Restructuring

Last verified on Tuesday 2nd January 2018

Brazil

Flávia Cristina Moreira de Campos Andrade
TozziniFreire Advogados (São Paulo)

    Actions prior to a formal proceeding

  1. 1.

    What duties do directors, officers or controlling shareholders of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? Is there a standard of care towards third parties? In what circumstances can directors, officers or controlling shareholders be found civilly or criminally liable for continuing to operate a company in financial difficulties? In practice, are such liabilities commonly enforced?

  2. In Brazil, directors and officers do not owe any duties directly to creditors of the insolvent company or third parties. Their duties are due to the shareholders of the company, even though such company may be facing financial difficulties. Nevertheless, the actions of the directors and officers carried out in the activities of the company may be analysed for prejudice of other parties. Article 158 of Law 6,404/76 (the Brazilian Corporations Law) establishes that there are two basic hypotheses of civil liability of managers of corporations: for damages caused to the corporation by virtue of negligence or willful misconduct, even within their powers; and for actions carried out beyond their authority, that is, exceeding the powers granted to them, or contrary to the provisions of the law or the company’s by-laws.

    As to tax liability, managers may be held liable for tax obligations of the legal entity in the event of:

    • its irregular dissolution;
    • action beyond their authority; or
    • actions contrary to the law or the company’s by-laws.

    In forced liquidation proceedings, shareholders, controlling shareholders, directors and executive officers may be considered liable for debts and/or acts if the court understands that some requirements were fulfilled.

    Regarding this topic, section 82 of Brazilian Bankruptcy and Restructuring Law (BRL) provides that the Bankruptcy Court may investigate and determine the shareholders and/or the managers’ liabilities if it verifies that they performed any act or omission that contravenes Brazilian law – such as corporate laws, tax laws, labour laws, among others – regardless of the collection of the assets and impossibility to pay all the creditors of the company.

    As an example, the Brazilian Corporate Law sets forth, in its section 116, the definition and the rules of the conduct that shall be observed by the controlling shareholder, and section 117 provides the liability rule applicable to the controlling shareholder. Also, section 153 and following provides the duties of the company’s directors and executive officers, and in case of violation of such duties or illegal acts in conducting social businesses, the managers shall be deemed liable for their acts.

    So, in principle, if the company’s shareholders and/or directors and officers have contravened one of the sections mentioned above, there is a possibility that the court will hold them responsible for certain obligations and/or acts.

    The same section 82 of the BRL predicts that in those cases, a responsibility lawsuit will begin in the Bankruptcy Court, and in this lawsuit, the defendant's assets can be blocked in compatible amount to the damage caused, until final judgment. The term for the filling of such lawsuit is two years after the decision that ends the forced liquidation proceeding becomes unappealable.

    Apart from that, based on section 50 of Brazilian Civil Code, the court may disregard the company’s corporate veil, if it considers that there was an abuse of its legal personality (in case of equity confusion and misuse of purpose). In this case, the shareholders would be considered liable for all the company’s debts.

    In limited liability company’s, the shareholder’s liability is initially limited to the price of the stocks emission or to the full payment of the company’s capital (stock). The company’s estate cannot be confused with the shareholder’s estate, and the company is the only one that responds for their obligation.

    The possibility of piercing the corporate veil was created as an exception to the limited liability of the shareholders, and once decreed by the judge, the shareholders shall respond with their estate for a specific obligation. This possibility is predicted in section 50 of the Civil Court, and can also be applied to a company that is bankrupted.

    The essential requirements are: abuse of the corporate veil, with deviation of the company’s purpose and/or estate confusion between company and shareholders. In each concrete case, the judge will analyse the presence of such requirements – these requirements are more objective than just “fraud” or “abuse”, but the decision by the court remains very subjective.

    Finally, the public prosecutor may understand that the shareholders, officers or directors committed a bankruptcy crime and file a criminal action, considering that section 179 of the BRL determines that the shareholders, executive officers, directors and counsellors will be equivalent to the debtor company for the criminal effects of the BRL. Also, BRL sets out several criminal offences related to bankruptcy, the penalties for which can vary from one to six years of imprisonment plus a fine.

    It is also possible for the Bankruptcy Court to determine the preventive detention of the debtor and its managers, if necessary to protect the interests of the involved parties and based on evidence.

    In addition, section 181 of BRL determines that a bankruptcy crime condemnation may lead to the following effects: (i) disqualification to engage in business activities; (ii) impediment to hold a headship position or function at the company; (iii) impossibility of managing a company even with a mandate. These effects must be declared in an award and will last for five years after the extinction of the criminal liability. 

  3. 2.

    What actions are available to creditors (secured or unsecured) prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceedings? 

  4. The Brazilian legal system provides for three different judicial measures that can be taken against the debtor to ensure fulfilment of a given obligation:

    • If the debt is represented by certain debt instruments specified by law (eg, promissory notes, recognition of debt signed by the debtor and two witnesses), the creditor could file a foreclosure proceeding. This is the faster proceeding for reaching the payment of the debt, since there is no need to obtain prior judicial recognition of the credit while the respective debt instrument already recognises it. In this proceeding, if the debtor does not pay the amount due within three days after being summoned, its assets become subject to attachment for further judicial sale. If the creditor is a secured creditor, such creditor has the possibility of attaching directly the asset that guarantees its credit.
    • If there is no debt instrument that legally authorises the foreclosure proceeding, but rather another written evidence of the credit, the creditor could file a summary collection proceeding. Such proceeding begins with the debtor being summoned to pay within 15 days. If the debtor complies with the payment order within the specified term, the debtor is released from paying court expenses and court-awarded legal fees. If the debtor fails to pay and does not present a defence within the specified term, a judgment will be immediately entered against the debtor with respect to the amount claimed by the creditor. The creditor is then allowed to enforce the judgment in order to collect its credit. However, if the debtor presents a defence in the specific term, an ordinary collection lawsuit will commence in order for the creditor to obtain judicial recognition of its credit against the debtor.
    • The ordinary collection lawsuit is the remaining option available to the creditor that does not hold a debt instrument authorising the filing of the foreclosure proceeding, or written evidence of its credit authorising the filing of summary collection proceeding. Therefore, the creditor will need to obtain judicial recognition of its credit through a specific judgment entered upon conclusion of the lawsuit. In fact, the creditor is actually a plaintiff who must have its claims against the defendant recognised by a court to be considered a rightful creditor.
    • If the debtor company enters into an insolvency proceeding (forced liquidation or reorganisation proceeding), the lawsuit against it will be suspended upon a judge’s declaration, with some rare exceptions. In the reorganisation proceeding, law provides that the suspension is temporary.
  5. 3.

    Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? If so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? Do insolvency proceedings stay the ability of secured creditors to foreclose on collateral of the debtor? Are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?

  6. Creditors secured by pledge or mortgage are allowed to foreclose on the collateral by means of a judicial sale and, in certain circumstances, through private sales (eg, when the pledge agreement so authorises, in the case of fiduciary transfers by way of security or when there is a judicial authorisation). In judicial sales, the relevant assets are appraised and the court will not accept sales for a disproportionate lower value. In private sales there are no specific legal provisions as to the sale price, but debtors may challenge abusive or unjustified sales conditions accepted or created by the creditor. In practice, some creditors voluntarily create private bidding proceedings to generate a proper sale price. The pledge over shares does not stop the shareholder (debtor) from exercising its right to vote, which can be limited, once the pledge agreement can provide that certain decisions must be approved first by the secured creditor. As a rule, the pledged shares must also be sold in a judicial sale or private sale by the secured creditor, which can also become the owner of the shares if the judicial adjudication is requested and granted. Pledged shares, in the reorganisation proceeding, may be renovated or replaced if matured during the proceeding, and while not renovated or replaced, any amount received by the creditor in relation the payment of the pledged shares will have to remain deposited in a judicial account bounded to the proceeding. Lenders are allowed to transfer their debt claims. ITo be effective against the debtor, any such transfer must be notified to the debtor. Effectiveness against third parties is achieved through registration of the transfer with the appropriate public registry. Security agreements cannot give the creditor the right to keep the underlying collateral in the event of default. However, after a default has been verified, the creditor and debtor may agree on the creditor keeping the collateral to satisfy its credit. Insolvency proceedings stay the ability of secured creditors submitted to the proceedings to foreclose on collateral of the debtor – in an in-court reorganisation proceeding, such stay lasts for a 180-day term that may be postponed by the Bankruptcy Court decision. 

  7. 4.

    Can creditors that have equity as collateral take control of a debtor by exercising voting rights attached to pledged shares? 

  8. The creditor secured by a pledge of equity submitted to the insolvency proceeding will not be able to foreclose on collateral, as mentioned above and, consequently, will not be able to take control of a debtor and exercise voting rights. Specifically in case of an in-court reorganisation proceeding, after the stay period of 180 days, if the term was not postponed and a reorganisation plan was still not approved, with renegotiation of debts, the creditor may enforce the pledged shares; however, in this case it must analyse if it is interested in exercising voting rights as shareholders in a debtor company under insolvency. 

  9. 5.

    Can secured creditors credit-bid their debt in a sale of a debtor’s assets, outside or within a formal insolvency proceeding? If so, what procedures or limitations apply?

  10. There is no specific provision in the BRL for credit bids. In an in-court reorganisation proceeding, the reorganisation plan to be presented by the debtor company may provide for a judicial sale of branches or business units belonging to the debtor, and it may also provide the possibility of creditors – submitted or not to the proceeding – acquiring the business units with its credits. Despite this possibility not being provided by law, it is usually accepted in case law. This possibility, however, is subject to creditors approval of the reorganisation plan and its judicial ratification. In a forced liquidation proceeding, the court may authorise such proceeding. And, outside a formal insolvency proceeding, there is the possibility of a secured creditor acquiring the collateral with its credit in an enforcement proceeding, paying the difference between the value of the asset and its credit or with the possibility of enforcing the remaining amount of the credit, if it exists. 

  11. 6.

    Are there legal or regulatory concerns that secured creditors should consider in connection with a sale or foreclosure? 

  12. The asset that guarantees a certain credit towards the debtor company must be sold – judicially or not, as already explained in the previous question – to pay the credit detained by the secured creditor. Only the amount obtained with the sale will be destined to the secured creditor, and the asset will be incorporated in the property of the purchaser, who may have the mentioned regulatory concerns. Therefore, for the secured creditor, there are no legal or regulatory concerns about such sale or foreclosure of the collateral, with exception of the concern regarding the order of register of such guarantee, which will define the order of payment of the creditors whose credits are secured by the same asset. Eventually, if the secured creditor acquires the property of the asset through judicial adjudication, it may have underlying businessliabilities, related to tax and labour credits, and, in case of fraud, the effects of the forced liquidation proceeding of the defaulted company may be extended to the secured creditor, if such creditor became the owner of the defaulted company.

    Formal proceedings

  13. 7.

    What types of insolvency proceedings are available in your jurisdiction? Are different insolvency proceedings available for individuals and companies? Is there any distinction made between "preventive" insolvency proceedings and "actual" insolvency proceedings?

  14. The BRL establishes three major mechanisms that may apply to troubled businesses (including business companies and individual businessmen):

    • forced liquidation;
    • in-court reorganisation; and
    • out-of-court reorganisation.

    Forced liquidation applies in case of insolvency when the business is no longer viable. It is a court procedure that may be requested by the company itself or by a creditor of the company. On the other hand, the mechanisms of in-court or out-of-court reorganisation may only be requested by the debtor, not by its creditors, and shall be used when a particular business, although facing difficulties, is still viable and may overcome its financial crisis. The previous legislation concerning insolvency of companies in Brazil, Decree-Law 7,661/1945, provided regulation for "preventive: insolvency proceedings, and can be used when a particular business, although facing difficulties, is still viable and may overcome its financial crisis. The current legislation only provides for actual insolvency proceedings and there is no mechanism such as “preventive" insolvency proceeding.

  15. 8.

    May government-owned entities, states or municipalities file for an insolvency proceeding in your jurisdiction? If so, are there special rules or a separate regime that applies to such entities?

