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Brazil

Last Verified on Tuesday 7th January 2020

    Actions prior to a formal proceeding

    • Brazil

      Pursuant to Brazilian Corporate Law (Brazilian Civil Code and Law No.6,404/1976), directors and officers own fiduciary duties only to the company, even if such company is facing financial difficulties or has a negative net worth. Management, as a general rule, does not owe fiduciary duties to creditors and other third parties, even in a distress scenario.  

      The liability of directors and officers will always be limited to acts that (i) cause damage to the company due to actions that violate the company’s by-laws, the applicable legislation and their fiduciary duties or (ii) in other circumstances such as mismanagement, fraud or abuse of the corporate legal entity. In addition to that, the fact that an extrajudicial or judicial reorganisation was filed by the company per se does impact the regime applicable to officers and directors.

      Controlling shareholders do not owe fiduciary duties to the company, and neither to third parties, an in general have limited liabilities. This principle also arises from the Brazilian Corporate Law, which provides that the shareholders’ liability is solely limited to the payment of the shares to which they have subscribed. Therefore, shareholders in general have no further liability before the company or with respect to the company’s obligations, once their respective shares have been fully paid in.

      Despite these general rules, in case of bankruptcy liquidation, there may be an extension of the effects of the bankruptcy of the company to its shareholders, making them jointly and severally liable for its obligations if the requirements to pierce the corporate veil are met, such as evidence of fraud, misuse of the legal entity or confusion or commingling of assets.

      Last verified on Tuesday 7th January 2020

    • Brazil

      The actions available to creditors and the time consumed by each of the alternatives depend on the relationship between creditor and debtor and how the relevant agreements have been formalised.

      The Brazilian Code of Civil Procedure imposes some requirements regarding the proof of claim to allow the collection of a certain debt through the filling of an enforcement proceeding, the most expedite proceeding for recover on defaulted obligations. The documents evidencing the credit must be clear, such as enforceable titles (ie, promissory notes, bonds, checks and debentures) or agreements executed between the parties, signed by two witnesses and with liquidity, certainty and that can be enforced immediately. Based on this rule, there is little, if any, production of evidence during the proceeding.

      As a general rule, after the commencement of the proceeding, creditors are entitled to indicate debtor’s assets to be attached, that can be the, for instance, any collateral that secured the original obligation. Debtors may indicate her own assets to be attached, including those granted as collateral to the same creditor or plaintiff, as a result of a general principle under Brazilian law stating that enforcement proceedings must be as less burdensome as possible to the debtor. The debtor’s indication may be accepted, if the debtor’s request has reasonable grounds. Any attached assets will be subject to an appraisal during the enforcement proceeding before being sold to third parties (through a public auction) or to the creditor himself.

      After being summoned to court, the debtor has three days to pay the debt and 15 business days to file a motion to stay the enforcement proceeding. Defence arguments are limited because of the strength of proof of claim in the commencement of the proceeding. Staying an enforcement proceeding is an exception under Brazilian law and the debtor has to demonstrate that (i) the creditor has no right under the applicable statutory provisions to enforce the claim through this type of proceeding and; (ii) the supposedly unfair enforcement proceeding may seriously harm the debtor.

      This type of proceeding has a much faster track and usually puts a lot of pressure on the debtor, considering the attachment rules and the priority determined by law to attach the debtor’s bank account. 

      On the other hand, if there is no debt instrument that would allow the creditor to collect through an enforcement proceeding, the creditor is entitled to file a summary collection proceeding or a regular collection lawsuit, that do not allow creditors to request attachment of assets from the commencement of the case and have deeper production of evidence.

      Last verified on Tuesday 7th January 2020

    • Brazil

      Brazilian law does not provide for a specific accelerated procedure available only for secured creditors. Fast-track proceedings to enforce on collateral are regular enforcements proceedings, that are available to all creditors, including unsecured creditors, depending on the formalities around the relevant proof of claim and security documents. In addition to that, Brazilian law does not allow creditors to directly expropriate the asset granted as collateral without a formal judicial proceeding. If enforcement is implemented extrajudicially, the creditor is obliged to sell the asset to third parties in order to remedy any default by the debtor. If enforcement is implemented through a judicial proceeding, creditors are entitled to keep the asset granted as collateral to pay down the debt after a proper appraisal is conducted by a court-appointed expert. Courts will not accept sales for a disproportionate lower value.

      In the case of a filing of the judicial reorganisation request by the relevant debtor, the Bankruptcy Court will analyse the requirements provided by the law and issue a decision, inter alia, granting the automatic stay, for 180 days, applicable to existing and potential lawsuits and enforcement proceedings against the debtor, except for tax proceedings and lawsuits of creditors holding fiduciary trust arrangements, leasing transactions, foreign exchange contracts for future liquidation and actions still seeking to liquidate indemnification amounts, which are not affected.

