Weathering a Crisis in Brazil: Fiduciary Duties of Directors and Officers of Brazilian Companies Approaching Insolvency

Introduction

The covid-19 financial fallout and Brazil’s ensuing economic recession have prompted Brazilian companies to take several measures in an effort to mitigate potential adverse impacts on their balance sheets and operations. Crises often put directors and officers of a corporation into delicate and high-pressure situations, as they have to deal with direct and indirect interests from different stakeholders in their decision-making process. Typically, when directors and officers identify a potential conflict of interests ex ante, they rely on their fiduciary duties under the law to make decisions in compliance with their obligations towards the company and its constituencies. However, when corporations approach or enter the zone of effective insolvency, directors and officers are confronted with the difficult questions on whether, when and how such fiduciary duties are affected by the corporation’s financially distressed scenario[2] - and the answer to these questions may not be entirely clear from a Brazilian law perspective.

Similar to other jurisdictions, the Brazilian Corporations Law (Law No. 6,404/76 (BCL)) generally provides that directors and officers owe a duty of care and a duty of loyalty towards the company.[3] In short, the duty of care requires that directors and officers act for the benefit of the corporation with the same standard of care as upright individuals would apply to their own business. The duty of loyalty means that directors and officers must refrain from self-dealing or practising any other act that would personally and inadvertently benefit them given their position in the corporation. Directors and officers owe both duties to the corporation itself, so the BCL confers on them the discretion to make decisions based on the best interest of the corporation, regardless of personal interests of shareholders and other stakeholders.[4]

In principle, these fiduciary duties to the corporation remain effective irrespective of the corporation’s financial condition. Neither the BCL nor the Brazilian bankruptcy law (Law No. 11,101/05 (BBL )) provide any change in fiduciary duties when companies approach or enter insolvency. Along these same lines, to the best of our knowledge, Brazilian courts have not yet entered any order expressly determining that directors and officers owe those fiduciary duties to other stakeholders (other than the corporation itself) exclusively because of the company’s financial straits. This leads practitioners and legal scholars to the preliminary conclusion that directors and officers must always make decisions considering what is best to the corporation within the same legal framework established under the BCL, regardless of any particular interest of a certain constituency or the financial condition that the corporation is dealing with.

Nevertheless, the continuity and the extent of directors’ and officers’ fiduciary duties in the context of financially troubled companies is not as clear as it may seem. In fact, the corporate (pre-)insolvency situation consists of a change of circumstances that has the potential to alter certain aspects of the corporation’s obligations towards its stakeholders, creditors, vendors, shareholders and other constituencies.[5] In these circumstances, directors’ and officers’ fiduciary duties should arguably not be viewed as a standalone obligation, but should instead be balanced with other obligations that the corporation itself may owe to its stakeholders, ultimately aiming at weathering the corporation’s financial crisis.

In view of the covid-19 financial fallout, the urge for directors and officers to make (often quick and hard) decisions aiming at the corporation’s rehabilitation in compliance with their fiduciary duties (and the potential conflicts arising thereof) have become more frequent. In this context, this chapter aims at providing some (non-exhaustive) insights into the decision-making process and fiduciary duties of directors and officers when a Brazilian corporation approaches or enters insolvency. To this end, the first section of this chapter (besides this introduction) provides some comments on whether and when directors and officers are able to identify that a corporation is approaching the zone of insolvency from a Brazilian law perspective. The second section addresses a certain legal obligation to pursue private debt-restructuring measures as part of the directors’ and officers’ fiduciary duties to the corporation when it is somehow identified that the corporation is approaching the zone of insolvency. Finally, the third section discusses the directors’ and officers’ duties to pursue a formal judicial restructuring proceeding with court involvement when things go south.

Identifying financial distress under Brazilian Law: when things go south

Identifying the financially distressed condition of a certain corporation naturally involves a financial analysis inherent to directors and officers through the interpretation of the company’s balance sheets and financial statements. Nonetheless, the financial condition of a corporation has a functional importance to the law, since it may trigger different obligations, rights and remedies depending on the company’s situation. That is, when a company’s financial records are able to demonstrate that the company is approaching or entering insolvency, different rules may apply to directors’ and officers’ decision-making process, so as to consider restructuring-related approaches in view of the company’s rehabilitation.

