applies to credit bidding in asset sales, but with a broad permission to any creditors – and not just secured creditors – to credit bid if the plan or the sale notice provide for it.

The Brazilian Bankruptcy Law provides that secured creditor liens and security arrangements may only be released with the explicit approval by the secured creditor, without which the debtor would not be able to sell the underlying asset (Article 50, paragraph 1).

During the judicial reorganisation proceeding, the court may, after hearing the Creditors’ Committee (when installed) and any other creditors, authorise the execution of financing agreements by the debtor, to finance the debtor’s activities and the expenses of restructuring or to preserve the value of assets (Article 69-A).

Any funds transferred to the debtor under a DIP loan shall have a super-priority in case the debtor’s restructuring is converted into a bankruptcy liquidation. If this happens before the full disbursement of funds by the DIP lender, then the financing agreement shall be considered automatically terminated. The lender’s super-priority and collateral shall be preserved up to the balance of the funds that were actually transferred to the debtor before the debtor’s bankruptcy liquidation (Article 69-D).

The Brazilian Bankruptcy Law has recently adopted the notion of statutory mootness in DIP financing. If the decision authorising the execution of the DIP financing is modified or reversed on appeal, and if the disbursement of funds has already occurred, the super-priority of the DIP lender’s claim cannot be repealed in case of the debtor’s bankruptcy liquidation (Article 69-B).

With regards to extrajudicial reorganisation proceedings, the Brazilian Bankruptcy Law does not explicitly offer the same protections, although one may argue for the application of the DIP financing provisions to extrajudicial reorganisation cases.

When filing for judicial reorganisation, or after the declaration of bankruptcy liquidation, the debtor must attach a list of creditors to the court records. If any creditors are not listed or if they disagree with the classification or the value of claims, they may submit motions before the judicial administrator. This is the administrative stage of the verification of claims, after which the judicial administrator files an updated list of creditors.

If there are creditors still in disagreement with the updated list of creditors, they may file proofs of claim before the court, which shall be analysed by the judge in independent and ancillary proceedings. This is the judicial stage of the verification of claims, which shall lead to a consolidated list of creditors, after all proofs of claim are sentenced.

In judicial reorganisation proceedings, after the general creditors’ meeting votes to approve the plan, the judicial administrator shall file a motion on the result of the voting, showing if the legal thresholds were met.

Afterwards, the court shall verify if the plan fulfils the legal requirements and does not violate the law – the court does not ordinarily analyse the economic or financial provisions in the plan (ie, the payment terms). The plan cannot provide unfair treatment of creditors that are in the same class or subclass of claims. However, there is no need to meet a fair and equitable test, since there is no absolute priority rule in judicial reorganisation proceedings in Brazil. If the plan fulfils the legal standards, then the court shall confirm the plan and give it full force and effect.

In extrajudicial reorganisation proceedings, there is no general meeting of creditors, but a submission of commitment forms to reach the legal threshold for creditor approval of the plan – this may happen at the time of filing, like a pre-packaged US Chapter 11, or up until 90 days after the filing. Since there is usually no judicial administrator appointed in these proceedings, the court shall verify if the legal thresholds were met and if they fulfil the legal requirements and do not violate the law, much like in judicial reorganisation proceedings. If the plan is legal, the court shall confirm the plan.

In both cases, if certain provisions in the plan are found to be illegal, the court may set them aside, while confirming the remainder of the plan, but only if such provisions are not considered to be fundamental for the economic and financial equation of the restructuring plan. If there are insurmountable illegalities in the plan, the court may order the debtor to submit a new draft of the plan, without the problematic provisions, for deliberation by creditors.

The Brazilian Bankruptcy Law does not explicitly allow for non-debtor parties to be released from liabilities, as provided in the debtor’s plan of reorganisation.

However, paragraph 1 of Article 49, provides that creditors retain their rights against third-party guarantors. In this situation, the release of third parties by the reorganisation plan requires their explicit consent or their approval of the plan without reservations regarding the release.

If the release pertains to other third parties that are not guarantors, then one may argue that there is more leeway for the debtor and creditors to negotiate and approve a plan of reorganisation that releases non-debtor parties from liabilities, considering the absence of statutory provisions.

According to the Brazilian Civil Code, mutual debtors and creditors of liquid and fungible credits and debts, which have become due, are set-off automatically, despite the recognition of such event by the court in the future.

That is allowed if all requirements for the set-off of credits and debts materialise before the commencement of a judicial reorganisation or extrajudicial reorganisation proceeding, regarding pre-petition claims, or if the creditor has a post-petition or non-subject claim against the debtor.