      Upon the expiry of the stay period, all creditors automatically regain the right to initiate or proceed with their actions or proceedings against the debtor, unless the creditors have already approved a judicial reorganisation plan, which encompasses all the obligations of the company subject to the judicial reorganisation. Creditors holding collateral in the form of a fiduciary liens, even though not subject to the restructuring, are not entitled to remove the respective asset from the debtor’s possession in case such asset is deemed to be essential to the debtor’s activities. Core assets are essential property of a business without which a business would not manage to continue as a going concern. Assessment of whether an asset is essential to the business is deferred to the bankruptcy court on a case-by-case basis.

      For extrajudicial reorganisations, there is no automatic stay upon filing, which means that creditors not subject to the restructuring may commence and continue lawsuits. In other words, only creditors that are subject to the extrajudicial restructuring plan are affected by the filing. 

      Further, in case of judicial liquidation, as a rule, all assets should be gathered by the court-appointed trustee to be subsequently sold. Creditors holding securities in the form of a fiduciary lien should be entitled to remove the respective asset from the bankrupt estate through the filing of a claim for restitution, as the case may be.

      Last verified on Tuesday 7th January 2020

    • Brazil

      As a general rule, creditors are not allowed to extrajudicially enforce and keep the collateral as payment of the outstanding debt. Considering that, the exercise of contractual step-in rights provided by pledged shares is controversial under Brazilian law. As mentioned above, considering that the BCivil Code forbids creditors to take control of the collateral without a formal judicial proceeding, contractual remedies, such as step-in rights, are extremely hard to enforce extrajudicially.

      Last verified on Tuesday 7th January 2020

    • Brazil

      The Brazilian Bankruptcy Law does not expressly provide for any credit-bidding rights to the creditors.

      In a judicial reorganisation proceeding, even though there is no specific statutory provision, the judicial reorganisation plan can establish the sale of debtor’s assets through an independent productive unit (UPI) structure, and may also provide for the possibility of creditors acquiring these assets thorough credit bidding.

      In a bankruptcy liquidation scenario, though, the asset sale mechanism is a bit distinct and credit bids are not common, even though there is no specific rule forbidding creditors from adopting this approach.

      Last verified on Tuesday 7th January 2020

    • Brazil

      As mentioned above, in judicial reorganisations, the plan can provide for the creation of an independent productive unit (UPI), which is a portion or block of tangible or intangible property assets and rights used in the distressed company’s business that may be sold to third parties, while the debtor keeps its business with the remaining assets. In addition to that, in bankruptcy liquidations, portions or blocks of tangible or intangible assets and rights may also be sold at public auctions, and proceeds used to pay down creditors according to the priority established by the law.

      The advantage is that, by selling assets through a public auction conducted by the Bankruptcy Court, the third party will acquire the unit/block free and clean from liens, claims and encumbrances. The dismissal of liabilities, however, does not apply to situations where the purchaser is an insider of the debtor, such as the shareholders.

      The sale of the debtor’s entire business, all its shares or assets to a third party is also permitted, to the extent provided by the plan, approved by creditors at the general creditors’ meeting and ratified by the Court. In this case, however, the acquirer will most likely be responsible for all the debtor’s liabilities, as successor.

      In cases where the sale of a UPI or the entire business is within the context of regulated activities, the potential acquirer must meet certain requirements (legal status, economic capacity, in some cases previous experience on the business, etc) to be verified by the licensing authorities (such as environmental state agencies, regulators, etc).

      Finally, depending on the situation, foreign investors may face restrictions to own real estate property in rural areas in Brazil, regardless of the means by which the acquisition of such property is implemented (sale or foreclosure).

      Last verified on Tuesday 7th January 2020

  • Formal proceedings

    • Brazil

      Even though proceedings created with the purpose of entitling individuals to file for insolvency in Brazil exist and are established by the former Brazilian Code of Civil Procedure (Law No. 5.869/1973), but are rarely used.

      When it comes to companies, there are three types of insolvency proceedings in Brazil, all governed by the Brazilian Bankruptcy Law (Law No. 11,101/2005): (i) judicial reorganisation; (ii) extrajudicial reorganisation; and (iii) bankruptcy liquidation proceeding.

      The judicial reorganisation consists of an arrangement between the debtor and its creditors, under the supervision of the judiciary, directly initiated by the debtor itself. It is an alternative for companies that, although facing financial difficulties, are still viable and may overcome an economic-financial crisis.

      The extrajudicial reorganisation is an arrangement between the debtor and its creditors designed to overcome the distressed situation and restructure specific categories of creditors, since, as provided by the Bankruptcy Law. This type of proceeding cannot restructure certain types of claims, such as labour claims and tax claims. It is “extrajudicial” because the proposed plan of restructuring must be agreed upon by the parties before the filing.

      Bankruptcy liquidation proceedings, in turn, have the main objective of: (i) removing the management from the operation of the business and transferring all the assets, business, rights and interests to the bankruptcy estate; and (ii) preserving and maximising the value of the assets so they can be sold through auctions for the benefit of creditors. The liquidation is an in-court proceeding and is supervised by the: (i) bankruptcy court; (ii) judicial administrator (and assistants, if any); and (iii) the creditors’ committee (if any) (creditors can hold a meeting to decide on whether a creditors’ committee should be created). All assets, business, rights and interests are owned by the bankruptcy estate. 

