I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
Several statutes regulate insolvency and bankruptcy proceedings in Brazil. The most prominent legislative instrument is the Bankruptcy and Reorganisation Act,2 which regulates bankruptcy, judicial reorganisation and extrajudicial reorganisation proceedings applicable to companies, whether they are limited liability companies, publicly traded stock corporations, private stock corporations or sole proprietorships – with the exclusion of companies controlled by the government.
The purpose of bankruptcy proceedings is to liquidate a company's assets and distribute the proceeds to its creditors, used as a last resort in the case of severe financial hardship. In turn, judicial and extrajudicial reorganisation proceedings are intended to streamline a company's debt structure, allowing it to preserve its business, retain its workforce and continue to pay taxes. Judicial reorganisation proceedings are entirely carried out under the control and supervision of the bankruptcy court and the judicial administrator, whereas extrajudicial reorganisation proceedings are the result of direct negotiations with each creditor, culminating in the submission of a prearranged reorganisation plan for court approval.
The Bankruptcy and Reorganisation Act was inspired by Chapter 11 of the US Bankruptcy Code, but with numerous adaptations. For instance, under Brazilian law, only the debtor may officially submit a reorganisation plan, and not its creditors. It is also important to note that Brazilian law provides for a system that is concerned primarily with the preservation of the company, which may at times be contrary to the creditors' interests.
Other insolvency proceedings for specific persons are provided for by various other legislation:
b bankruptcy proceedings for limited liability companies are provided by the Brazilian Civil Code; and
c stock corporations are liquidated in accordance with the Stock Corporations Act.5
The scope of this chapter is limited to addressing bankruptcy and reorganisation proceedings in a more comprehensive manner, rather than approaching several subjects without the necessary depth.
Main effects of bankruptcy and reorganisation proceedings
There are certain consequences to the commencement of bankruptcy or judicial reorganisation proceedings. The declaration of bankruptcy or the admittance of judicial reorganisation generate the following effects:
- the appointment of a judicial administrator who undertakes the role of examiner and court assistant, supervising the debtor's activity and reviewing the creditors' accounts. In bankruptcy proceedings, the judicial administrator also takes possession of the company's administration and liquidates the assets;
- the stay of legal actions and enforcement proceedings against the debtor for 180 days, except for tax claims, actions that demand an illiquid amount and judicial proceedings concerning claims that are not affected by the debtor's bankruptcy or judicial reorganisation; and
- with respect to tax collection claims and claims that are not affected by a debtor's bankruptcy or judicial reorganisation, the seizure of the debtor's assets or any judicial proceedings that may interfere with the debtor's possession of assets that are essential to the continuity of the business activity are suspended and subject to the bankruptcy court's assessment.
In bankruptcy proceedings, the judicial administrator may choose to satisfy existing contracts if they are financially viable to the estate and may possibly benefit the company as a going concern, maximising its value. In judicial reorganisation proceedings, all existing contracts are normally fulfilled by the company's management, unless they are beyond its economic capacity. In both cases, there is controversy regarding the possibility of the other party terminating the contract based on an ipso facto provision, with scholars recognising that such a provision is void and case law analysing the singularities of each situation to determine whether to nullify this provision.
In judicial reorganisation proceedings, the sale of assets by the company's management is restricted. The sale of fixed assets after the filing requires either the authorisation of the bankruptcy court or a specific provision in the reorganisation plan, to be approved by the creditors.
Creditors' claims in insolvency proceedings
Brazilian bankruptcy law provides for particular treatment in respect of secured and unsecured claims. Secured claims may be divided into two categories:
a claims held by creditors with property interests that are in the possession of the debtor, such as chattel mortgage and capital or operating leases. These claims are not affected by bankruptcy or judicial reorganisation proceedings; and
- claims that are secured by certain assets of the debtor's estate, such as pledges and mortgages. These claims are affected by bankruptcy and reorganisation proceedings:
- in bankruptcy, the creditor is entitled to the satisfaction of his or her claim with the earnings from the sale of the secured asset; and
- in judicial reorganisation, the creditor may be subject to a haircut, a deferral of payment or even the suppression of the security, if approved by the creditors.
Unsecured claims are classified as follows:
- claims arising from the labour legislation or resulting from work-related accidents, with the highest priority in bankruptcy and judicial reorganisation;
- tax claims, administrative fines and other penalties imposed by government entities. These claims are subject to bankruptcy, but not to judicial reorganisation proceedings;
- claims with special and general privileges established by law;
- claims that have no preference or privilege whatsoever. This class usually encompasses the vast majority of claims in bankruptcy or judicial reorganisation proceedings; and
- subordinate claims, which arise from contractual agreements or legal provisions, or are held by creditors who are also shareholders, partners or executives without an employment relationship.