  16. The BRL only applies to entrepreneurs and business companies in general. Therefore, it is not applied to states or municipalities. It is also not applied to state-owned companies, mixed capital companies, financial institutions, insurance companies, and some other entities expressly excluded by the law, which are subject to specific insolvency proceedings.

  17. 9.

    On what grounds may or must a debtor be placed into an insolvency proceeding? Who may do this? What are the grounds for a voluntary proceeding? If an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? 

  18. In-court reorganisation

    In Brazil, only the debtor company may request the commencement of its in-court reorganisation proceeding, there is no possibility of creditors doing so. The debtor must be facing a financial crisis and must prove the following requirements:

    • it cannot be forced liquidated, and if it has been, the resulting liabilities must have been discharged by final and conclusive decision;
    • it may not have engaged in in-court reorganisation within the last five years or within the last eight years, as a small business; and
    • it may not have been convicted or does not have, as a senior manager or controlling partner, a person convicted of any of the crimes provided for in the BRL.

    Out-of-court reorganisation

    An out-of-court reorganisation plan is simply a private arrangement between a debtor and some of its creditors. The BRL provides that debtors that meet all the same conditions to file for in-court reorganisation, may propose and negotiate with its creditors an out-of-court reorganisation plan.

    Forced liquidation

    According to the BRL, debtors that are facing a financial crisis and do not meet the conditions to benefit from in-court reorganisation proceeding should request the declaration of their own forced liquidation, however, there is no penalty for the company that does not request its forced liquidation. In addition, any creditor may request the forced liquidation of a debtor in certain circumstances, including the following:

    • failure by the debtor to comply with payment obligations in excess of 40 times the prevailing minimum wage, provided that a protest with a public registry has been lodged with respect to the corresponding indebtedness. In order to reach the above threshold, two or more creditors can combine their credits;
    • the existence of debt collection proceedings against the debtor where no assets have been attached or no money has been deposited to secure payment of the relevant obligations;
    • the debtor has engaged in actions such as unjustified sales of assets or fraudulent schemes against the interests of creditors; and
    • failure by the debtor to comply with obligations under a judicial reorganisation plan.

    Creditors requesting the forced liquidation of a debtor will have to pay the usual court fees. Liability will not reach such creditors simply because they used their legal right to institute forced liquidation proceedings on the debtor. Liability may reach if it is proven that creditors caused damages to the debtor by filing a groundless forced liquidation request. 

  19. 10.

    What effect, if any, does a filing have on a subsidiary or affiliate of the debtor? Are there any actions the debtor, the subsidiary or the affiliate can take to limit such effects? Are there any grounds for procedurally and substantively consolidating insolvency proceedings involving related parties? If a debtor organised under the laws of your jurisdiction entered into local insolvency proceedings, could the debtor’s foreign affiliates be included in the local filing? 

  20. Brazilian case law have been accepting substantive consolidation in in-court reorganisation proceedings, when the debtors companies demonstrate that they developed its activities as one sole unity, although formally organised under several different companies, even if the related party is consolidated under a foreign jurisdiction law. As in-court reorganisation may only be filled by the debtor(s) itself, a creditor has no possibility to include a related party of such debtor in the same in-court reorganisation.

    In forced liquidation proceedings, if certain requirements are fulfilled (most related to a wrongdoing), the effects of the proceeding may be extended to companies of the same economic group, even without the consent of the extended company.

  21. 11.

    What notifications and meetings are required after a debtor has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? What must they show to prove their ownership interest in the underlying debt? 

  22. There are no specific legal requirements in relation to meetings and notifications in out-of-court reorganisations, and these matters can be regulated by the relevant reorganisation plan. 

    In in-court reorganisation and forced liquidation, all acts are public and some must even be disclosed through a public notice in the Official Gazette; these include acts that initiate terms for the creditors to present manifestation and acts that notify creditors that a general creditor meeting has been scheduled. General creditor meetings may be schedule for (i) the creation of a creditors’ committee, (ii) deliberation about a reorganisation plan, (iii) approval of a sale of assets or (iv) any other matter that the court understands may affect the creditors.  

    Bondholders, as any creditor, may participate in insolvency proceedings. Its representation on the proceeding, however, is very controversial in Brazil, because Brazilian Law does not provide powers of representation to an indenture trustee. Law only provides power of representation to fiduciary trustees in relation to issuances of debentures, a figure similar to the indenture trustee.

    One of the case law positions allows such representation once the indenture trustee may be likened to the fiduciary trustee provided by Brazilian law. The other position defends that bondholders cannot be represented by the indenture trustee if there is no proof that the bondholders have each individually granted powers to the trustee for representation before the court (not only through the indenture). By this understanding, if no document is presented, the bondholder itself must participate in the proceedings (represented by a lawyer, if need be). 

  23. 12.

    How are contingent creditors dealt with? Are inter-company or affiliate claims treated differently from other creditor claims in terms of recovery or voting? If so, has this been challenged and with what result? Are there special rules for certain contracts?

  24. In in-court reorganisation proceedings, existing credits at the date of the filling, whether matured or not, are included in the proceeding and must be paid in accordance to a reorganisation plan to be approved by the majority of creditors at a general creditors' meeting. Excluded from the proceeding are tax creditors with title to assets and foreign exchange advancements credits.

    Inter-company and affiliate creditors are allowed to attend the general meeting of creditors, but they are not allowed to vote. These restriction is also valid for specific relatives of the company’s administrators, a controlling partner or legal representatives.

    Out-of-court reorganisations are a negotiation between the debtor and its creditors. This negotiation is not supervised by the court and the creditors that accept its conditions subscribe the plan together with the debtor (the adherent creditors). Then, the debtor requests the judicial ratification of the plan, with possibility of enforceability even towards creditors that did not adhere to it, provided that the respective credits are treated in the plan and if a certain quorum of adherence is obtained.

    In a forced liquidation, the company ceases it activities and any debts will be paid within the proceeding, in accordance to a legal preference order. Shareholders are ranked as subordinated credits (the last class in the payment order).

  25. 13.