      It is important to note that the  Bankruptcy Law is not applicable to financial institutions, credit cooperatives, consortiums, insurance companies and other entities legally equivalent to the previous ones, that are subject to special insolvency regimes.

      Last verified on Tuesday 7th January 2020

    • Brazil

      No. According to the Brazilian Bankruptcy Law, insolvency proceedings are not applicable to government-owned entities, states and municipalities, and neither Brazilian law establishes any special regime for such entities.

      Last verified on Tuesday 7th January 2020

    • Brazil

      There is no involuntary restructuring in Brazil. Only the debtor can commence both an extrajudicial or a judicial reorganisation proceeding. According to the Brazilian Bankruptcy Law, the debtor has to meet certain requirements to file for an extrajudicial or judicial reorganisation: (i) having exercised regular business activities for at least two years; (ii) not have been declared bankrupt in the past eight years, or not have been subject to a judicial reorganisation procedure in the past five years; (iv) not have been convicted for any bankruptcy crime.

      Also, the debtor must provide the following information to the Bankruptcy Court (i) the reasons for its financial difficulties; (ii) its financial statements from the last three financial years and one specifically drawn up to the date of filing the judicial reorganisation request; (iii) a list of all creditors, with details of the nature of the debt, classification of the debts pursuant to the priority order provided by the law (labour, secured and unsecured) and updated amounts of the claims; (iv) a list of all employees, with details of their activities, their remuneration, the amount of due indemnification; (v) a certificate of good standing, issued by the Board of Trade; (vi) the company's by-laws and articles of association. 

      On the other hand, in the case of bankruptcy liquidation proceeding, the Bankruptcy Law establishes that following persons are entitled to request the debtor’s liquidation: (i) the debtor him or herself; (ii) the surviving spouse or any heir of the debtor; (iii) the quotaholder or shareholder of the debtor or company; or (iv) any creditor. Except in the case of item (i) mentioned above (voluntary liquidation), the debtor will be summoned to respond the liquidation request within 10 days or to pay the debt in the same period.

      Last verified on Tuesday 7th January 2020

    • Brazil

      As a general rule, the commencement of an insolvency proceeding of a company does not have effects over the subsidiaries or affiliates of the debtor. However, in some cases, Brazilian courts have generally accepted joint filings (by companies and its affiliates and subsidiaries) accompanied or not by the presentation of consolidated plans based on grounds that will vary on a case-by-case basis. 

      It is possible that subsidiaries or affiliates jointly request a judicial reorganisation, what is defined by Brazilian scholars as procedural consolidation. In these cases, the jointly filing aims only expedite the procedure and reduce the costs and does not result in a unification of assets and debts. 

      In addition to the procedural consolidation, there is the substantive consolidation. Although this is a legal concept that is not expressly provided by the Brazilian Bankruptcy Law, the analysis of Brazilian case law regarding the matter evidences some elements that, jointly, could trigger the use of the substantive consolidation doctrine. Mainly, those elements are: (i) the existence of common head offices and/or common management (same officers or directors); (ii) the commingling of business functions and/or of assets; (iii) the unity of ownership between the companies; (iv) the existence of intercompany loans and/or cross-collateralisation to respond for obligations to third parties; and (v) the inability to separate affiliated companies’ assets and liabilities. This is usually a more fact-oriented analysis, based on the concrete situation of the companies and how they conduct their ordinary business.

      Concerning the foreign affiliates, even though the Bankruptcy Law does not provide any specific treatment, case law adopted an understanding generally authorising foreign entities that are a part of an economic group with its headquarters in Brazil to be a part of the proceeding.

      Last verified on Tuesday 7th January 2020

    • Brazil

      As a general rule, all acts performed in the context of extrajudicial and judicial reorganisation proceedings and bankruptcy liquidations are public. Stakeholders must be given notice of any actions taken in the context of such proceedings, such as hearings and general creditors’ meetings), through the publication of such acts in the official gazette. Depending on the type of proceeding commenced by the debtor, creditors may be required convene meetings with creditors to have a successful restructuring confirmed (such as judicial reorganisations with objections from creditors against the plan presented by the debtor).

      Even though the Brazilian Bankruptcy Law has no specific provisions governing bondholders’ participation in insolvency proceedings, case law adopted the understanding that bondholders have the right to participate directly and be treated as individual claimholders for the purposes of seeking any relief in court and voting their claims at the general creditors’ meeting. Rules for participation may vary on a case-by-case basis by the court and respective judicial administrator, but generally bondholders, in order to be allowed to participate, must present to the bankruptcy court a proof of their claim, a declaration of the amount of bonds held by such bondholder and documents evidencing powers of the signatory of such declaration.