In this context, legal regimes should ideally define legal parameters for directors and officers to identify whether the corporation is solvent or insolvent.[6,7] In the absence of legal parameters that enable the identification of a (pre-)insolvency situation, it remains unclear when and whether a certain troubled financial condition of a corporation actually triggers the application of a different set of rules (including in connection with directors’ and officers’ fiduciary duties) given the change of financial situation that the corporation faces.

Brazilian law does not set clear legal parameters and criteria on which the corporation (through its directors and officers) can rely to identify whether it is approaching a pre-insolvency situation.[8] Instead, the BBL only establishes the legal regimes (i.e., the legal consequences)[9] that should apply to companies facing an economic and financial crisis, without specifying the financial criteria that directors and officers should take into account in order to reach the conclusion that the corporation is approaching or has entered into such condition.

In this context, although the BBL establishes that the company should inform the causes and reasons for its economic and financial crisis when filing for judicial reorganisation (RJ)[10], there is no indication about the components of such a crisis, or an express requirement for the court to assess (and confirm) such a crisis to grant the processing of an RJ proceeding. Moreover, the BBL refers to the same economic and financial crisis as a general term applicable to different financial situations of an insolvent company, which leads practitioners, legal scholars and judges to the conclusion that the term economic and financial crisis is an open concept with a great level of flexibility on its interpretation.

Unfortunately, other codes and laws (such as the Civil Code, the Code of Civil Procedure and the BCL) are not helpful in providing directors and officers with guidance and criteria for the identification of an insolvent condition. Even though the insolvency condition of a corporation appears in other aspects of Brazilian law (e.g., identifying an insolvency condition is a requirement for fraudulent conveyance under Section 792, IV of the Brazilian Code of Civil Procedure), there are no clear parameters in place.

In light of the above, the lack of legal parameters and criteria to identify the (pre-)insolvency situation of a corporation under Brazilian law may cause an issue of accountability in connection with directors’ and officers’ fiduciary duties. Since there are no clear rules to identify a financially distressed scenario, it becomes harder for the stakeholders of a corporation to expect and require a certain conduct from the corporation’s directors and officers based on the alleged insolvency scenario, which is not backed by a clear legal test.

Given the lack of clear parameters under Brazilian statutory and case law to determine corporate insolvency, directors and officers are forced to resort to the predominant insolvency tests widely known among bankruptcy practitioners, legal scholars and judges to identify a (pre-)insolvency condition of a corporation: the cash flow and the balance sheet insolvency tests. The former suggests that a corporation becomes insolvent when it is unable to pay its debts when they become due, while the latter suggests that a corporation is insolvent when the total amount of assets on its balance sheet is lower than the total amount of liabilities.[11]

Putting aside the financial difficulties and issues related to the above-mentioned tests, economic players have applied those concepts in the legal setting to keep track of their counterparties’ financial condition. For example, the cash flow insolvency test is largely used in corporate finance transactions (e.g., loans and issuance of debt instruments) as an early termination event when the corporation defaults on monetary obligations above a specified amount. The balance sheet test is also often enabled through loan agreements and bonds indentures that typically require the Brazilian corporation to inform counterparties about its financial situation, including by presenting its balance sheets and financial statements on a quarterly or yearly basis; and in the case of publicly held corporations, publication of such companies’ balance sheet and financial statements as part of their obligations under applicable securities regulation.

Therefore, given the lack of clear parameters and criteria under Brazilian law to determine when and whether a corporation is facing (or approaching) an insolvency condition, directors and officers are expected to rely on widely known tests to determine corporate insolvency, which are typically applied or encouraged by economic players and regulations in the private sector. There may be situations in which the corporate solvency tests will provide sufficient grounds to identify that a certain corporation is approaching or entering insolvency. There may be other situations, however, where these tests will not provide a clear view of whether a corporation is in a (pre-)insolvency scenario. In such cases, corporate insolvency will be determined on a case-by-case basis, which may cause confusion and lack of accountability in connection with directors’ and officers’ fiduciary duties, as there will not be any clear parameter to determine a change of condition triggering a shift of fiduciary duties in light of the distressed scenario.