Unsecured claims are affected by bankruptcy and are discharged with the proceeds from the sale of the estate's assets. In judicial reorganisation, too, all these claims are affected, except for tax claims. Certain other claims are unimpaired by bankruptcy or judicial reorganisation proceedings, such as administrative expenses, post-petition claims, advances on foreign exchange contracts and certain bank loans relating to export finance.
The main purpose of judicial reorganisation proceedings is to protect the company and stimulate economic activity, providing the debtor with the tools needed to overcome its economic and financial crisis, to maintain the production source, the employment of workers and the interests of creditors. Usually, a company will only be admitted into judicial reorganisation if it demonstrates its economic viability. Once a company is considered viable, all efforts are made to preserve it and ensure its continuity.
Although it is recommended that companies resort to judicial reorganisation at the first sign of financial hardship, it is not uncommon for companies to use this instrument as a way to postpone bankruptcy, dragging creditors and stakeholders down a long and tortuous road paved with little economic activity, plummeting revenue and even more debt.
However, extrajudicial reorganisation is a measure used by companies that intend to limit the reputational troubles caused by the filing of a judicial reorganisation. By nature, it is an agreement achieved by direct negotiation with certain creditors – commonly the most important and relevant creditors. The result is an extrajudicial reorganisation plan that is submitted to the bankruptcy court for validation. For a long time since the enactment of the Bankruptcy and Reorganisation Act, this instrument was seldom used by companies owing to the lack of legal discipline, legal studies and case law; only recently has extrajudicial reorganisation gathered interest from companies undergoing financial difficulty.
Finally, the main objectives of bankruptcy proceedings are to maximise the value of assets and liquidate the company, using the proceeds from the sale to pay the company's creditors. Whenever possible, the judicial administrator will sell the company as a whole, transferring to the buyer all, or most of, the assets, the workforce and existing contracts. This allows the business to continue, without the responsibility of paying the estate's creditors, which will receive the gains from the sale in the order of priority.
iii Insolvency procedures
Extrajudicial reorganisation proceedings
Considering its transactional nature, extrajudicial reorganisation proceedings begin with the company submitting a reorganisation plan to the bankruptcy court for validation. Alongside the reorganisation plan, the company must present a commitment term for each creditor that approves the plan. If all creditors encompassed by the plan approve it, the bankruptcy court may validate the plan, as long as it fulfils the other legal requirements. However, the plan may be validated if at least three-fifths of the encompassed creditors approve it, in which case the plan will bind the remaining the creditors that did not approve it.
Once the plan is presented to the court, the bankruptcy judge shall order the release of a public notice so that all creditors may submit their objection, if any, including those that are not affected by the extrajudicial reorganisation plan. With the resolution of any potential objection, the bankruptcy court must validate the plan, after which it will start taking effect.
It should be emphasised that not all claims may be impaired by the extrajudicial reorganisation plan, such as labour-related claims, tax claims, claims held by creditors with property interests that are in possession of the debtor, advances on foreign exchange contracts and certain bank loans relating to export finance.
Judicial reorganisation proceedings
In judicial reorganisation proceedings, the debtor remains in possession of its business, maintaining shareholders' powers and prerogatives, barring a few occasions when the bankruptcy court, its creditors and even the debtor may replace the company's management. When a company is under financial duress, it may file for judicial reorganisation hoping to stay any payments to its creditors and renegotiate its debts.
At the time of filing, there is no judicial reorganisation plan and there are usually very few ongoing negotiations with creditors. Once the petition is filed, all existing claims, except for those mentioned previously, are subject to the effects of judicial reorganisation and any payments regarding such debts are halted. These claims will be paid in accordance with the provisions of the judicial reorganisation plan and may suffer a haircut, have lower interest rates and longer payment schedules, for example.
The Bankruptcy and Reorganisation Act requires the following of a company that is filing for judicial reorganisation:
- the petition must explain the causes of the company's financial hardship and the grounds for restructuring;
- the company must submit financial statements for the current year and the past three years, its cash flow report and projection, and its bank statements;
- the petition must also be accompanied by a list of creditors and employees;
- the controlling shareholders and management must provide a list of their private assets; and
- the company must present a list of any existing protests of titles and legal actions.
The request is reviewed by the bankruptcy court and, if all legal requirements are fulfilled, the company is admitted into judicial reorganisation. A judicial administrator is appointed, but it does not hold managing powers; it works as a court examiner, reviews the list of creditors, provides an independent evaluation of the debtor's accounts and is heard on almost every subject regarding the proceedings. At the same time, legal actions and enforcement proceedings against the debtor are stayed for 180 days, and there is a suspension of the statute of limitations.