      Last verified on Tuesday 7th January 2020

    • Brazil

      Once a judicial reorganisation proceeding is filed, all existing credits on the date of the filing are subject to the proceeding – this means that, once a reorganisation plan is approved by the general creditors’ meeting, all credits will be paid accordingly to its provisions, whether materialised or not. Nevertheless, according to article 49 of the Brazilian Bankruptcy Law, there are certain creditors’ whose claims are not included in the judicial reorganisation proceedings, namely: (i) credits secured by fiduciary liens; (ii) tax credits; (iii) credits held by the owner or seller of real property in which the agreement has an irreversibility or irrevocability clause; (iv) credits held by the owner of an asset in a sale contract with title retention; (v) credits that are originated from Advance on Currency Exchange Contracts; (vi) credits related to financial leasing agreements; and (vii) credits that are constituted after the actual filing of the judicial reorganisation proceeding. 

      As to inter-company and affiliate creditors, while they are allowed attendance to the general creditors’ meeting, Bankruptcy Law expressly forbids any voting rights.

      In regard to extrajudicial reorganisations, given that these consist of negotiations involving the insolvent company and its creditors, once the plan is ratified by court, creditors who have opted-in shall be paid in accordance with the plan’s provisions. The ratified plan’s payment provisions may be extended to all creditors mentioned in the plan, as long as this is approved by over 60 per cent of credits in each existing group of creditors being restructured.

      Last verified on Tuesday 7th January 2020

    • Brazil

      Yes. As already mentioned above, the Brazilian Bankruptcy Law provides an automatic stay period, counted from the decision (i) granting the processing of the judicial reorganisation proceeding, or (ii) to liquidate the debtor, applicable to existing and potential lawsuits and enforcement proceedings. In the case of judicial reorganisations, such stay is for 180 days. 

      A company under a reorganisation proceeding shall continue its ordinary activities and, as a general rule, management retain their positions. The company is allowed to perform acts in its regular course of business and enter into contracts, but there is no express provision authorising the rejection of contracts as a consequence of the acceptance of the case (this analysis will depend on the specific contractual provisions). In addition to that, any sale of fixed assets must be authorised by the Bankruptcy Court or provided for in the reorganisation plan approved by the creditors. 

      On the other hand, the consequences of a decision determining the debtor’s liquidation, as abovementioned, is the removal of the management from the operation of the business and transferring all the assets, business, rights and interests to the bankruptcy estate. Thus, all the agreements of the debtor will be terminated, unless the judicial administrator understands that the continuation of such agreements will maximise value and be beneficial to the bankruptcy estate.

      Last verified on Tuesday 7th January 2020

    • Brazil

      Under Brazilian law, avoidance actions and claw back rights are just applicable to bankruptcy liquidation proceedings. In this sense, the Brazilian Bankrupcty Law provides for a legal term, also known as the look-back period that addresses the possibility of challenging transactions entered into in up to 90 days before: (i) the request for involuntary bankruptcy liquidation; (ii) decisions determining the conversion of a judicial reorganisation proceeding into judicial liquidations; (iii) the first protest against the debtor following the absence of payment. In that sense, the Brazilian Bankruptcy Law describes certain situations that can trigger avoidance action rights, such as: (i) payment of unmatured debts during the look-back period, which includes transactions performed in a manner that is different from what was initially agreed upon; (ii) new securities aimed at securing the payment of already existing indebtedness during the look-back period; and (iii) donations and similar actions performed within a two year’s period prior to the beginning of a judicial liquidation proceeding. 

      Other than that, the sale or transfer of assets can be declared null and void if all of the following requirements are met: (i) the acquirer or creditor acted in bad faith; (ii) the transaction resulted in losses to the creditors; and (iii) the seller or debtor was insolvent during the transaction or became so because of it.

      Such transactions can be challenged by any creditors, third parties acting in good faith and public prosecutors, through requests to the insolvency proceeding court supervising the case. The burden of proof usually is attributed to the claimant. Even though it is hard to establish a percentage of successful cases, it can be said that Brazilian courts and stakeholders are used to avoidance actions and this is a type of instrument constantly used.

      Last verified on Tuesday 7th January 2020

    • Brazil

      Secured creditors rights are generally respected in the Brazilian insolvency regime (ie, the filing per se does not have the effect of change any rights with regards to any type of collateral). First, with respect to the classification of secured creditors for purposes of voting and payment priorities, secured creditors are considered as secured up to the amount of the collateral they hold (pledges, mortgages, etc). In addition to that, regardless of the type of insolvency regime and type of collateral, as a general rule, if the debtor and/or other creditors have the intention to somehow use, sell or encumber assets that are granted as collateral to a certain secured creditor, such creditors has a consent right that must be respected. If such consent right is disrespected, secured creditors have the right to request protection to the bankruptcy court supervising the case, to avoid the use of collateral without consent.