Is there a fiduciary duty to renegotiate? Some insights from the directors’ and officers’ perspective

As mentioned in the introduction to this chapter, directors and officers of Brazilian corporations owe a fiduciary duty of care and a fiduciary duty of loyalty to the corporation. In general, this means that directors and officers must primarily pursue strategic decisions for the benefit of the corporation, irrespective of particular interests of other constituencies. When the corporation approaches or enters the zone of insolvency, the fiduciary duties of directors and officers under Brazilian law remain to the corporation, although other interests may come into play.

When directors and officers identify through a certain corporate solvency test that a corporation is approaching or entering insolvency, a set of business decisions (both operational and financial) is expected to be taken for the benefit of the corporation and, even indirectly, of other players that may benefit from the corporation’s rehabilitation (such as the shareholders, creditors, vendors and employees).

In this context, directors and officers typically rely on debt extensions and reductions in the stated value of debt claims as two of the most effective restructuring measures available to a corporation approaching or entering insolvency. In view of the financial benefits that such debt re-profiling may bring to the corporation, renegotiation efforts are deemed as an essential step towards reestablishment and eventual maximisation of the corporation value, but more importantly, its continuity as a going concern.

The BCL and the BBL, however, do not establish any express and direct obligation of a company’s directors and officers to pursue a debt renegotiation with creditors when it approaches insolvency.[12] In spite of that, given the benefits that a debt renegotiation may bring to an insolvent corporation, the statutory fiduciary duties under the BCL should be sufficient to lead directors and officers towards active measures aiming to renegotiate the corporation’s debts with the largest or most relevant creditors when the corporation approaches insolvency.

In this regard, the BBL embedded the principles of recovery and continuity of a corporation’s business into the Brazilian legal system.[13] In particular, the BBL establishes that maturity extensions and special payment terms consist of recovery measures that a company may pursue in the context of RJ proceedings.[14] In the same line of the fiduciary duties under the BCL, these principles and rules establish a legal framework within which directors and officers are expected to take all necessary measures aiming at the company’s rehabilitation, including by approaching its creditors for a tentative debt renegotiation.

In light of the above, although the obligation to renegotiate when corporations approach or enter insolvency is not expressly provided in Brazilian commercial law, the statutory fiduciary duties of directors and officers and the legal framework for the Brazilian bankruptcy regime suggest that, when debt renegotiation is in the best interests of insolvent corporations, it becomes an important rehabilitation measure that directors and officers are encouraged to take in compliance with their fiduciary duties.

Typically, debt renegotiation measures come naturally when the company approaches or enters insolvency. However, debt renegotiation processes in financially distressed scenarios tend to trigger conflicts of interests between the company’s interests and those of its constituencies, often bringing the directors’ and officers’ fiduciary duties to the fore. For instance, debt restructurings between the corporation and its largest stakeholders often involve the conversion of debt into equity, which can cause frictions between their respective interests and the interests of equity holders, particularly because shareholders may have their stake diluted by virtue of the debt-to-equity conversion. This is particularly problematic in private, family-owned companies, where the shareholder is also a senior officer or director. This may put officers and directors in tough and high-pressure situations, as they may be required to take strategic decisions to the detriment of certain stakeholders when time is of the essence.

When directors and officers of Brazilian corporations face this kind of conflict in debt renegotiation processes, their fiduciary duties towards the corporation should prevail over lateral and particular interests of shareholders, creditors or other stakeholders. In other words, Brazilian law does not provide for a shift of directors’ and officers’ fiduciary duties when a corporation becomes insolvent, which means that directors and officers must continue to pursue the best interest of the corporation when taking tough decisions in debt restructuring processes.