Although much of the debtor's corporate information becomes public after the filing, the judicial reorganisation proceeding does not interfere with the company's day-to-day matters, considering that the debtor is still running the business and relatively free to make business-oriented decisions. It must ask the court's permission to sell fixed assets but does not need any previous authorisation to run the business as a whole.
After the company is admitted into judicial reorganisation, its management and executives negotiate the terms of the reorganisation plan with its main creditors and submit the plan for discussion and voting at the general creditors' meeting, if need be. The plan is filed by the debtor before the general creditors' meeting, and the creditors may present an objection to the plan before the vote.6 Although the Bankruptcy and Reorganisation Act provides that only the debtor may submit a reorganisation plan to the creditors, it is common for creditors to submit modifications to the plan at the general creditors' meeting, to be reviewed, discussed and voted by the creditors – however, any changes need to be approved by the debtor before they can replace the original plan's provisions.
The means of reorganisation that serve as a foundation for the company's recovery are listed by the Bankruptcy and Reorganisation Act, but not to the exclusion of other possible means of rehabilitation. The following are only examples of the methods used most often:
- modification of the contractual framework, which may include an extension in the payment schedule, an equalisation of financial charges and interest rates, and, most often, a haircut on the face value of the claims;
- the sale of assets, be it a partial sale of the company's assets, a lease or the sale of a complete isolated productive unit;
- a conversion of debt to equity in the company; and
- corporate restructuring, with a transfer of the company's control, a total or partial spin-off, a merger consolidation, or, simply, the replacement of its executives.
If none of the creditors opposes the reorganisation plan presented by the debtor, the court will grant the company's judicial reorganisation. However, if at least one creditor objects, a general creditors' meeting must be held to discuss and vote on the plan. There are two possible outcomes from this: if the plan is approved (by double majority – heads and volume of claims), the bankruptcy court simply confirms the plan; if the plan is rejected, the bankruptcy court may allow the debtor to submit an alternative plan, declare the debtor's bankruptcy or confirm the plan through cramdown.
There are specific requirements that need to be met for a Brazilian bankruptcy court to confirm a reorganisation plan via cramdown: (1) approval of the plan by creditors representing more than half the value of all claims present in the meeting, regardless of class; (2) approval of two classes of claims, or at least one class if there are only two classes; and (3) within the class that rejected the plan, the approval of at least one-third of its creditors.
The approval and confirmation of the reorganisation plan binds all creditors (whether they have approved the plan or not) and results in the novation of the impaired claims. The debtor must remain under supervision of the court and the judicial administrator for two years, after which it may request the court to terminate the judicial reorganisation proceeding, if all the plan's obligations, within that period, are duly satisfied. If any obligations are defaulted, the bankruptcy court may declare the debtor's bankruptcy, though recently courts have allowed for a debtor to submit an amendment to the plan for creditor approval, before declaring the company bankrupt.
With an order of bankruptcy, a judicial administrator is appointed to replace the company's executives and management. The judicial administrator takes control of the company and seizes all its assets for liquidation at a later date. If the company still performs a business activity, the judicial administrator may choose to preserve it to generate more proceeds and maximise the value of the company's assets when sold.
Following the seizure of the debtor's assets, they are listed and evaluated by the judicial administrator. The evaluation may consider each asset individually (for instance, a piece of machinery inside a factory) or bundled together in an isolated productive unit (the factory and everything needed for it to operate), whichever generates more resources to pay the creditors.
Once the assets have been evaluated, the judicial administrator moves on to the judicial sale of the assets, under the bankruptcy court's supervision. There are three different procedures that may be adopted: (1) a public auction of the assets; (2) a sale through sealed proposals, in which the bids are submitted to the bankruptcy court and are opened by the judge and judicial administrator on a designated day, time and place; and (3) a two-stage auction, with the submission of sealed proposals first, then an auction by oral bidding, in which only interested buyers who have submitted proposals of no less than 90 per cent of the highest bid may participate.
The winning bidder will acquire the property without any risk of succession of debts or other obligations originating from the asset or the debtor.
After the sale of assets, the judicial administrator shall distribute the proceeds to the creditors in accordance with the classification of their claims. If all creditors are paid in full (which is very unusual), the remaining balance is transferred to shareholders, pro rata. The judicial administrator then presents a report of its accounts to the bankruptcy court with all necessary documents, which the judge does or does not accept. If the accounts are not accepted, the judicial administrator is responsible for indemnifying the debtor against any damages caused. If the accounts are accepted, the judicial administrator submits a final report, and the court terminates the bankruptcy proceeding.