      Last verified on Tuesday 7th January 2020

    • Brazil

      During any of the insolvency proceedings provided by Brazilian Bankruptcy Law, unsecured creditors have generally rights to directly participate in the case, vote in creditors’ meetings, if the case, participate in committees, even though, from a practical perspective, they have less leverage to negotiate and may end up with a worse recovery in comparison to secured creditors. In bankruptcy liquidation proceedings, unsecured creditors must respect the priority waterfall provided by the law (unsecured creditors are paid after labour claims, up to 150 minimum wages, secured creditors, tax claims, credits with special privilege, credits with general privilege).

      As for equity holders, there is no rule similar to absolute priority rule applicable to extrajudicial and judicial reorganisation proceedings. In those proceedings, equity holders are not entitled to vote on judicial reorganisation plans, but are allowed to participate in the creditors’ meetings. Nevertheless, when it comes to payment of pre-petition credits, all creditors and equity holders will be paid in accordance with the reorganisation plan approved by the creditors meeting. In addition to that, in bankruptcy liquidations, equity holders are subordinated.

      Last verified on Tuesday 7th January 2020

    • Brazil

      In the event of extrajudicial and judicial reorganisation proceedings, the filing by the relevant debtor of any of these proceedings per se has no direct effects on the roles performed by employees, that are entitled to maintain their positions, or neither has any effects on retired employees. The effects of a judicial reorganisation filing for any employees are basically related to the credits held by these employees against the debtor: pre-petition credits (ie, existing credits on the filing date) are subject to the restructuring, and must be paid in accordance with the judicial reorganisation plan. Post-petition obligations are not affected by the restructuring and must be paid in accordance with its relevant terms, as if no insolvency proceeding is in place.  

      In the case of bankruptcy liquidations, employees’ agreements are terminated and employees will be dismissed unless otherwise determined by a court decision. Labour claims (retired or active employees), though, have payment priority over any claims with other nature, up to the amount of 150 Brazilian minimum wages.

      Last verified on Tuesday 7th January 2020

    • Brazil

      In extrajudicial and judicial reorganisation proceedings, directors or officers do not suffer any consequences as a result of the filing as long as they do not commit: (i) any bankruptcy crimes, as described by the Brazilian Bankruptcy Law: or (ii) any fraudulent acts to the detriment of creditors. In addition to that, the fact that an extrajudicial or judicial reorganisation was filed by the company per se does impact the regime applicable to officers and directors.

      When a corporation is declared bankrupt (in other words, is in bankruptcy liquidation), directors and officers liability, whether several or joint, is limited to the acts that caused losses to the corporation, due to negligence or willful misconduct, or even as a result of violation of the law or the corporate by-laws. In other words, the filing of any of the insolvency proceedings provided by the Bankruptcy Law will not have consequences in terms of liabilities to officers and directors if there was no violation to the law, including any type of fraud, or the corporation’s by-laws.

      Last verified on Tuesday 7th January 2020

    • Brazil

      In judicial and extrajudicial reorganisations, there is no rank or priority among creditors in terms of receiving consideration, even though creditors are divided in classes for voting purposes (in a judicial reorganisation proceedings, for instance, creditors are divided into four groups: (i) class I – labour creditors (ii) class II – secured creditors; (iii) class III – unsecured creditors; and (iv) small businesses and individual entrepreneurs).

      As to bankruptcy liquidation proceedings, the Bankruptcy Law establishes a payment waterfall, in which certain claims have priority.

      Labour claims up to five times the minimum wage, due over three months prior to the beginning of the bankruptcy, have priority over all other credits.

      After the above-mentioned labour credits are fully satisfied, the following order of payment must be observed (called créditos extrancorsais): (i) fees due to the judicial trustee (and assistants, if any); (ii) amounts disbursed to the bankrupt company’s by creditors; (iii) court’s fees and expenses to gather and sell the assets; (iv) court expenses related to enforcement lawsuits in which the bankrupt company has not prevailed; (v) any acts and obligtations performed or assumed during the judicial reorganisation proceeding and taxes due post-bankruptcy liquidation. 

      Lastly, the remainder of the company’s debts shall be paid in the following order: (i) labour-related claims, limited to one 150 minimum wages per creditor, and occupational accident claims; (ii) secured credits, limited to the amount of the collateral’s value; (iii) tax debts; (iv) credits with special privileges; (v) credits with general privileges; (vi) unsecured credits; (vii) contractual and tax penalties, as well as fines deriving from the violation of legal provisions; and, finally, (viii) subordinated credits.

      Last verified on Tuesday 7th January 2020

    • Brazil

      No. One of the founding principles of the Bankruptcy Law is the pars conditio creditorum, which literally means that the same conditions and considerations must be applied equally to creditors in the same situation, and nationality cannot be interpreted as a fair discrimination criteria. Hence, there cannot be any different treatment whatsoever between local and foreign creditors. Nevertheless, foreign creditors have to fulfil certain formalities to be represented in insolvency proceedings in Brazil, such as notarising, legalising (consularisation or apostille) and translating powers of attorney, bylaws and any other relevant documents that will be presented in judicial proceedings for such documents to be valid and accepted in Brazil.