If one of the mutual claims becomes due after the restructuring proceeding is filed, and it is not a post-petition claim by the creditor against the company undergoing restructuring, for instance, then set-off may only occur if explicitly allowed and provided for in the plan of reorganisation.

After the reorganisation plan is confirmed by the court in a judicial reorganisation proceeding, the debtor may remain under the supervision of the court and the judicial administrator for up to two years.

If all the plan’s obligations within that period are duly satisfied, the judicial reorganisation proceeding is terminated.

If any obligations are defaulted within the supervision period, the court may declare the debtor’s bankruptcy liquidation, though sometimes courts allow for a debtor to submit an amendment to the plan for creditor approval. In this case, only if such plan is not approved, will the court convert the judicial reorganisation into a bankruptcy liquidation.

After the supervision period ends and the debtor exits the judicial reorganisation proceeding, failure to comply with the terms of the plan allow any creditors to file proceedings to enforce unfulfilled obligations provided by the plan, or even request the debtor’s involuntary bankruptcy liquidation in a separate proceeding, if the legal requirements of Article 94 of the Brazilian Bankruptcy Law are present.

Regarding extrajudicial reorganisation proceedings, once the court confirms the plan and the deadline for appeal elapses, then the proceeding is terminated. Any default on the plan would allow creditors to file enforcement proceedings for unfulfilled obligations provided by the plan or file a lawsuit for the debtor’s involuntary bankruptcy liquidation, if the legal requirements are met.

It is common for existing equity owners to retain their ownership interests. Equity holders are not considered as creditors or interest holders in restructuring proceedings unless they also hold claims against the debtor. This means that their equity interest is not subject to the proceeding. Since the Brazilian Bankruptcy Law does not have an absolute priority rule for judicial reorganisation proceedings, like the US Chapter 11, equity holders are not ranked in last and cannot, ordinarily, be wiped out in a formal restructuring.

It is possible, though, for the reorganisation plan to provide for the conversion of debt into equity, which could dilute existing equity holders, but not entirely remove them from the debtor’s shareholding structure.

The commencement of bankruptcy liquidation proceedings may be a result of a request from a debtor (voluntary liquidation) or one of its creditors (involuntary liquidation).

When a debtor files for voluntary bankruptcy liquidation, the petition must be accompanied by essential information and documents (much like a petition filed for judicial reorganisation), as required by Article 105 of the Brazilian Bankruptcy Law.

If a creditor petitions for a company’s involuntary bankruptcy liquidation, it has the burden of proof regarding the company’s insolvent estate and the necessity for a declaration of bankruptcy by the court. Pursuant to Article 94, a company’s insolvency may be proved by demonstrating that:

• without relevant reason, the company defaulted on an obligation corresponding to more than 40 minimum wages at the time of the filing;
• in a collection proceeding proposed by the creditor, the company did not pay its debt or did not offer any of its assets for attachment, within the legal time frame (what is commonly known as a frustrated collection proceeding); and
• the company committed any of the following acts, among others, except in the case of judicial reorganisation:
1. a hasty liquidation of the company’s assets;
2. the fraudulent transfer of assets to third parties;
3. the transfer of the whole company without the consent of its creditors and without enough assets to satisfy its debts; and
4. a default on any obligation arising from the reorganisation plan.

However, the company may stay the involuntary bankruptcy request if it deposits the amount owed, or if it files for judicial reorganisation, within the legal time frame for submitting its defence.

With an order of bankruptcy liquidation, a judicial administrator is appointed to replace the company’s executives and management. If the company still performs a business activity, the judicial administrator may choose to preserve its activities to generate more proceeds and maximise the value of the company’s assets when sold. The judicial administrator is required to submit a liquidation plan within 60 days of appointment and carry out the sale of the estate’s assets within 180 days of their collection and seizure.

Following the seizure of the debtor’s assets, they are listed and evaluated by the judicial administrator, after which they are sold, under the bankruptcy court’s supervision.

After the sale of assets, the judicial administrator shall distribute the proceeds to creditors according to the priority of their claims; if all creditors are paid in full (which is extremely unusual), the remaining balance is transferred to shareholders, pro rata.

The judicial administrator then presents a report of its accounts to the bankruptcy court, which the judge shall analyse. If the accounts are not accepted, the judicial administrator is responsible for indemnifying the debtor for any damages caused. If the accounts are accepted, the judicial administrator submits a final report, and the court terminates the proceeding.