    What effect does the commencement of an insolvency proceeding have on the debtor and its operations? Is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?

  26. A company under a reorganisation proceeding must continue its ordinary activities. In principle, company managers retain positions, although working under the supervision of a judicial administrator appointed by the court. The company is allowed to practice regular business acts and enter into contracts, but any sale of "permanent" assets must be approved by the Bankruptcy Court or provided for in the reorganisation plan approved by the creditors. After an in-court reorganisation is accepted by the court, a suspension of 180 days (stay period) shall apply to existing lawsuits and enforcement proceedings against the debtor, except for those credits that are not affected by reorganisation proceedings). Companies will not have a specific right to terminate or reject contracts other than normally available rights under contract law.

    In forced liquidation, the company ceases its activities and the agreements will be terminated, unless the judicial administrator decides not to terminate the agreement if he or she understands that the continuation of the agreement will benefit the bankruptcy estate. 

  27. 14.

    In what circumstances could transactions entered into before an insolvency proceeding be challenged? How far does the claw-back period extend? Who can bring such challenges and who bears the burden of proof? How frequently are such challenges made and upheld? 

  28. The bankruptcy legal term, also known as the ‘suspect period’ or ‘look-back period’, shall be set by the court upon the declaration of forced liquidation. This legal term may apply retroactively up to 90 days before:

    • the forced liquidation request;
    • the application for in-court reorganisation proceedings later converted into forced liquidation; or
    • the first protest for non-payment lodged against the debtor.

    The BRL contains a list of actions that may produce no effects with respect to the bankruptcy estate, regardless of whether the parties were aware of the financial difficulties facing the debtor or whether there was any fraudulent intent. Accordingly, they may be disregarded automatically by the court or at the request of any interested party. Actions considered ineffective include, for instance:

    • payment of unmatured debts during the look-back period;
    • payment of overdue debts effected during the look-back period in a manner that is different from what was originally established in the agreement;
    • the creation of security interests during the look-back period to secure payment of pre-existing indebtedness; and
    • donations and other equivalent actions effected within the period of two years preceding the forced liquidation.

    In addition to those actions deemed automatically ineffective, any action aimed at intentionally defrauding creditors may be revoked. In this case, however, the party seeking the revocation must prove, in a separate lawsuit, that there was a fraudulent scheme arranged between the debtor and a third party, and that the bankruptcy estate actually suffered damages as a result of such scheme.

  29. 15.

    How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? Do liens on receivables, revenues or cash flow continue with respect to such collateral after a debtor’s insolvency filing has been accepted by a court, or are they cut off as of the date of the filing or acceptance? If they are not cut off, may the debtor use that cash collateral and, if so, must it provide any protection to the secured creditors?

  30. In in-court reorganisation proceedings, creditors are organised by categories and voting in the general meeting of creditor is divided according to each category. Creditors secured by pledge or mortgage comprise a specific category, and each secured creditor is listed in such category to the extent of the security it holds. Any use or disposal of collateral by the debtor should be approved previously by the relevant secured creditor. Therefore, the secured creditors do not hold a different mean for seeking remedies for protection of their collateral, other than negotiating the payment of the respective credit under the reorganisation plan. Unsecured creditors also comprise a specific category. All the categories of creditors are paid according to what is established in the reorganisation plan. In forced liquidation proceedings, secured credits (limited to the value of the collateral) rank behind labour credits (limited to 150 times the prevailing minimum wage) and credits deriving from accidents at work, but ahead of tax credits and unsecured credits. The credits of equity holders are classified as subordinated credits and they are the last in the order of payment of credits. Regarding liens on receivables, revenues or cash flow, it shall in principle be kept pledged or fiduciary transferred, but in case of pledge, it cannot be used for payment of the credit. However, especially regarding pledges, the debtor company could allege that the maintenance of the amounts with the creditors could harm the continuity of the activities of the company and request its release to the court. In case of fiduciary transferred amounts, case law has already decided on the possibility of creditors particularly retaining the respective amount.

  31. 16.

    How are unsecured creditors treated? How are equity holders treated? May an equity holder recover prior to creditors being paid in full?

  32. In an in-court reorganisation proceeding, unsecured creditors are a specific class of creditors and the plan will only be approved if the majority of creditors (head count) and the majority of credits (amount) votes in favour of it. Equity holders, in case they are also creditors, will be able to participate in the general meeting of creditors, but will not have the right to vote the plan. In an in-court reorganisation proceeding, all creditors (secured, unsecured or equity holder) will be paid according to the provisions of the reorganisation plan.

    In a forced liquidation proceeding, unsecured creditors are the sixth in the ranking of creditors for payment purposes, which is applied after the payment of non-concurrent privileged creditors. Equity holder’s credits, of any nature, will be considered subordinated, which is the last category in the ranking of creditors for payment purposes, and any amounts resulting from its rights to receive his portion of the capital stock upon liquidation of the company cannot be enforced against the bankruptcy estate. Also, according to BRL, the decree of the company’s forced liquidation suspends the possibility of the shareholders exercising certain withdrawal rights for receipt of their shares in the bankrupt company.

  33. 17.

    What is the effect of an insolvency proceeding on current and retired employees?

  34. As in reorganisation proceeding, the company continues its activities, employees may be maintained in their jobs. In addition, employees with credits subject to the proceeding will represent a separate category of creditors and the plan will only be approved if the majority of creditors (head count) votes in favour of it.

    In a forced liquidation, the company ceases its activities and the employes must be dismissed, unless the judicial administrator decides that the debtor will continue to fulfil its contractual obligations and, therefore, the employees will be maintained in their jobs (which is very unlikely to happen). Employees rank ahead of any other creditor, with a limit of 150 times the prevailing minimum wage per employee. The amounts of labour credits that exceed such limits are classified as unsecured credits. In principle, the insolvency proceedings do not have any effect on retired employees. Labour credits up to five times the prevailing minimum wage for each creditor, due in the three months prior to the decree of the forced liquidation proceeding, have super priority and are paid as soon as there is any cash available.

  35. 18.

    Do directors or officers of companies in insolvency proceedings suffer any consequences?