      Last verified on Tuesday 7th January 2020

    • Brazil

      In extrajudicial reorganisations, debtors need approval of 60 per cent of each category of class or group of creditors being impaired/subject to the restructuring to file the extrajudicial reorganisation plan. The Bankruptcy Law determines that the debtor can seek judicial confirmation to bind all creditors from the same class or group to the terms of the plan, including those who have not approved it if it reaches the minimum 60 per cent class approval requirement. Note that this percentage refers to the total claims in the class as opposed to the percentage of the claims being voted in that class.

      In judicial reorganisation proceedings, the required quorum for plan approval varies according to each class of creditors: (i) in classes I and IV (labour and small business), creditors vote per capita, disregarding the amount of each credit, which means that the reorganisation plan must be approved by majority by headcount of creditors present and the meeting (ie, more than 50 per cent of creditors from these classes); (ii) in classes II and III (secured and unsecured creditors), plan approval depends on majority by headcount and by amount, both of credits present at the creditors’ meeting. If requirements for approval are met, all creditors are bound to the terms of the plan, even if they have rejected it.

      The ‘cram-down’ scenario is established in the Bankruptcy Law’s article 58, which states that the court may confirm the judicial reorganisation plan if the plan is approved by only two of the  (or three) groups of creditors and, at the same time: (i) the plan is approved by more than 50 per cent of the creditors present in the general creditors’ meeting; (ii)  in the group in which the plan has been rejected, more than one-third of the creditors, per capita and by amount, have voted for its approval.

      Finally, the reorganisation plan must be is economically feasible and must not violate any of the applicable laws. In addition to that, for judicial reorganisation proceedings, the Bankruptcy Law determines that every decision related to the reorganisation plan must first be subject to a vote in the general creditors’ meeting, where voting and verification of the quorums described above will take place. In extrajudicial reorganisation proceedings, no meetings are necessary, mainly because quorum is already met on the filing date (creditors agreed to the plan before filing).

      Last verified on Tuesday 7th January 2020

    • Brazil

      Yes, creditors can trade their claims freely and be substituted by the assignees during the course of any of the insolvency proceedings. The impact shall be merely of a procedural substitution between the original creditor and the acquirer of such credit. The only restriction provided by the Brazilian Bankruptcy Law is labour claims that, if assigned to third parties, will be considered as unsecured claims.

      Last verified on Tuesday 7th January 2020

    • Brazil

      In bigger cities and metropolitan areas, the courts tend to be specialised in insolvency matters. The same, however, does not, if ever, apply to smaller municipalities or remote areas.

      At the beginning of each proceeding, the court appoints a specialised judicial administrator to supervise the debtor’s activities and coordinate the process of verification of claims. This person or company is known as a judicial administrator, and neither the debtor nor any other party can influence the selection of this professional (it is usually someone that the court trusts).

      Creditors are entitled to form committees, which will act to represent the creditors’ best interests regarding the implementation and fulfilment of the reorganisation plan, but the creation of these committees is optional. As said before, creditors play a crucial role in judicial reorganisation proceedings, whether they are grouped in a committee or not, being entitled to voting rights, objection rights and filing petition in the case files whenever creditors deemed necessary. In addition to that, creditors role in the proceeding is even more relevant when participating in general creditors’ meetings, which are, in practice, the appropriate forum for all of the discussions related to the plan.

      In Brazil, the filing of a judicial reorganisation plan is an exclusive right from the debtor.

      Last verified on Tuesday 7th January 2020

    • Brazil

      A debtor is entitled to obtain financing while in judicial reorganisation, but the lender is not entitled to prime or come ahead of any existing lien without the consent of the creditor holding such lien. Even though the mere fact of entering into a loan agreement does not require judicial authorisation, in practice, debtors tend to give notice to the relevant court. Court authorisation is just required if any assets granted as collateral to any loan are any the debtor’s fixed assets The lender will only enjoy special rights or preferences as a result of providing such financing if there is a corresponding clause in the reorganisation plan or in the case of conversion of the judicial reorganisation into bankruptcy liquidation, in which case it will be treated as extraconcursal. The main difficulty to implement such type of financing are usually the impossibility to prime other existing liens, especially because a company under judicial reorganisation usually has no assets free of liens to grant as collateral.  

      Last verified on Tuesday 7th January 2020

    • Brazil

      Unless there is such a provision in the reorganisation plan, meaning that such offset would be part of the payment of the credits, no – credits subject to the reorganisation proceeding cannot be offset with credits of the insolvent company.

      In bankruptcy liquidation proceedings, it is possible for creditors to offset debts owed to them by the debtor if the following conditions are met: (i) the requirements established by the Brazilian Civil Code are met (credits that are already due, fungible and with a determined value); and (ii) the debtor incurred in such debts prior to the commencement of the bankruptcy liquidation proceeding. 

      In regard to recovering the expenses as a consequence of participating in the insolvency proceedings, the Brazilian Bankruptcy Law establishes that, as a general rule, creditors cannot seek reimbursement from the debtor. In any case, reimbursement of fees and expenses are disposable rights, so debtor willing to reimburse are entitled to do so.