Notwithstanding, the debtor is discharged from its obligations: (i) if all claims are satisfied completely; (ii) if more than 25% of the unsecured claims without preference or privilege have been paid; (iii) three years after the declaration of bankruptcy liquidation; or (iv) on the date the proceeding is terminated. Federal Law No 14,112/2020 modified the situations under which the debtor may be discharged to create an environment that privileges a fresh start and fosters entrepreneurship.

In bankruptcy liquidation proceedings, Article 140 of the Brazilian Bankruptcy Law allows the sale of the entire company, of segregated business units, or of individual assets piecemeal, and item II of Article 141 states that the sale shall be carried out free and clear of the seller’s liabilities, obligations and contingencies, if concluded in observance of Article 142.

Article 142 sets out the competitive procedures that can be adopted for the sale of assets in bankruptcy liquidation, with the recent amendments by Federal Law No 14,112/2020, some of which have been previously discussed.

With the amendments made by Federal Law No 14,112/2020, the Brazilian Bankruptcy Law now has a catch-all provision that allows the estate, in bankruptcy liquidation, to structure the sale procedure in a manner that is more conducive to competition and better fits the characteristics of the asset being sold (Article 142, item V).

Bidding procedures with stalking horse bids (whether by creditors or third parties) are also allowed, with the sale notice, whether approved by creditors and confirmed by the court or simply authorised by the court, providing the incentives and other rights offered to the stalking horse bidder.

Creditors may be organised in a Creditors’ Committee, pursuant to Articles 25 through 27 of the Brazilian Bankruptcy Law, with one member of each of the following classes of claims: (i) labour claims arising; (ii) secured claims; (iii) claims that have no preference or privilege whatsoever, as well as claims with special and general privileges established by law; and (iv) claims from small and medium enterprises.

The role of the Creditors’ Committee is to supervise and issue opinions throughout the proceeding and their expenses may be reimbursed, if they have been previously authorised by the court – there is no remuneration for the members of the Creditors’ Committee.

Nonetheless, the installation of a Creditors’ Committee is not very common in bankruptcy liquidation proceedings (or even judicial reorganisation proceedings, for that matter). Usually, creditors are represented by their attorneys in the bankruptcy liquidation proceeding and if matters need to be decided by creditors, the judicial administrator will request the court to convene a general meeting of creditors for formal deliberation.

The recent reform carried out by Federal Law No 14,112/2020 incorporated the UNCITRAL Model Law on Cross-Border Insolvency, with its mechanisms for international co-operation, expressly permitting plenary insolvency proceedings at the centre of main interests and ancillary proceedings where the debtor has foreign affiliates.

Through the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, the Brazilian Bankruptcy Law internalises its rules and principles that require courts to co-operate and accomplish the goals of the law. However, the rules applicable to international insolvency proceedings have not been largely tested by Brazilian courts.

The Brazilian Bankruptcy Law originally adopted the principle of territorialism to determine that the country where the company’s assets are situated has jurisdiction over insolvency matters. With the recent changes, territorialism gave way to mitigated universalism (embraced by the UNCITRAL Model Law on Cross-Border Insolvency), which asserts that insolvency proceedings should commence in the jurisdiction of the company’s centre of main interests.

Even before the reform, case law allowed for foreign companies to file judicial reorganisation and extrajudicial reorganisation proceedings, if they were part of a corporate group with its centre of main interests in Brazil.

The Brazilian Bankruptcy Law expressly prohibits distinct treatment between foreign and national creditors.

Foreign awards and court orders issued in the foreign main proceeding that need to be effective in Brazil must either:

• comply with the internalisation procedure provided for in the Brazilian Code of Civil Procedure and the Internal Rules of the Superior Court of Justice; or
• be issued by a foreign main proceeding, once the Brazilian court has recognised it as such, pursuant to the novel set of rules on international insolvency provided by the Brazilian Bankruptcy Law.

According to the first bullet point above, to be effective in Brazil, judgments rendered abroad must be internalised through the procedure for confirming a foreign decision or granting an exequatur to a letter of request. The request shall comply with several formal requirements and, in substance, the foreign decision cannot violate the Brazilian national sovereignty, public policy and/or human dignity and must not be related to a matter in which Brazilian courts have exclusive jurisdiction.