  36. In the case of an in-court reorganisation proceeding, in principle there will be no change in management. Therefore, the managers of the debtor will retain their positions, although working under the supervision of the creditors’ committee (if any) and the judicial administrator appointed by the court. In certain circumstances, however, managers shall be removed from their positions, including when:

    • there are indicia and evidence of bankruptcy related crimes;
    • they have acted with wilful misconduct or engaged in fraudulent schemes against creditors;
    • they have been making personal expenditures that are not compatible with their income; or
    • their removal is specified in the restructuring plan.

    In the case of a forced liquidation, the directors and officers will be removed from their positions and the judicial administrator named by the court will manage the bankruptcy estate. If any director or officer is convicted of a bankruptcy-related crime, the court may also disqualify him or her from serving as manager of other companies for a period of up to five years, if there is no conviction on bankruptcy crimes.

  37. 19.

    How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority? May claimants with lower priority receive consideration under a reorganisation plan even though claimants with higher priority are not paid in full? 

  38. Reorganisation

    In both out-of-court and in-court reorganisations, the provisions established in the applicable reorganisation plan will determine the payment conditions of different creditors.

    Forced liquidation

    Labour claims of up to five times the prevailing minimum wage for each creditor, due in the three months prior to the decree of the forced liquidation proceeding, have super priority and are paid as soon as there is any cash available.

    If the debtor is in possession of assets (including money) that belong to third parties at the time the forced liquidation is decreed (by a leasing or fiduciary sale agreement or advance of foreign exchange currency agreement, for example), rightful owners may request restitution of their assets before the payment of any creditor, which may be understood also as a priority over the order of preference of the BRL. This is the case because such assets (which may include money) are understood by law and case law to not belong to the debtor, and, therefore, cannot be included as part of the bankruptcy estate.

    After the restitution, if any, the following credits must be paid in this order:

    (1) the compensation payable to the judicial administrator and his or her assistants, and labour-related claims or occupational accident claims referring to services rendered after the decree of the forced liquidation;

    (2) sums provided to the bankruptcy estate by the creditors;

    (3) expenses with schedules, management, asset sale and distribution of the proceeds, as well as court costs of the forced liquidation proceedings;

    (4) court costs with respect to actions and enforcement suits found against the bankruptcy estate; and

    (5) obligations resulting from valid legal acts performed and contracts agreed during the judicial restructuring proceeding, such as loans and continuity of supply, or after the decree of the forced liquidation, and taxes relating to triggering events postdating the decree of the forced liquidation.

    Finally, the remaining creditors will be paid as follows:

    • labour claims of up to 150 times the prevailing minimum wage for each creditor, and claims deriving from accidents at work;
    • secured credits up to the value of the relevant collateral;
    • tax debts;
    • credits with special privileges;
    • credits with general privileges;
    • unsecured credits;
    • contractual penalties, tax penalties and fines deriving from violations of legal provisions; and
    • subordinated credits (as considered by law or agreement, and shareholders’ and certain managers’ credits).
  39. 20.

    Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?

  40. Local creditors and foreign creditors are treated equally. However, foreign creditors must follow some formal requirements to be represented in the proceedings, such as presentation of documents, power of attorneys and by-laws legalised before the competent Brazilian consulate (consularised), when applicable, notarised and sworn translated. In the in-court reorganisation proceeding, the foreign credits will be listed in the original currency, and the credit will only be converted to the national currency for voting purposes in the general meeting of creditors. In the forced liquidation proceeding, all the foreign credits will be listed in the Brazilian national currency, by the exchange rate of the date that the forced liquidation is decreed.

  41. 21.

    What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be "crammed down"? Are there any substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?

  42. Any in-court reorganisation plan must be approved by the following four categories of creditors in a general meeting of creditors specifically called for that purpose: (i) labour creditors and creditors related to accidents at work; (ii) secured creditors; (iii) unsecured creditors, creditors with special or general preference, and subordinated creditors and (iv) small business creditors (companies that have yearly revenue up to a cap established by law).

    In the first and last classes of creditors, approval is achieved with the favourable vote of the majority of creditors present at the meeting, regardless of the amount of their credits. In the other two classes, approval is achieved with the favourable vote of the majority of the credits (amount) and the creditors (head count).

    If certain vote combinations specified in the BRL are reached in the general meeting of creditors, the court may approve the reorganisation plan even if the plan was not approved pursuant to the quorum requirements explained above (cramdown).

  43. 22.

    May creditors trade their claims during the course of a reorganisation? What impact, if any, will it have on voting for a plan?

  44. Creditors may trade their claims during the reorganisation proceeding. After the trade, the former and current creditors must inform the court and request the substitution of parties in the proceedings. The current creditor will only be able to participate in the general meeting of creditors and vote on the reorganisation plan if the judge examines and approves the substitution request prior to the meeting.

  45. 23.

    What kind of court supervision is there in each type of insolvency proceeding? Are the judges that supervise and administer the process specialised? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to control operations during the insolvency proceeding? May a debtor company or its creditors select or influence the selection of the trustee, receiver or other court-appointed officer? Can creditors form creditors’ committees? What formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the trustee, receiver or other court-appointed officer?

  46. In an in-court reorganisation proceeding, the court appoints a judicial administrator (trustee) in charge of supervising the company’s activities and accomplishment of the reorganisation plan. The judicial administrator is named by the court, and the debtor and the creditors do not have any power to select it. The judicial administrator does not manage the company. In principle, company managers retain positions, although they work under the supervision of a creditors’ committee (if any) and the trustee appointed by the court. However, managers may be removed in certain circumstances (indicia of bankruptcy related crimes, wilful misconduct or fraudulent schemes against creditors, etc). Judicial managers will then be appointed to run the company.

    In the event of a forced liquidation, company managers are removed and the judicial adminstrator appointed by the court will be empowered to: seize the company’s assets; veri-fy the existing credits against the company; organise the creditors according to the preference order established by law; and organise the sale of seized assets.