Notwithstanding, the debtor is only discharged of its obligations (1) if all claims are satisfied completely, (2) if at least half of the unsecured claims without preference or privilege have been paid, (3) five years after termination of the proceeding, if the debtor, its controlling shareholder or its executives have not been convicted for committing a crime provided by the Bankruptcy and Reorganisation Act, and (4) 10 years after termination of the bankruptcy proceeding, in the case of conviction.
iv Starting proceedings
Judicial and extrajudicial reorganisation proceedings
Only a company may file for judicial or extrajudicial reorganisation (its creditors are not legally allowed to do so), and provided it:
- has been in activity for at least two years prior to the filing;
- has not been declared bankrupt or, if it has, was discharged by a final decision of the bankruptcy court;
- has not been granted judicial reorganisation in the previous five years;
- has not been granted special judicial reorganisation (for small business entities) in the previous eight years; and
- does not have an executive or manager who has been convicted of any crimes provided by the Bankruptcy and Reorganisation Act.
There are a few entities that are not encompassed by the Bankruptcy and Reorganisation Act and may not file for judicial or extrajudicial reorganisation, such as government entities, public or private financial institutions, credit unions, insurance companies, healthcare companies, supplementary pension companies, cooperatives, associations and natural persons.
A judicial or extrajudicial reorganisation proceeding may involve one company or a group of companies. As regards the latter, bankruptcy courts have allowed for a substantive consolidation (and not just a procedural consolidation) of the entire group, with all its assets responsible for satisfying all its debts, as if it were a single company. Thus, instead of an individual reorganisation plan for each company, separate lists of creditors and separate general creditors' meetings, there is only one reorganisation plan, one list of creditors and one general creditors' meeting.
The commencement of bankruptcy proceedings may be a result of a request from a debtor or one of its creditors. When a debtor files for bankruptcy, the petition must be accompanied by essential information and documents (much like a petition filed for judicial reorganisation):
- the company must submit a special financial statement (made exclusively for the bankruptcy petition), as well as financial statements for the past three years, a cash flow report and projection, and its bank statements;
- the company's articles of incorporation, with the indication of its shareholders, their addresses and a list of their assets;
- a list of the company's assets and properties, with estimated values and the necessary documents to prove ownership;
- a list of the company's executives and management for the previous five years, their positions, their addresses and their equity interest in the company;
- an updated list of creditors; and
- the company's books and accounts, as required by law.
A creditor has the burden of proof regarding a company's insolvent state and the necessity for a declaration of bankruptcy by the court. A company's insolvency may be proved by demonstrating that:
- without relevant reason, the company defaulted on an obligation corresponding to more than 40 minimum wages at the time of the request;
- in an enforcement procedure proposed by the creditor, the company did not pay its debt or did not offer any of its assets as attachment, within the legal time frame (what is commonly known as a frustrated enforcement procedure); and
- the company committed any of the following acts, among others, except in the case of judicial reorganisation:
- a hasty liquidation of the company's assets;
- the fraudulent transfer of assets to third parties;
- the transfer of the whole company without the consent of its creditors and without enough assets to satisfy its debts; and
- a default on any obligation arising from the reorganisation plan.
However, the company may stay the bankruptcy proceeding if it deposits the amount owed, or if it files for judicial reorganisation, within the legal time frame for submitting its defence.
v Control of insolvency proceedings
Bankruptcy, judicial reorganisation and extrajudicial reorganisation proceedings are held before the bankruptcy court where the company's main establishment is situated, or where the company conducts most of its business. In large cities, such as São Paulo and Rio de Janeiro, there are specialised bankruptcy courts, but in smaller cities, common civil courts hold jurisdiction.
The bankruptcy court has power to determine whether the company fulfils the requirements for its admittance into judicial or extrajudicial reorganisation; if the reorganisation plan meets the legal requirements and, with the approval of the majority of creditors, grants judicial reorganisation; analyses requests for bankruptcy and, if need be, declares a company bankrupt; and if the proceedings may be terminated.
It is also an attribution of the bankruptcy court to appoint a judicial administrator in the case of bankruptcy, or judicial reorganisation, and to oversee the proceedings. During the proceedings, the bankruptcy court holds hearings and decides on relevant matters involving the debtor's assets and the creditors' claims.
In turn, the judicial administrator appointed by the bankruptcy court performs different roles depending on the type of proceeding. In a judicial reorganisation, the judicial administrator supervises the debtor's activities, draws up a list of claims based on the list submitted by the debtor and the declarations provided by the creditors, presents its opinion in matters relevant to the proceeding and prepares monthly reports. In a case of bankruptcy, the judicial administrator replaces the debtor's management, initiates an inventory and evaluation of its assets, promotes the sale of the assets and pays the creditors, in accordance with their classification.
vi Special regimes
Financial institutions and insurance companies are subject to extrajudicial intervention and bankruptcy proceedings undertaken by the Brazilian Central Bank and are regulated by Statute No. 6,024, dated 13 March 1974. However, the trustee appointed by the Brazilian Central Bank, with its authorisation, may commence a bankruptcy proceeding that is governed by the Bankruptcy and Reorganisation Act.