In addition, the success of private debt restructuring between a financially distressed corporation and its creditors may put the corporation in a more favourable position than if it had to commence a formal judicial proceeding in Brazil to implement its debt re-profiling. In general, judicial bankruptcy reorganisation proceedings carry numerous (direct and indirect) costs and disincentives for directors and officers to pursue the filing.[15] These disincentives in Brazilian RJ proceedings include:

  • the court appointment of a judicial administrator who will oversee the corporation’s activities and keep the Bankruptcy Court and creditors informed throughout the RJ proceedings;
  • the possibility of converting the RJ proceeding into bankruptcy liquidation if creditors do not approve the plan of reorganisation or the corporation defaults on the plan after its court confirmation;
  • the costs that the corporation will incur with advisers and the court-appointed judicial administrator’s fees; and
  • the damage that the RJ proceedings may cause to the corporation’s reputation.

These disincentives and other aspects of RJ proceedings may encourage directors and officers of a corporation to pursue private debt restructurings in a timely manner, forcing them to accommodate the interests of different stakeholders as much as possible to reach a consensual deal.

In this context, the BBL establishes an in-court fast-track restructuring mechanism (extrajudicial reorganisation (ER)) that boosts private renegotiations, combined with certain protection and benefits from the bankruptcy court. The ER consists of a formal bankruptcy proceeding in which the debtor has the exclusive standing to file an ER plan with the Bankruptcy Court that has been pre-agreed with creditors holding at least 60 per cent of the impaired claims. Once the ER plan is publicly filed, the Bankruptcy Court determines the notification of all the impaired creditors to present potential objections to the confirmation of the ER plan within a 30-day term. Upon the filing of potential objections, the Bankruptcy Court is expected to decide on the ER plan confirmation. If it is ultimately confirmed, the pre-petition claims affected by the ER plan are discharged, and the terms and conditions of the ER plan becomes binding on the remaining impaired (dissenting or hold-out) creditors who had not originally agreed on the ER plan prior to the filing.

In recent cases, ER proceedings have been presented as an effective legal tool to enable debt renegotiations when private renegotiation fails. For example, debtors often struggle to get the approval of the requisite majority of debenture holders or bondholders according to the minimum threshold provided in the applicable indentures. In these cases, debtors can benefit from the lower threshold of the ER (i.e., 60 per cent) to implement their debt restructuring, by binding the remaining creditors on the terms of the ER plan if it is ultimately confirmed by the Bankruptcy Court. In the same way, the ER presents a considerable lower (direct and indirect) cost to debtors compared with the RJ.

In view of the above, the directors and officers of a Brazilian corporation owe a fiduciary duty of care and a fiduciary duty of loyalty to the corporation, even when the corporation approaches or enters insolvency. However, in an insolvency scenario, directors and officers should take into account the interests of different stakeholders (i.e., not only of the corporation’s shareholders), ultimately aiming at strategic decisions that enable the corporation’s rehabilitation. In this context, private debt renegotiation (liability management) processes are deemed as an effective rehabilitation measure that directors and officers are encouraged to pursue under the Brazilian legal system, although there is not an express provision in this specific regard in Brazilian commercial law. Finally, these fiduciary duties to the corporation must remain in force even when conflicts of interests appear in debt restructuring processes, so that directors and officers of a corporation must not let particular interests of certain constituencies have a negative bearing on the corporation’s rehabilitation through the private renegotiation.

To file or not to file? When that becomes the question

Bankruptcy law carries a number of functions that practitioners and legal scholars have studied over the years to develop a legal framework that is able to maximise debt collection and to help corporations to stay in business when their going concern value is higher than their liquidation value. In this context, there is a general understanding among legal scholars that the collective debt-collection system imposed by bankruptcy law is, in principle, beneficial.[16] To this end, bankruptcy law aims at promoting an organised negotiation environment among creditors, from which corporations would not otherwise benefit from in a private negotiation scenario.

With this, when private restructurings between the insolvent corporation and individual creditors (or group of creditors) are no longer able to overcome the distressed condition of a corporation, directors and officers of Brazilian companies may resort to the legal tools available in bankruptcy law to enable a forced and organised negotiation with the various groups of creditors. This measure is consistent with the directors’ and officers’ fiduciary duties to pursue strategic decisions taking into account the best interests of the corporation.