    Specialised bankruptcy and restructuring courts are available only in a few large cities. In other cases, regular courts will administer insolvency proceedings. According to the BRL, the creditors listed in the restructuring proceeding or in the forced liquidation proceeding can form what is called a creditors’ committee, which is optional and must be composed by one representative of each creditor class, and two substitutes for each class. The committee has several assignments, appointed by the law, such as verifying the judicial administrator’s work and the execution of the plan, among others. It is important to highlight that the committee is not mandatory, and in the absence of the committee, the trustee and the judge will discharge its duties.

    According to the BRL, only the debtor may present a plan and therefore there is no possiblity of competing reorganisation plans. However, in a very recent case, a competing plan was presented with grounds on foreign jurisdiction. There is no decision on that so far. 

  47. 24.

    May a debtor obtain financing while in insolvency? Will the lender enjoy special rights or preferences for providing DIP financing? Can a DIP lender ‘prime’ or come ahead of an existing lien? What difficulties typically arise in obtaining such funding or any required approval thereof?

  48. The company under reorganisation may continue its ordinary activities, which includes obtaining financing, so the debtor company does not need to obtain any kind of approval towards the court. However, before any guarantee over a permanent asset of the debtor is granted, it needs to be judicially authorised. The BRL does not establish any special rights or preferences derived from financing obtained during the course of the in-court reorganisation, although the reorganisation plan may provide some preference in order to attract potential investors.

  49. 25.

    If a debtor company has issued debt securities, does your jurisdiction’s insolvency or securities law provide for any exemptions from registration of those securities under applicable securities law?

  50. The BRL does not provide and exemption from registration of the debt securities. This sort of special treatment is not provided by Brazilian insolvency laws.

  51. 26.

    May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does this require court approval? Can creditors recover the expense of participating in the process? How?

  52. Credits submitted to the reorganisation proceeding cannot be offset with credits of the debtor company, unless the plan provides so, once those credits can only be paid in accordance to the plan and the offset is a way of payment of debts.

    In a forced liquidation proceeding, debts can be offset if (i) they are constituted until the date of the judicial decree of the forced liquidation, and (ii) if the requirements of the Brazilian Civil Code are fulfilled.

    The expenses in participating in the insolvency proceeding cannot be charged from the debtor company, with exception of those that are a result of a judicial dispute other than the insolvency proceeding with the debtor company, being submitted to the regular proceeding of proof of claims.

  53. 27.

    If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?

  54. Tax credits are not submitted to in-court and out-of-court reorganisation proceedings, therefore, tax collection proceedings can continue as normal, so there is no possibility of retaining them. Federal Law No. 13.043/2014 provides for a specific federal tax relief system for companies under judicial restructuring proceeding (REFIS). To be able to benefit from this relief system, some specific requirements must be fulfilled (such as not judicially discussing the tax debt to be renegotiated), and if the request is approved by the Federal Tax Authorities, the debtor company will be able to pay its tax debts in up to 84 instalments. The first 12 instalments must correspond to 0.666 per cent of the debt; from the 13th to the 24th, the instalments must correspond to 1 per cent of the debt; from the 25th to the 83rd instalments, each shall correspond to 1.333 per cent of the debt; and the last instalment must correspond to the remaining amount of the debt. Also, the debtor company can only request this benefit once in each judicial restructuring proceeding, and it must refer to all of its federal tax debts.

    Also, the BRL establishes that, as a condition for the initiation of an in-court reorganisation proceeding, the debtor company is required to submit tax certificates attesting that it has no outstanding tax debts. If there are outstanding taxes, the debtor would have to submit evidence that (i) a tax rescheduling is in place, (ii) assets have been attached to secure existing tax collection proceedings, or (iii) the enforceability of the relevant tax claims has otherwise been suspended as provided by law. However, courts have frequently disregarded the condition above and have authorised the initiation of in-court restructuring proceedings without the presentation of tax clearance certificates. The reorganisation itself should not affect the treatment related to any tax losses the debtor company may have. Therefore, the same conditions normally applicable to the use of tax losses by companies in general will also apply to a debtor company that goes through reorganisation proceedings.

  55. 28.

    What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?

  56. In a forced liquidation, if less than 50 per cent of unsecured credits have been paid, all debtors’ obligations will be terminated in either five years, if the debtor has not been convicted of any bankruptcy crime, or 10 years, if the debtor has been convicted of a bankruptcy crime. In an in-court reorganisation, all existing credits (subject to the proceeding) will be novated if the reorganisation plan is approved. The applicable judicial proceedings shall remain in place until all obligations maturing within two years that are specified in the plan are fully complied with by the debtor. If the debtor fails to comply with any obligation within such period, it shall have its forced liquidation decreed. Any obligation unfulfilled after the two-year period entitles creditors to initiate collection proceedings or request the declaration of the debtors’ forced liquidation. In order to file for in-court reorganisation, the debtor company can’t have been in another in-court or out-of-court reorganisation proceeding in the last five years.

  57. 29.

    How long do restructurings last? Is there a formal deadline?

  58. Verifying that all obligations provided in the reorganisation plan maturing within two years from its approval were fulfilled, the court shall order the termination of the in-court reorganisation proceeding. Although no longer subject to court proceedings, the debtor remains liable for all obligations specified in the plan that are still outstanding. No formal deadlines apply to out-of-court reorganisations.

  59. 30.

    Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work? Are out-of-court proceedings commonly used and what are the primary benefits and drawbacks?

  60. Any debtor that meets the same conditions to file for in-court reorganisation may propose and negotiate with its creditors an out-of-court reorganisation plan. It is not commonly used in Brazil, and it is considered a market solution for debtors who enter into renegotiation with some creditors and wish to extend such renegotiation to other creditors through judicial ratification. Despite being deemed ‘out-of-court’, the plan must be ratified by a court in order to produce effects established by law.

    In addition to the creditors specified above, any other creditors may be left out of a particular plan negotiated by the debtor. Ratification of the out-of-court reorganisation plan can be accomplished in one of the following two options. With the first option, the debtor requests ratification of the plan to produce effects only with respect to those creditors that have expressly adhered to the plan. With the second alternative, the debtor requests ratification of the plan to produce effects with respect to all creditors contemplated in the plan, including those that have not expressly adhered to the plan. In order to be ratified in these circumstances, the plan must have been approved by creditors representing more than three-fifths of credits in each category of creditors contemplated by the plan. With both options, a public notice will allow creditors to challenge the ratification. Nevertheless, any challenges may be based solely on an alleged illegality or a failure by the debtor to comply with all necessary legal requirements or formalities.