Electrical power companies, as public service providers, are governed by a special regime introduced most recently by Statute No. 12,767, dated 27 December 2012. The National Electrical Power Agency intervenes in the company in distress, and its shareholders propose a reorganisation plan for the Agency's approval. However, this special regime is not applicable to the holding company, which is still subject to the Bankruptcy and Reorganisation Act.
vii Cross-border issues
There is currently no legislation regarding transnational insolvency, ancillary proceedings and cross-border issues in Brazil. The Bankruptcy and Reorganisation Act adopts the principle of territorialism, which determines the jurisdiction of the country where the company's assets are situated. In contrast, the principle of universalism (embraced by the UNCITRAL Model Law on Cross-Border Insolvency) asserts that insolvency proceedings should commence in the jurisdiction of the company's centre of main interests and encourages cooperation between different countries.
Although Brazil has not yet passed an amendment to the Bankruptcy and Reorganisation Act based on the Model Law, case law has allowed for judicial reorganisation proceedings to encompass foreign companies, as long as they are part of a larger economic group with its centre of main interests in Brazil. Examples of this were the submission of foreign companies to the judicial reorganisation proceedings of Constellation Group,7 OGX Group,8 Sete Brasil Group,9 OAS Group10 and Oi Group,11 all carried out by bankruptcy courts in Brazil. Even without any provision in the Bankruptcy and Reorganisation Act regarding cross-border insolvency, Brazilian courts have cooperated with foreign courts and received their assistance when needed.
II INSOLVENCY METRICS
Between 2004 and 2014, Brazil's gross domestic product (GDP) has grown annually by an average of 3.72 per cent (with its peak reaching 7.5 per cent in 2010). However, after the beginning of Operation Car Wash in early 2014, Dilma Rousseff's victory in the 2014 presidential election and the decline in market value of several commodities (particularly petroleum and iron ore), Brazil entered into a deep recession, with its GDP falling by 3.8 per cent in 2015 and by another 3.6 per cent in 2016.12
In roughly the same time frame, the economy's base interest rate (SELIC) was raised by the Brazilian Central Bank from 7.25 per cent in 2013 to 14.25 per cent in 2015,13 in an attempt to slow down the rate of inflation (10.67 per cent in 2015).14 Unemployment rates skyrocketed from 4.8 per cent in 2014 to 13.7 per cent in early 2017.15
The economic crisis deepened with the revelation that several companies colluded with government officials in elaborate corruption schemes, involving state-controlled companies, to divert funds from government contracts. This worsened the political climate and culminated with President Dilma Rousseff's impeachment in mid 2016. The presidency was handed over to Vice President Michel Temer, who took power with a discourse of financial austerity and plans to reinvigorate the economy, with the renewal of the economic cabinet. Markets responded well and the Brazilian Stock Exchange rose from 51,804 points on 13 May 2016 to 87,652 points on 26 February 2018, even though President Temer was implicated in the large corruption scheme unearthed by Operation Car Wash on 17 May 2017 (which caused the Brazilian Stock Exchange to plunge 8.8 per cent in a single day).16
In the 2018 election, Jair Bolsonaro was elected president with a liberal economic agenda led by Economy Minister Paulo Guedes. The first radical change that the government and Congress proposed was the Social Security Reform. Although it had its ups and downs, on 7 August 2019, after two rounds of voting, the House of Representatives approved the Proposed Amendment to the Constitution, which may reduce the social security deficit by 933.5 billion reais over the course of 10 years. The proposal still awaits a vote in the Senate, before the Constitution is amended. The Social Security Reform is expected to be the first of a series of reforms intended to usher in a new period of economic growth, create new jobs and attract a wave of investments in several areas of the Brazilian economy. In the days immediately before the first round of voting by the House of Representatives, the Brazilian Stock Exchange reached an historic high of 106,650 points (10 July 2019).