Pursuant to the second bullet point above, the foreign main proceeding before the foreign court must be recognised by the Brazilian court, following the recently adopted set of rules inspired by the UNCITRAL Model Law on Cross-Border Insolvency, after which any foreign orders and rulings shall become effective in Brazil. Besides the formal requirements that need to be met, the Brazilian Bankruptcy Law requires that the co-operation with the foreign authority does not flagrantly violate Brazilian public policy; and the interests of creditors, the debtor and third parties must be adequately protected.

Pursuant to the Brazilian Bankruptcy Law, the judicial administrator, like a trustee in US Chapter 11, is the principal officer to be appointed in judicial reorganisation and bankruptcy liquidation proceedings in Brazil (Article 22).

In judicial reorganisation proceedings, the judicial administrator has an auxiliary and supervisory role, through which they assist the court in supervising the debtor’s restructuring proceeding, whereas in bankruptcy liquidation proceedings, the judicial administrator replaces the debtor’s management and has the important role of collecting and selling assets, as well as distributing the proceeds to creditors according to their ranking.

Although the Brazilian Bankruptcy Law does not specifically provide for the appointment of a judicial administrator in extrajudicial reorganisation proceedings, in some cases, courts have appointed judicial administrators to aid in the assessment of the legal requirements and approval thresholds before the plan may be confirmed.

Moreover, before admitting a debtor into judicial reorganisation, whenever the court has doubts regarding the actual continuity of the debtor’s business or the fulfilment of the legal requirements, the court may appoint an expert that shall make an assessment and submit a report on such matters (Article 51-A). After the report is filed, the court shall then decide whether to admit the debtor into judicial reorganisation and subsequently appoint a judicial administrator. Usually, the court appoints the expert as judicial administrator.

The judicial administrator’s role differs depending on the type of proceeding, whether a judicial reorganisation, a bankruptcy liquidation, or an extrajudicial reorganisation (in those few cases in which a judicial administrator is appointed), but their attributions and duties are generally provided by Article 22 of the Brazilian Bankruptcy Law.

First, in a judicial reorganisation, the judicial administrator performs several important tasks:

• the judicial administrator carries out the administrative verification of claims and publishes their own list of creditors, in light of their analysis of the debtor’s documentation and the input from creditors’ proofs of claims;
• the judicial administrator issues opinions on certain matters during the judicial reorganisation proceeding, including in the judicial phase of the verification of claims;
• the judicial administrator supervises the debtor’s business activities, and submits periodic reports on the status of the business and the restructuring proceeding; and
• the judicial administrator supervises the fulfilment of the restructuring plan by the debtor; among other undertakings.

The judicial administrator works independently and does not need to wait for instructions from creditors or the court, although the court may order them to perform certain tasks. However, they do not manage the debtor, since the debtor remains in possession of the business, but rather take the backseat with a more secondary role.

Second, in a bankruptcy liquidation, the judicial administrator:

• also performs the administrative verification of claims, in order to publish a list of creditors;
• also issues opinions on specific matters throughout the bankruptcy proceeding;
• collects the estate’s assets and evaluates them, in preparation for a subsequent sale;
• promotes the sale and liquidation of the estate’s assets, with the authorisation of the bankruptcy court and after hearing the estate’s creditors;
• distributes the proceeds of the sale, according to the order of payments provided by the Brazilian Bankruptcy Law;
• represents the estate in any lawsuits and undertakes to collect any claims and credits the estate may have;
• in certain cases, may continue to temporarily manage the business, to maintain it as a going concern and subsequently sell it at a higher price;
• investigates if there was any wrongdoing in the management of the company and takes the necessary actions to hold the involved parties liable for any damages caused to the company and its creditors; and
• also submits periodic reports to the bankruptcy court and creditors, to provide information on the development of their tasks; among other responsibilities.

Differently from a judicial reorganisation proceeding, the judicial administrator has a more prominent role in a bankruptcy liquidation, because they replace the debtor’s management and represent the estate in all legal relations and agreements it may have. The judicial administrator also has a significant degree of independence in a bankruptcy liquidation but is held accountable to the court and creditors for their actions.

According to Article 21 of the Brazilian Bankruptcy Law, the judicial administrator shall be a suitable professional, preferably a lawyer, economist, business manager or accountant, or a specialised legal entity. If the judicial administrator is a legal entity, they shall declare the name of the professional responsible for conducting the bankruptcy or rescue proceeding, which cannot be replaced without the court’s authorisation. It is the presiding judge in the proceeding that appoints the judicial administrator, without any influence from the debtor, creditors or any third party.

This means that anyone fitting those requirements may be appointed as a judicial administrator in a bankruptcy or rescue proceeding. In most state courts, however, there is a database of registered judicial administrators, and in some states, judicial administrators may be required to take and pass a course with a syllabus specifically tailored to the judicial administrator’s role in bankruptcy and rescue proceedings.