    Additional considerations

  61. 31.

    Does the government tend to play an active role in insolvency proceedings? What factors determine this?

  62. In the insolvency proceedings provided in the Brazilian Bankruptcy and Restructuring Law, the government does not have a regulated active role. On the other hand, in order to enable a more active participation of the government in the insolvency of some entities, the Brazilian Bankruptcy and Restructuring Law is only applicable to debtor companies that pursue economic activities, while some entities are prohibited from filing a request for bankruptcy in any situation: government-controlled companies or public companies, clearing agents and companies that deal with financial liquidation are prohibited from going bankrupt under the Brazilian Bankruptcy and Restructuring Law.

    There are some entities that are only relatively excluded from the insolvency proceedings: insurance firms, companies that deal with health insurance and financial institutions – broadly speaking, they must be liquidated out of court, but, if some special requirements are fulfilled, they can go bankrupt (forced liquidation). According to Law No. 10,190/2001, insurance firms are not allowed to file a request for bankruptcy, unless, in this last case, the total amount of assets after the decreeing of its extrajudicial liquidation is not sufficient to pay at least 50 per cent of the unsecured credits or when there are traces of existence of a bankruptcy crime.

    Also, different from regular insolvency proceedings, the debtor company itself may not file the request for bankruptcy, but there is an autonomous government entity (SUSEP) that is responsible for the control and supervision of the insurance market and that is authorised to request the bankruptcy proceeding of a certain insurance firm in the cases explained above (this government entity is also responsible for the extrajudicial liquidation).

    Regarding the financial institutions, considering the large impact of the situation of financial institutions upon the national economy, there are several governmental strategies that might be taken in order to avoid and prevent the financial institution from a crisis and a future liquidation or bankruptcy proceeding. The insolvency proceeding (liquidation) of these institutions is regulated in Federal Law No. 6.024/1974, which also provides the intervention of the government in the financial institutions.

    On 29 August 2012, Provisional Measure No. 577 was adopted by the President of Brazil, providing the intervention of the government, through the Brazilian Regulatory Agency of Electric Energy Sector (ANEEL), in the companies responsible for the distribution of electricity, in order to avoid their insolvency. The above-mentioned Provisional Measure was voted by the Brazilian Congress and on 27 December 2012 Law 12,767/2012 was enacted confirming all the effects carried out by the previous Provisional Measure.

  63. 32.

    How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? If a company organised under the laws of your jurisdiction (or whose principal place of business is in your jurisdiction) entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?

  64. Brazilian laws do not contain any specific rules dealing with extraterritorial bankruptcy or insolvency proceedings, or provisions regarding the recognition of other countries’ statutory processes, unlike Chapter 15 of the US Bankruptcy Code, for example. In fact, bankruptcy and reorganisation proceedings involving Brazilian companies, with its centre of main interest in Brazil, must be necessarily administered by a Brazilian court. As a result, any effects and consequences of possible ancillary or parallel proceedings in foreign jurisdictions will have to be dealt with on a case-by-case basis, subject to applicable conflicts of law provisions in cross-border matters.

  65. 33.

    How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? What factors determine this?

  66. In-court reorganisation is quite common for the business to be sold (totally or partially) to third parties, assuring the continuity of the activities and the maintenance of employment. The financial conditions in which the company entered the reorganisation proceedings and successfully obtaining investors and/or selling relevant assets is a decisive factor for a possible recovery.

  67. 34.

    What is the appeal process for an insolvency proceeding in your jurisdiction and what effect do appeals have on approved plans? How long do appeals take to resolve?

  68. In an in-court reorganisation proceeding, the appeal to be filed against the decision that ratifies a reorganisation plan, granting the reorganisation of a company, is the interlocutory appeal to the Court of Appeals that may be filed by any creditor or the public prosecutor within 15 business days of the publication of the decision in the Official Gazette. As a rule, the interlocutory appeal does not suspend the decision ratifying a reorganisation plan. However, if requested by the appellant, a stay effect may be granted by the court, which leads to the suspension of the reorganisation plan until the appeal is judged. The Court of Appeals have shown a tendency of altering such ratifying decisions and decreeing the reorganisation plan null and void if the content of the plan is against the law and intends to infringe the creditor’s rights. An interlocutory appeal to the Court of Appeals may also be filed against the decision that decrees the forced liquidation of a company, and an ordinary appeal can be filed against the decision that denies any forced liquidation request, within a 15-business day term. An estimation of the term for judgments of appeals is not possible to be presented, since such term varies from each state of the Brazilian Federation in which the in-court reorganisation proceeding is pending.

  69. 35.

    Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?

  70. Debtors often use different strategies in an attempt to improve their position during insolvency proceedings and put pressure on creditors, which occurs normally on a case-by-case basis rather than through a somewhat uniform course of action. One attempt that became reasonably common in the past was related to the venue of the judicial reorganisation proceeding. Some debtors headquartered in a remote city, but with their main business location in a large commercial city, would file the proceeding with the court having jurisdiction over their headquarters knowing that this would be an inconvenient venue for creditors. However, courts have refused to accept this practice and jurisdiction is normally shifted to the company’s main business location. Also, debtors tend to use the risk of a forced liquidation proceeding as a way to convince the creditors to accept the judicial reorganisation plan that is put to vote, since forced liquidation proceedings in Brazil are always avoided by creditors due to the low chance of recovering the credits.

  71. 36.

    What impact, if any, has the ongoing volatility in the global credit markets and rise in corporate restructurings had on your jurisdiction’s insolvency regime? Are any amendments to your jurisdiction’s insolvency laws envisaged? If so, which problems are such amendments intended to address and how? 