      Last verified on Tuesday 7th January 2020

    • Brazil

      The Brazilian Bankrupcty Law does not establish any special provision with regards to utilisation of tax losses. As a consequence, as a general rule, the debtor will retain rights to use tax loses after it emerges from the reorganisation, according to the applicable rules.

      Last verified on Tuesday 7th January 2020

    • Brazil

      According to the Bankruptcy Law, the debtor stays under formal supervision of the court for the period of two years, counted from the issuance of the confirmation decision. During such supervision period, the debtor must fulfil all of the obligations provided by the judicial reorganisation plan, otherwise the court will convert the judicial reorganisation into a bankruptcy liquidation. After the supervision period, if the debtor fulfilled all of the obligations provided by the judicial reorganisation plan, the court will issue the decision closing the proceeding. The Bankruptcy Law does not provide for a specific concept of discharge applicable to judicial reorganisations, but establishes that all of the pre-petition obligations are subject to the restructuring and, as a consequence, must be paid in accordance with the plan approved in the proceeding. 

      On the other hand, during the course of a bankruptcy liquidation proceedings, discharge of obligations will occur if (i) more than 50 per cent of the unsecured creditors has been paid; or (iii) five years after the issuance of the decision closing the case, if no bankruptcy crimes have been committed; and (ii) 10 years after the decision closing the case, if the debtor committed any bankruptcy crimes during the course of the proceeding.

      Last verified on Tuesday 7th January 2020

    • Brazil

      Even though the Brazilian Bankruptcy Law establishes some deadlines that generally must be followed by the relevant stakeholders (for example, 60 days for the debtor to present the judicial reorganisation plan after acceptance of the case), such deadlines, in practice, are interpreted as tentative. It is almost impossible to define how long any insolvency proceeding in Brazil lasts – it depends a lot of the debtor, capital structure, debt structure, court of jurisdiction and any other relevant elements applicable to the specific case.

      Last verified on Tuesday 7th January 2020

    • Brazil

      The Brazilian prepackaged reorganisation is a proceeding designed to overcome the distressed situation in an expedited way, restructuring specific categories of creditors, as determined by the debtor before the filing. This fast-track procedure minimises transaction costs and average time for reorganisation, and is commonly used in Brazil, but less used than judicial reorganisations. 

      The debtor is only entitled to file for an out-of-court reorganisation if it complies with the following requirements: 

      • the debtor has performed its regular business activities for at least two years prior to the filing;
      • the debtor has not previously faced bankruptcy proceedings or if it has, the debtor has had all obligations and liabilities under the bankruptcy proceedings judicially extinguished;
      • the debtor has not been granted judicial reorganisation in the past five years (or if the insolvent company was classified as a small enterprise at the time of the first judicial reorganisation, eight years);
      • the debtor (including its managers and shareholders) has not been found guilty of bankruptcy crimes.

      The restructuring plan is negotiated by the debtor and certain predetermined creditors ahead of the actual filing. According to the Bankruptcy and Restructuring Law, a Brazilian pre-packaged reorganisation may restructure: (i) any of the classes that can be restructured under a judicial reorganisation proceeding (secured or unsecured), except for labour-related claims and (ii) groups of creditors whose claims have similar terms and conditions of payment, such as bondholders.  

      Some claims cannot be restructured thorough a pre-packaged reorganisation, such as labor claims, occupational accident claims, tax claims, claims related to agreements for the conditional sale of goods and real estate; fiduciary trust arrangements; leasing transactions; foreign exchange contracts for future liquidation. Secured claims up to the value of their collateral are also excluded from the procedure.

      After the definition of which of classes or groups of creditors will be restructured under the pre-packaged reorganisation, a restructuring plan is then drawn up by the debtor.

      The restructuring plan cannot provide for payments in advance, and creditors that are not subject to the restructuring cannot be impaired or treated unfavourably.

      For the creditors being restructured, as a general rule, debtors have to treat all creditors belonging to the same class (secured and unsecured) or group (bondholders, for instance) in an equitable fashion, as the Brazilian bankruptcy system legal framework is grounded on the par conditio creditorium principle.

      Debtors need the approval of 60 per cent of each category of class or group of creditors being impaired/subject to the restructuring to file the extrajudicial restructuring plan (the plan can restructure one or more classes or groups). The Bankruptcy Law determines that the debtor can seek judicial confirmation to bind all creditors from the same class or group to the terms of the plan, including those who have not approved it if it reaches the minimum 60 per cent class approval requirement. Note that this percentage refers to the total claims in the class as opposed to the percentage of the claims being voted in that class.

      After the filing, a notice to creditors must be published in the Official Gazette and in a widely circulated newspaper (nationally or within the region of the debtors’ headquarters), informing about the filing.

      The publication triggers the 30 business day period deadline for creditors to present an objection to the restructuring plan. If there is any challenge, the debtor will have five business days to present a response. After that, a bankruptcy court will rule on the potential issues raised and the ratification.