Brazil's GDP grew by 1 per cent in 2017, 1.1 per cent in 2018 and is expected to grow by 0.83 per cent in 2019. The rate of inflation in 2017 was 2.95 per cent, 3.75 per cent in 2018 and projected to be 3.71 per cent in 2019. In light of this, the base interest rate was lowered to 6 per cent on 31 July 2019 and is expected to be lowered again later in the year.17
All this political and financial turbulence caused an increase in the number of bankruptcy and reorganisation proceedings in Brazil, according to the table that follows. A record 1,863 companies filed for judicial reorganisation in 2016, more than twice the number verified two years previously. The information in this table takes account of proceedings commenced after the Bankruptcy and Reorganisation Act passed into law in 2005.
|Year||No. of bankruptcy proceedings1||Variation||No. of judicial reorganisation proceedings2||Variation|
This table shows a great leap in judicial reorganisation proceedings after the sub-prime mortgage crisis in 2008–2009. In 2015 and 2016, another gradual increase is noticeable, because of the deep recession that Brazil went through. Since bankruptcy is considered the last resort for executives and management, the number of bankruptcy proceedings does not show a growth, but rather a decrease since the enactment of the Bankruptcy and Reorganisation Act in 2005, which offered companies the possibility of commencing reorganisation proceedings to ensure their recovery.
In the year from April 2018 to April 2019, 853 small businesses, 329 medium-sized companies and 212 large companies have filed for judicial reorganisation; and 657 small businesses, 223 medium-sized companies and 74 large companies have been declared bankrupt. Although this information shows the difficult situation being faced by Brazilian companies, there is hope for a new cycle of economic growth, with the government's commitment to propose important reforms and the ability of Congress to pass them.
III PLENARY INSOLVENCY PROCEEDINGS
i Odebrecht Group
On 17 June 2019, Odebrecht Group, one of Brazil's largest conglomerates with businesses in the fields of engineering, construction, chemicals and petrochemicals, among others, filed its petition for judicial reorganisation. It is considered the largest judicial reorganisation in Brazilian history, with a total debt of 83.6 billion reais, considering intercompany obligations. According to the filing, Brazil's tough economic recession and the consequences of the corruption scheme revealed by Operation Car Wash were the main reasons for the judicial reorganisation request.
The proceeding is still in its early stages, and the reorganisation plan has not yet been filed, but reports indicate that it may restructure part of its debt by issuing a perpetual domestic profit-sharing bond, which would entail the payment of dividends, and a portion of the proceeds from asset sales – most notably, Odebrecht Group's ownership of a 38 per cent stake in Braskem, one of the largest petrochemical companies in the world. A challenge lies ahead: the Braskem shares were previously given as collateral to financial institutions, which would be entitled to sell the shares and pay themselves. However, an order was granted by the bankruptcy court staying any enforcement measures by the creditors; this order was later suspended by an injunctive relief issued by the São Paulo Court of Appeals. The discussion should continue and may become an important precedent for similar situations in the future.
ii Constellation Group
The Constellation Group, formerly known as Queiroz Galvão Óleo e Gás, is an oil and gas services company that operates drill ships, both onshore and offshore. On 6 December 2018, the Constellation Group filed for judicial reorganisation after pre-negotiating the support of several of its creditors via a plan support agreement (totalling 48.3 per cent of secured claims and 60.2 per cent of unsecured claims), to restructure its debt of 5.75 billion reais. Since the first signs of financial deterioration, Constellation Group has been working with external financial and legal advisers in Brazil and abroad; their assistance in negotiating with creditors and the evaluation of viable alternatives for recovery has been essential to the success of the reorganisation process.
Owing to the transnational services it provides, the Constellation Group encompasses 14 foreign companies as well as the four companies incorporated in Brazil. A judicial reorganisation of this complexity required a coordinated effort, with the judicial reorganisation filed in Brazil, alongside a Chapter 15 filing in the US Bankruptcy Court and a Joint Provisional Liquidation in the British Virgin Islands. On 9 May 2019, the US Bankruptcy Court recognised Brazil as the centre of main interests for seven of the nine foreign entities party to the Chapter 15 filing and granted recognition as a foreign main proceeding – the US Bankruptcy Court did not issue an order regarding the other three entities until the Brazilian court decides whether they should be included in the Brazilian judicial reorganisation proceeding.
On 1 July 2019, the Brazilian court confirmed the reorganisation plan approved by a general creditors' meeting held on 28 June 2019.
iii Oi Group
Oi Group is Brazil's largest telecommunications company. Several events paved the way to the group's judicial reorganisation proceeding, including, but not limited to: changes in consumer habits over time; excessive regulation over the telecommunications sector, which has forced Oi to invest in less relevant markets; high interest rates; and substantial enforcement of regulatory fines by the Brazilian Telecommunications Agency.
In parallel with the judicial reorganisation proceeding in Brazil, the Dutch Court of Appeals has declared the bankruptcy of two Netherlands-based companies that are part of Oi's conglomerate and subject to the Brazilian reorganisation proceeding.