Accordingly, the BBL confers on corporations the right to voluntarily file for an RJ proceeding aiming at reorganising its business and renegotiating its debts. In short, RJ proceedings are somewhat analogous to a Chapter 11 proceeding under the US Bankruptcy Code, and consist of a judicial bankruptcy proceeding that affects all the debtor’s pre-petition claims – except for some safe harbours[17] – and keeps directors and officers in the management of the corporation. In an RJ, the debtor has the exclusive standing to file, and it is expected to propose and negotiate the plan of reorganisation with its creditors, aiming at its approval by the required threshold of creditors gathered at a general creditors’ meeting, and its subsequent confirmation by the Bankruptcy Court. If the plan of reorganisation is ultimately approved and confirmed, it becomes binding on the remaining creditors that have not approved it or have not participated in the RJ proceedings (e.g., unliquidated, contingent, unmatured or disputed claims).

When dealing with the decision on filing for RJ, directors and officers of a corporation naturally consider the benefits that such a process may bring to the corporation from a business perspective. In this context, certain business advantages of the RJ filing include the stay of all collection, enforcement and foreclosure proceedings against the debtor for 180 days; the incentives for asset sales free and clear of the debtor’s liabilities (analogous to 363 sales under the Chapter 11); (3) the incentives for the extension of loans to the distressed corporation (i.e., debtor-in-possession financing);[18] and the possibility of extension of maturity dates and haircuts on claim amounts, leading to a (partial) discharge.[19]

However, the filing for an RJ under the BBL is also a complex business decision that involves several interests from different stakeholders, as it has the potential to materially alter the rules governing the creditors’ debt-collection measures and other commercial relations carried out by the corporation. In general, the decision on filing for an RJ must be taken in light of a global assessment of the corporation’s business, and not in view of an isolated issue that the corporation intends to solve. As a result, directors and officers usually face many disincentives for the filing, including those listed under the ‘Is there a fiduciary duty to renegotiate? Some insights from the directors’ and officers’ perspective’ section of this chapter, which generally relate to the direct and indirect costs of a formal bankruptcy proceeding. In fact, in the great majority of cases, the corporation will be better off if it reaches an out-of-court restructuring with creditors (or if it implements an ER restructuring) and avoids the RJ filing.

Therefore, from a commercial and business perspective, the decision on filing for an RJ is complex and touches upon many interests of the corporation and its stakeholders. By the same token, it is also not an easy task to decide whether and when directors and officers are expected to take measures for an RJ filing from a legal perspective under Brazilian law.

The BBL and the BCL do not require the corporation (through its directors, officers or shareholders) to file for an RJ when it becomes insolvent or approaches insolvency. Therefore, in principle, the corporation has the discretion to file for RJ whenever it considers more appropriate, taking into account the business decision made by its directors, officers and shareholders, or not file for RJ at all. In addition, Brazilian law does not establish a change of directors’ and officers’ fiduciary duties when the corporation approaches or enters insolvency (although other interests may also come into play in such financially distressed scenario).

In fact, the BCL provides that the shareholders have the exclusive power to authorise the directors and officers of a corporation to file for RJ. In urgent cases, the BCL authorises directors and officers to file for RJ without shareholder approval, provided that the controlling shareholder agrees with the filing and that the shareholders subsequently deliberate on the filing at an appropriate meeting.[20]

The shareholders’ exclusive power to authorise the RJ filing may support the preliminary conclusion that directors and officers do not have the obligation to seek an RJ filing, since they do not have the statutory power to take such action without shareholder approval, except in urgent circumstances. However, the lack of an independent power to file for RJ may not exempt directors and officers from taking interim measures towards the RJ filing when there is a business judgement that supports the idea that such a filing is in the best interest of the corporation.