      After ratification of the restructuring plan by the court, creditors bound by the agreement, including those who were crammed down, cannot enforce their claims by any means, if the debtor complies with terms of the plan. On the other hand, creditors who are not a party to the agreement and were not crammed down are not bound by any of its provisions and can enforce their respective debt claims by any means, without restrictions.

      Last verified on Tuesday 7th January 2020

  • Additional considerations

    • Brazil

      The Bankruptcy Law does not attribute any specific role to the government in regard to insolvency proceedings in Brazil. Usually government agencies play an active role in cases in which to company being restructured belongs to a regulated sector, and the agency must participate to supervise if the proceeding and the negotiations follow the specific regulations and will not impair the company’s ability to provide services to the general public. Such active role was played, for instance, (i) by Anatel, the telecom agency, in the judicial reorganisation of OI SA...; (ii) by Anac, in the Avianca case, in which the debtor intended to sell to third parties its rights to explore one of the most profitable airports in Brazil.

      Last verified on Tuesday 7th January 2020

    • Brazil

      The Bankruptcy Law has currently no provisions governing the recognition of extraterritorial bankruptcy or insolvency proceedings, neither has any ancillary or parallel provision, regardless of the principal place of business. Any decisions issued in the context of a foreign proceeding (ie, any proceeding outside Brazilian territory) will have to be ratified by the Brazilian Superior Court of Justice to be valid and have its effects recognised in Brazil, in a type of proceeding that is not tailor-made for insolvency cases, but rather is applicable to all decisions issued in arbitral and judicial proceedings outside Brazilian territory.

      Last verified on Tuesday 7th January 2020

    • Brazil

      The determining factors for a company to emerge from a judicial reorganisation vary from a wide range of factors, such as the potential delay for commencing the case, its ability to negotiate with creditors and propose different solutions, flexibility to convert debt into equity and restructure its management, etc. That being said, recent research indicates that, with exception to small business, only roughly half of the companies in judicial reorganisation emerge. 

      Bankruptcy liquidations, on the other hand, in practice does not work. Usually companies and stakeholders are tangled in a never-ending proceeding, that may take years to be closed.

      Last verified on Tuesday 7th January 2020

    • Brazil

      In Brazil, as a general rule, any court decision may be subject to appeal. Any of the appeals potentially filed per se will stay the proceeding, even though the appellant may request an injunction to suspend the proceeding if demonstrated that the case prima facie has merits and there may be an irreparable harm if proceeding is not stayed. That being said, for the implementation of an approved plan to be suspended, the relevant appellant must demonstrate to the court of appeals that implementation will cause irreparable harm and the plan (or process of approving the plan) has any illegality. If there is no appeal or such injunction suspending implementation is not granted, debtor is entitled to implement the plan. It is really hard to provide an accurate estimation as to how long appeals take to be ruled in Brazil, mainly because it depends on a lot of factors, varying from courts, localisation, type of discussions, etc, but, based on former cases, it is fair to estimate that an appeal will take six to 12 months to be ruled on the merits.

      Last verified on Tuesday 7th January 2020

    • Brazil

      Brazilian insolvency proceedings are, as a general rule, debtor-friendly, mainly because the system as established today gives to much power to the debtor (for instance, there is no provision authorising creditors to push the debtor into a restructuring; neither are creditors allowed to present a competing judicial reorganisation plan). As a consequence of such concentration of power, creditors' leverage is mainly their voting rights in the creditors' meeting that will analyse and approve or reject the plan. Being said that, techniques and strategies used by the debtor are usually a consequence of such power to control the process. In any case, creditors are entitled to challenge any techniques or strategies that they deemed abusive and illegal, and have indeed challenged over the past few years, with increasingly sophisticated cases in Brazil.

      Last verified on Tuesday 7th January 2020

    • Brazil

      Not only the volatility in the global credit markets, but also the global economic crisis and, more recently, the local economic crisis in Brazil (one of the consequences of the major recent corruption scandals) have tested the Brazilian insolvency regime and the Brazilian courts. Since 2012, major and multinationals corporations have filed for insolvency in Brazil, and complex corporate structures and sophisticated debtors, creditors and other stakeholders started using the Brazilian insolvency regime to implement corporate restructurings. As a consequence of such reality, practitioners have realised that the current Bankruptcy Law still needs a lot of improvements to meet the needs of an increasingly globalised and complex market.

      A reform is being planned to alter many of the Bankruptcy Law’s provisions. The bill is still being debated in Congress and subject to constant changes, as it is a work in progress. Generally, the major points of improvement brought by the reform of the law are: (i) the increase in legal certainty, with the definition of concepts such as substantial consolidation and the establishment of specific provisions about transnational insolvency and a Brazilian ancillary proceeding; and (ii) the focus on the efficiency of the judicial reorganisation and bankruptcy proceedings, by creating mechanisms to avoid filings for judicial reorganisation by companies without any capacity to restructure and to speed up the sale of assets and distribution of proceeds in bankruptcy liquidations.

      Last verified on Tuesday 7th January 2020

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