The group's total debt subject to the judicial reorganisation proceeding exceeds 65 billion reais, which makes it the second largest reorganisation proceeding in Brazilian history. There is also a substantial number of creditors – more than 90,000. On 20 December 2017, a general creditors' meeting approved the reorganisation plan, with the possibility of the creditors owning up to 75 per cent of the company, through a conversion of debt to equity. The plan was subsequently confirmed by the US Bankruptcy Court of the Southern District of New York and the Dutch court overseeing the bankruptcy proceeding of the foreign subsidiaries, namely Oi Brasil Holdings Cöoperatief UA (FinCo) and Portugal Telecom International Finance BV.
Oi has been carrying out its reorganisation plan and, on 15 January 2019, issued new common shares in a capital increase equivalent to approximately 337 million reais, subscribed by investors and investment funds.
iv Eneva Group
Eneva, previously known as MPX Energia S/A, is an energy company that focuses on power generation, as well as oil and gas exploration and production. It is considered one of the sector's main players.
The company has accumulated debts with financial institutions through project finance operations. Eneva has organised its expansion by using special purpose companies to concentrate its operational activity, but because of difficult economic conditions, the group was not able to fulfil its plans to build power plants. When these subsidiaries did not generate the estimated revenue, Eneva could not satisfy its obligations to financial institutions. Furthermore, a significant increase in the price of electric energy and economic instability were also deciding factors that contributed to the filing of the judicial reorganisation proceeding in December 2014 by the Eneva Group. The special purpose companies that are party to the government contracts for energy production were not involved in the proceeding.
After a very successful restructuring process, Eneva's judicial reorganisation proceeding was terminated roughly 19 months after its filling and 11 months after the decision that confirmed the reorganisation plan. This time frame is well below the two-year minimum supervision period and is considered one of the most successful judicial reorganisation cases since the enactment of the Bankruptcy and Reorganisation Act.
On 21 June 2019, Eneva disclosed to its shareholders and the market in general that it has paid 100 per cent of the unsecured creditors ahead of the schedule set forth by the reorganisation plan.
v Triunfo Group
Triunfo Group is one of Brazil's largest infrastructure conglomerates. The recent economic instability is one of the main reasons for the financial distress suffered by the group, which has had a substantial effect on the infrastructure sector and on credit costs. In addition, the Brazilian National Bank of Investment (BNDES) filed enforcement claims against the group's companies to receive a payment of more than 980 million reais. These factors forced Triunfo Group to negotiate with its creditors and file for extrajudicial reorganisation, to restructure its debts with financial institutions. The group's debt covered by its extrajudicial reorganisation proceeding amounts to nearly 2.5 billion reais.
The group's restructuring proceeding is one of the largest and most significant extrajudicial reorganisation cases, considering its total debt and the participation of important creditors, such as BNDES. On 9 February 2018, the São Paulo bankruptcy court confirmed the extrajudicial reorganisation plan.
Although the ruling is the object of pending appeals, they did not stay the implementation of the extrajudicial reorganisation plan. Thus, in compliance with the plan, the company has conducted a reverse Dutch auction in which the creditors had the opportunity to propose haircuts on their own claims. At the end of this auction, the debt restructuring process proved to be very successful, resulting in an average haircut of 55.2 per cent on the group's debts.
Currently, Triunfo Group awaits the rejection of the pending appeals against the extrajudicial reorganisation plan by the São Paulo Court of Appeals.
IV ANCILLARY INSOLVENCY PROCEEDINGS
Ancillary insolvency proceedings are not mentioned by the Bankruptcy and Reorganisation Act, but despite the lack of legal provisions, case law in recent years has allowed the dialogue between Brazilian bankruptcy courts and foreign courts, mostly in cases in which the foreign subsidiary is part of a larger economic group with its centre of main interests in Brazil. Examples of this were the submission of foreign companies to the judicial reorganisation proceedings of Constellation Group, OGX Group, Sete Brasil Group, OAS Group and Oi Group, as discussed in Section III.
A major discussion involves the Dutch subsidiaries part of the Oi Group, namely FinCo and PTIF: the Dutch court has declared these companies bankrupt, and the Brazilian bankruptcy court handling Oi's judicial reorganisation proceeding has not acknowledged this ruling. Further, the Brazilian court imposed a fine in the event that the trustee in the Dutch proceedings fails to respect its decision. In light of this, the trustee requested the recognition of FinCo's declaration of bankruptcy by the US Bankruptcy Court of the Southern District of New York, the same court that signed off on Oi's Chapter 15 protection (recognising the judicial reorganisation before the Brazilian court as the foreign main proceeding). The US Bankruptcy Court later acknowledged that the Dutch court and the trustee should comply with the Brazilian bankruptcy court's rulings.