Therefore, it is fair to conclude that Brazilian law encourages directors and officers to review and take measures towards the filing for RJ proceedings when the corporation is insolvent but viable, and an out-of-court restructuring is no longer a feasible alternative to promote the debt renegotiation, although it does not give them an independent power to file, which is ultimately contingent on shareholder approval, except in urgent circumstances (which often put the management in direct conflict against the shareholders). This conclusion is based on the benefits that the filing for an RJ may bring to the corporation in such cases, and the directors’ and officers’ fiduciary duties to act in the best interest of the corporation. In this context, such adoption of measures towards filing can be implemented in many ways, such as requesting the shareholders’ deliberation on the filing, conducting contingency planning and advancing the necessary documentation required for such (which may be time-consuming depending on the circumstances).

Conclusion

The economic recession that Brazil currently faces (aggravated by the covid-19 financial fallout) is causing and will continue to cause serious problems to the financial situation of Brazilian corporations. As a result, directors and officers of Brazilian companies have had to make and are expected to make tough decisions, as they typically aim at accommodating different interests from the corporation’s various stakeholders.

Brazilian statutory and case law does not establish any legal parameters and criteria for determining whether and when a corporation is approaching or entering insolvency. Therefore, directors and officers must rely on typical solvency tests (e.g., cash flow and balance sheet solvency tests) to identify whether the corporation is facing a financially distressed scenario, even though such tests may not present clear answers from a financial and legal perspective. If insolvency is identified through those tests and the company has a viable business, directors and officers are encouraged (but not expressly obligated) to pursue restructuring-related measures towards the corporation’s rehabilitation.

As private debt restructurings tend to be a beneficial and effective tool for the benefit of distressed corporations, directors and officers arguably have a fiduciary duty to consider debt re-profiling alternatives in their efforts to weather the financial crisis. If such alternatives fit well with the company’s rehabilitation plan, they are encouraged to pursue a private debt restructuring with creditors in a timely manner (including through an ER) while they are able to avoid a formal RJ filing. Given the continuity of directors’ and officers’ fiduciary duties to the corporation even in an insolvency condition, the decisions taken by the corporation’s management in debt restructuring processes must always observe the best interests of the corporation, which must prevail over particular interests of shareholders or a particular group of creditors, especially when a conflict of interest between them is crystalised. If things go south and an RJ filing becomes unavoidable, directors and officers are highly encouraged under Brazilian law to take necessary measures towards filing, even though the BCL does not confer on them the power to implement the decision on the RJ filing without prior shareholder approval (except in urgent circumstances).

In light of this, it is fair to conclude that although Brazilian commercial law does not establish express obligations to directors and officers to take active restructuring-related measures to overcome a corporation’s distressed condition, their general fiduciary duties to the corporation imply that directors and officers must consider private debt renegotiations and, if not successful, the filing of an RJ for the benefit of the corporation’s rehabilitation. The recovery and continuity of a corporation’s business are principles embedded in the BBL that have to be translated into business actions and decisions, notably in a pre-filing situation, for the direct benefit of the corporation’s activities, and the (indirect) benefit of its stakeholders.


[1] Giuliano Colombo is a partner and João Guilherme Thiesi da Silva is an associate at Pinheiro Neto Advogados.

[2] The shift of directors’ and officers’ fiduciary duties when a corporation is in the zone of insolvency is a relevant topic that practitioners, legal scholars and judges around the world have struggled with for years. In the United States, Delaware courts’ current ruling is that directors’ and officers’ fiduciary duties remain to the corporation when companies are in the vicinity of insolvency, and thereby they are allowed to pursue risky strategies as they continue to be protected by the business judgement rule (see North American Catholic Educational Programming Foundation Inc v. Gheewalla – 930 A.2d 92 (Del. 2007) – and Trenwick America Litigation Trust v. Ernst & Young – 906 A2.d 168 (Del. Ch. 2006)). Delaware courts’ opinion on this issue has changed over time, as Delaware judges had initially ruled that directors’ fiduciary duties shifted to creditors when a company is in the vicinity of insolvency or insolvent – see Bovay v. H.M. Byllesby & Co. – 38 A.2d 808, 8013 (Del. 1944). In Brazil, however, judges have not yet dived deep into this issue and have not yet formed a matured understanding in this regard.