  72. So far, the volatility in the global credit markets and rise in corporate restructurings has had no impact in Brazil’s insolvency regime. However, these events have had significant impact in the analysis made by the courts when judging appeals related to insolvency proceedings, with stricter control over the companies. The most important amendments currently envisaged are:

    • Legislative Bill No. 314/2014, which intends to alter the name of the BRL to the ‘Ramez Tebet Law’. It has already been approved by the Brazilian Senate and is currently in the Brazilian House of Representatives for analysis. Ramez Tebet was a former senator and participated significantly in the drafting of the BRL; and

    • Legislative Bill No. 5587/2013, from the Brazilian House of Representatives, already sent to the Senate under No. 191/2015, which adds to the BRL a paragraph regulating the extension of the forced liquidation effects to affiliated companies and companies controlled by the debtor, when there is strong influence of a corporate economic group in the other, with the intention of harming creditors.

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Questions

    Actions prior to a formal proceeding

  1. 1.

    What duties do directors, officers or controlling shareholders of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? Is there a standard of care towards third parties? In what circumstances can directors, officers or controlling shareholders be found civilly or criminally liable for continuing to operate a company in financial difficulties? In practice, are such liabilities commonly enforced?


  2. 2.

    What actions are available to creditors (secured or unsecured) prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceedings? 


  3. 3.

    Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? If so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? Do insolvency proceedings stay the ability of secured creditors to foreclose on collateral of the debtor? Are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?


  4. 4.

    Can creditors that have equity as collateral take control of a debtor by exercising voting rights attached to pledged shares? 


  5. 5.

    Can secured creditors credit-bid their debt in a sale of a debtor’s assets, outside or within a formal insolvency proceeding? If so, what procedures or limitations apply?


  6. 6.

    Are there legal or regulatory concerns that secured creditors should consider in connection with a sale or foreclosure? 


  7. Formal proceedings

  8. 7.

    What types of insolvency proceedings are available in your jurisdiction? Are different insolvency proceedings available for individuals and companies? Is there any distinction made between "preventive" insolvency proceedings and "actual" insolvency proceedings?


  9. 8.

    May government-owned entities, states or municipalities file for an insolvency proceeding in your jurisdiction? If so, are there special rules or a separate regime that applies to such entities?


  10. 9.

    On what grounds may or must a debtor be placed into an insolvency proceeding? Who may do this? What are the grounds for a voluntary proceeding? If an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? 


  11. 10.

    What effect, if any, does a filing have on a subsidiary or affiliate of the debtor? Are there any actions the debtor, the subsidiary or the affiliate can take to limit such effects? Are there any grounds for procedurally and substantively consolidating insolvency proceedings involving related parties? If a debtor organised under the laws of your jurisdiction entered into local insolvency proceedings, could the debtor’s foreign affiliates be included in the local filing? 


  12. 11.

    What notifications and meetings are required after a debtor has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? What must they show to prove their ownership interest in the underlying debt? 


  13. 12.

    How are contingent creditors dealt with? Are inter-company or affiliate claims treated differently from other creditor claims in terms of recovery or voting? If so, has this been challenged and with what result? Are there special rules for certain contracts?


  14. 13.

    What effect does the commencement of an insolvency proceeding have on the debtor and its operations? Is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?


  15. 14.

    In what circumstances could transactions entered into before an insolvency proceeding be challenged? How far does the claw-back period extend? Who can bring such challenges and who bears the burden of proof? How frequently are such challenges made and upheld? 


  16. 15.

    How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? Do liens on receivables, revenues or cash flow continue with respect to such collateral after a debtor’s insolvency filing has been accepted by a court, or are they cut off as of the date of the filing or acceptance? If they are not cut off, may the debtor use that cash collateral and, if so, must it provide any protection to the secured creditors?


  17. 16.

    How are unsecured creditors treated? How are equity holders treated? May an equity holder recover prior to creditors being paid in full?


  18. 17.

    What is the effect of an insolvency proceeding on current and retired employees?


  19. 18.

    Do directors or officers of companies in insolvency proceedings suffer any consequences?


  20. 19.

    How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority? May claimants with lower priority receive consideration under a reorganisation plan even though claimants with higher priority are not paid in full? 


  21. 20.

    Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?


  22. 21.

    What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be "crammed down"? Are there any substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?


  23. 22.

    May creditors trade their claims during the course of a reorganisation? What impact, if any, will it have on voting for a plan?


  24. 23.

    What kind of court supervision is there in each type of insolvency proceeding? Are the judges that supervise and administer the process specialised? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to control operations during the insolvency proceeding? May a debtor company or its creditors select or influence the selection of the trustee, receiver or other court-appointed officer? Can creditors form creditors’ committees? What formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the trustee, receiver or other court-appointed officer?


  25. 24.

    May a debtor obtain financing while in insolvency? Will the lender enjoy special rights or preferences for providing DIP financing? Can a DIP lender ‘prime’ or come ahead of an existing lien? What difficulties typically arise in obtaining such funding or any required approval thereof?


  26. 25.

    If a debtor company has issued debt securities, does your jurisdiction’s insolvency or securities law provide for any exemptions from registration of those securities under applicable securities law?


  27. 26.

    May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does this require court approval? Can creditors recover the expense of participating in the process? How?


  28. 27.

    If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?


  29. 28.

    What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?


  30. 29.

    How long do restructurings last? Is there a formal deadline?


  31. 30.

    Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work? Are out-of-court proceedings commonly used and what are the primary benefits and drawbacks?


  32. Additional considerations

  33. 31.

    Does the government tend to play an active role in insolvency proceedings? What factors determine this?


  34. 32.

    How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? If a company organised under the laws of your jurisdiction (or whose principal place of business is in your jurisdiction) entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?


  35. 33.

    How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? What factors determine this?


  36. 34.

    What is the appeal process for an insolvency proceeding in your jurisdiction and what effect do appeals have on approved plans? How long do appeals take to resolve?


  37. 35.

    Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?


  38. 36.

    What impact, if any, has the ongoing volatility in the global credit markets and rise in corporate restructurings had on your jurisdiction’s insolvency regime? Are any amendments to your jurisdiction’s insolvency laws envisaged? If so, which problems are such amendments intended to address and how? 


Other chapters in Restructuring