Moreover, the court can dismiss and replace the judicial administrator at any time ex officio if the judicial administrator:

• lacks the trust of the judge;
• has been dismissed in the last five years, failed to render accounts within the legal deadlines or had such accounts disapproved, pursuant to Article 23, sole paragraph; or
• acts in violation of the Brazilian Bankruptcy Law or in gross negligence and breach or harmful act against the debtor’s activities or against third parties, in accordance with Article 31.

Upon the occurrence of any of the circumstances listed in Article 31, the Brazilian Bankruptcy Law also allows for any interested party to request the dismissal of the judicial administrator. In compliance with due process of law, it is necessary that the court give the judicial administrator the opportunity to present their defence before issuing a decision, which is subject to appeal.

Under the Brazilian Bankruptcy Law, directors and officers do not have a duty to creditors in judicial reorganisation or extrajudicial reorganisation proceedings.

Since shareholders retain their equity in the company in rescue proceedings, except if the plan provides for their dilution or the change of control through a sale to a third party, directors and officers continue to owe fiduciary duties to the company’s shareholders.

Furthermore, there is also no provision in Brazilian law imposing a duty on directors and officers to file for rescue or insolvency proceedings in case of deepening insolvency.

Directors and officers may be held liable for any breach of their duties, as provided for in the Brazilian Companies Law (Federal Law No 6,404/1976), for instance, but creditors may only file lawsuits if they were directly harmed by such violations.

In bankruptcy liquidation proceedings, on the other hand, directors and officers are removed from their positions and the judicial administrator takes over the management of the estate.

In case directors and officers breach their fiduciary duties toward shareholders, the company, and shareholders if the company does not act, may file a lawsuit to hold them liable for the damages caused by the breach. Creditors may only file a lawsuit if they are directly harmed by the directors’ and officers’ actions.

If the company is declared bankrupt, the judicial administrator may file the liability suit against the former directors and officers – such lawsuit may be filed before the bankruptcy court in this case.

Historical transactions that preceded the bankruptcy liquidation proceeding may be set aside or annulled by the court.

Article 129 of the Brazilian Bankruptcy Law provides the following grounds for setting aside historical transactions:

• the payment of undue debts made by the debtor within the look-back period;
• the payment of overdue and payable debts carried out within the look-back period, in any way other than that provided for by the contract;
• the constitution of collateral within the look-back, in the case of previously contracted debt;
• the practise of acts free of charge, starting two years before the declaration of bankruptcy;
• the disclaimer of interest in inheritance, up to two years before the declaration of bankruptcy;
• the sale or transfer of an establishment made without the express consent or payment of all existing creditors at that time, with the debtor not having sufficient assets left to settle their liabilities, unless there is no objection from creditors within 30 days, after being duly notified; and
• the registration of collateral and transfer of property made after the declaration of bankruptcy, unless there has been a previous annotation.

If these transactions were carried out in accordance with the debtor’s plan of reorganisation, then they cannot be set aside under the terms of Article 129.

Article 130 allows historical transactions to be set aside if they were carried out with the intention of harming creditors, with evidence of fraudulent collusion between the debtor and the creditor or third party on the other side of the transaction and of the actual loss suffered by the bankrupt estate.

The look-back period, pursuant to Article 99, item II, is determined by the decision that declares the debtor’s bankruptcy liquidation and may start up to 90 days before the declaration of bankruptcy, the filing for the debtor’s judicial reorganisation, or the filing of the first public protest against the debtor for default on a claim.

The transactions mentioned in Article 129 may be considered ineffective if carried out in the look-back period.

However, the transactions within the scope of Article 130 may fall outside of the look-back period, since the intent of the legal provision is to hinder and attempt to reverse the effects of the practice of fraud to the detriment of creditors and the estate.

With respect to the transactions mentioned by Article 129 and carried out within the look-back period, the judicial administrator, the creditors, and the Public Prosecutor’s Office may request the recognition of the inefficacy of the transactions to the bankruptcy court, and even the bankruptcy court, on its own, may set aside such transactions.

Regarding the fraudulent transactions encompassed by Article 130, the judicial administrator, the creditors and the Public Prosecutor’s Office all have standing to bring an action before the bankruptcy court to set aside such transactions and claw-back any assets and funds. There is a three-year deadline for this lawsuit, starting on the date of the order declaring the debtor’s bankruptcy liquidation.