[3] Articles 153 et. seq. and 155 et. seq. of the BCL.

[4] In this context, the BCL sought to embed the business judgement rule into the Brazilian legal system, by providing that a judge can exclude directors’ and officers’ liability in the context of an indemnification lawsuit if they acted in good faith and aimed at the corporation’s interest (Article 159, Paragraph 6 of the BCL).

[5] For example, when directors and officers decide to pursue an out-of-court debt restructuring in the best interest of the corporation due to its financially distressed condition, several obligations, rights and remedies of the corporation provided under Brazilian law are put into play, such as the balance of rights between senior and junior creditors, as well as potential conflicts between the corporation’s and the shareholders’ interests (e.g., situations in which the corporation pursues risky strategies to the detriment of the shareholders’ equity investments).

[6] In certain jurisdictions, there are fixed legal parameters to test whether a corporation is solvent. In this regard, see Section 4 of the New Zealand Companies Act of 1993.

[7] Heaton, JB, ‘Solvency Tests’ (2007). Business Lawyer, Vol. 62, No. 3, 983-1006 (2007), Available at SSRN: https://ssrn.com/abstract=931026 or http://dx.doi.org/10.2139/ssrn.931026.

[8] To clarify, the BBL establishes certain criteria that may support an involuntary bankruptcy liquidation request by a certain creditor of the corporation. These criteria are not considered in this chapter as fixed legal parameters for identifying the pre-insolvency situation of a corporation, since such criteria refer to its counterparties’ assessment (and not the corporation’s), and the financial situation underlying a bankruptcy liquidation request may be different than the financial situation of a pre-insolvency scenario.

[9] The BBL establishes that viable corporations facing an economic and financial crisis are entitled to file for judicial reorganisation proceedings, while not viable corporations facing economic and financial crisis should file for voluntary bankruptcy liquidation proceedings (Articles 47 and 105 of the BBL).

[10] RJ proceedings are analogous to a Chapter 11 proceeding under the US Bankruptcy Code.

[11] Heaton, 2007.

[12] For purposes of this chapter, only commercial, business and transactional aspects of Brazilian law are taken into account to ground the views stated herein. To clarify, civil law aspects of the corporations’ obligation to renegotiate its debt should be subject to an independent analysis that is not part of the proposed scope of this chapter.

[13] Article 47 of the BBL.

[14] Article 50, I of the BBL.

[15] Squire, Richard. Corporate Bankruptcy and Financial Reorganization. New York: Wolters Kluwer, 2016. Chapter 3: ‘Reorganization without Bankruptcy? Workouts and Holdouts’, pages 35-45.

[16] Jackson, Thomas H, The logic and limits of bankruptcy law. Washington, D.C.: Beard Books, 1986. Chapter 1: ‘The Role of Bankruptcy Law and Collective Action in Debt Collection’, pages 7-19.

[17] As a rule, all claims existing on the RJ filing date, even if not yet due and payable (i.e., accelerated or matured), are subject to the RJ proceeding. There are, however, certain exceptions to this general rule, including (1) tax claims; (2) claims secured by fiduciary liens; (3) claims deriving from financial leasing; (4) claims deriving from advance on export exchange contracts; (5) claims held by the owner or committed seller of real estate whose respective agreements include an irrevocability or irreversibility clause, including for real estate developments; and (6) claims held by the owner under a sale agreement with a title retention clause.

[18] The BBL provides that the claims deriving from loans extended after the RJ filing are not subject to the payment terms provided for in the plan of reorganisation, and thereby can be collected outside the judicial reorganisation proceedings in the event of default.

[19] On 26 August 2020, Congress passed a bill of law that amends certain aspects of the BBL and promotes significant changes to these advantages, such as the extension of the purchaser’s protection in free and clear sales, and the financier’s protections and guarantees in the context of debtor-in-possession financing. The bill of law is currently under review and discussion in the Senate. If it is approved by senators, the bill of law will have to be sanctioned by the President to enter into effect.

[20] Article 122, IX and the sole paragraph of the BCL.

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