Once the reorganisation plan was approved and confirmed by the Brazilian court at the end of 2017, the Dutch court and the US Bankruptcy Court also confirmed the plan, demonstrating a remarkable level of cooperation between different jurisdictions, with the same goal: the successful recovery of the ailing telecommunications conglomerate.
In Constellation Group's judicial reorganisation, as previously mentioned, 14 entities incorporated abroad petitioned in Brazil alongside four Brazilian entities. The Brazilian court's jurisdiction was questioned, and the Rio de Janeiro Court of Appeals ruled that any foreign entities with assets in national territory are subject to Brazilian jurisdiction. Notwithstanding, a special appeal is still pending before the Superior Court of Justice, which is expected to decide whether the notion of centre of main interests may be adopted in light of Brazilian law (or lack thereof).
One of the many proposals to boost economic growth is an amendment to the Bankruptcy and Reorganisation Act – the Draft Bill No. 10,220 – introduced to the Brazilian House of Representatives on 10 May 2018. The first draft was the result of a working group put together with several respected scholars and tasked with the objective of updating the current legislation. Unfortunately, this first draft has been significantly modified by the Ministry of Economy, mainly to strengthen the tax authority's privileges in judicial reorganisation proceedings.
However, the Draft Bill proposes some relevant changes to the current legislation:
- financing would be facilitated tremendously with several provisions allowing the encumbrance of assets after the filing for judicial reorganisation;
- the Bankruptcy and Reorganisation Act would no longer separate creditors into different classes in judicial reorganisation proceedings. The debtor would be able to do so in the reorganisation plan, dividing creditors in accordance with their interests and similarities;
- secured claims held by creditors with property interests that are in possession of the debtor, such as chattel mortgage and capital or operating leases, would be affected by judicial or extrajudicial proceedings;
- the termination of contracts based on an ipso facto provision would not be allowed, and such a clause would be legally considered void; and
- the termination of the judicial reorganisation proceeding would occur at the same time it is granted.
One of the most important changes in the Bankruptcy and Reorganisation Act would be the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, with its mechanisms for international cooperation, expressly permitting plenary insolvency proceedings at the centre of main interests and ancillary proceedings where the debtor has foreign affiliates. Nevertheless, this draft of the Bill still needs to be deliberated in both the House of Representatives and the Senate (where it could be subject to any number of changes) and then passed into law, with the President's sanction.
Although the Draft Bill has almost been forgotten, the Special Treasury Secretary (part of the Ministry of Economy) has announced that the government will propose structural changes to the current bankruptcy and reorganisation regimes.
It is also relevant to mention that, because of Brazil's economic instability, as has been discussed, as well as the increase in the number of judicial reorganisation proceedings, creditors seem more open to directly negotiating their claims with companies in debt. This creates the possibility of a greater number of extrajudicial reorganisation proceedings, which is seen by stakeholders as a way of avoiding the negative reputational effects of judicial reorganisation proceedings.
1 Mauro Teixeira de Faria and Rodrigo Saraiva Porto Garcia are partners at Galdino & Coelho Advogados.
2 Statute No. 11,101, dated 9 February 2005, known as Lei de Recuperação de Empresas e Falências, latest amendment Provisional Measure No. 881/2019.
3 Statute No. 10,406, dated 10 January 2002, latest amendment Provisional Measure No. 881/2019.
4 Statute No. 5,869, dated 11 January 1973, mostly revoked by Statute No. 13,105/2015, with the exception of the provisions regarding insolvency proceedings for natural persons, effective until specific legislation is passed.
5 Statute No. 6.404, dated 15 December 1976, latest amendment Provisional Measure No. 881/2019.
6 The debtor must ensure that the plan is economically viable, presenting an economic and financial evaluation based on the company's assets and projections.
7 Amaralina Star Ltd, Brava Star Ltd, Lone Star Offshore Ltd, Gold Star Equities Ltd, Olinda Star Ltd, Laguna Star Ltd, Alpha Star Equities Ltd, Snover International Inc, Lancaster Projects Corp, Constellation Services Ltd and Constellation Overseas Ltd incorporated in the British Virgin Islands, Star International Drilling Ltd incorporated in the Cayman Islands, Arazi SÀRL and Constellation Oil Services Holding SA incorporated in Luxembourg.
8 OGX International GmbH and OGX Austria GmbH HSBC CTVM S/A incorporated in Austria.
9 Sete Holding GmbH, Sete International One GmbH and Sete International Two GmbH incorporated in Austria.
10 OAS Finance Ltd and OAS Investments Ltd incorporated in the British Virgin Islands and OAS Investments GmbH incorporated in Austria.
11 Oi Brasil Holdings Cöoperatief UA and Portugal Telecom International Finance BV incorporated in the Netherlands.