The Insolvency Review: Brazil

Insolvency law, policy and procedure

i Statutory framework and substantive law

General

Several statutes regulate insolvency and bankruptcy proceedings in Brazil. The most prominent legislative instrument is the Bankruptcy and Reorganisation Act,2 which regulates bankruptcy liquidation, 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 Bankruptcy and Reorganisation Act has recently been amended by Statute No. 14,112, dated 24 December 2020, which altered several of its provisions.

The purpose of bankruptcy liquidation proceedings is to liquidate a company's assets and distribute the proceeds to its creditors. However, judicial and extrajudicial reorganisation proceedings are intended to streamline a company's debt structure, allowing it to preserve its business activities, 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 confirmation by the court.

Other insolvency proceedings for specific persons are provided for by various laws:

  1. insolvency for natural persons is governed by certain provisions in the Brazilian Civil Code3 and the still effective provisions of the revoked Brazilian Code of Civil Procedure;4
  2. liquidation proceedings for limited liability companies are provided by the Brazilian Civil Code; and
  3. stock corporations are liquidated in accordance with the Stock Corporations Act.5

The scope of this chapter is limited to addressing bankruptcy liquidation and reorganisation proceedings in a broad manner, rather than approaching several specific subjects.

Main effects of bankruptcy and reorganisation proceedings

There are certain consequences to the commencement of bankruptcy liquidation or judicial reorganisation proceedings. The declaration of bankruptcy or the admittance of judicial reorganisation generate the following effects:

  1. 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 liquidation proceedings, the judicial administrator also takes possession of the company's administration and liquidates its assets;
  2. the stay of legal actions and enforcement proceedings against the debtor for 180 days ('stay period'), except for tax claims, actions that demand an illiquid amount and judicial proceedings concerning claims that are not affected by the debtor's bankruptcy or judicial reorganisation;
  3. with respect to tax collection claims, the bankruptcy court may find that the assets that have been seized and are essential to the continuity of the business activities and may order their substitution by other unencumbered and less relevant assets; and
  4. with respect to claims that are not affected by a debtor's 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 deemed essential to the continuity of the business activities by the bankruptcy court may be suspended.

In bankruptcy liquidation proceedings, the judicial administrator may choose to satisfy existing contracts if they are financially viable to the estate and may possibly benefit the business 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 commentators recognising that the provision is void and case law analysing the singularities of each situation to determine whether to nullify this provision.

Creditors' claims in insolvency proceedings

Brazilian bankruptcy law provides for particular treatment with respect to secured and unsecured claims. Secured claims may be divided into two categories:

  1. 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 liquidation or judicial reorganisation proceedings; and
  2. claims that are secured by certain assets of the debtor's estate, such as pledges and mortgages. These claims are affected by bankruptcy liquidation and reorganisation proceedings:
    • in bankruptcy liquidation, the creditor is entitled to the satisfaction of his or her claim with the earnings from the sale of the secured asset (if all other preferential claims have been paid, such as administrative expenses or workers' wages); 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 respective creditors.

Unsecured claims are classified as follows:

  1. claims arising from the labour legislation or resulting from work-related accidents;
  2. tax claims, administrative fines and other penalties imposed by government entities. These claims are subject to bankruptcy liquidation, but tax claims, however, are not subject to judicial reorganisation proceedings;
  3. claims that have no preference or privilege whatsoever, as well as claims with special and general privileges established by law (Statute No. 14,112/2020 has combined these claims in the same class in bankruptcy liquidation). This class usually encompasses the vast majority of claims in bankruptcy liquidation or judicial reorganisation proceedings; and
  4. 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, as long as the contracts have not been executed in market conditions (i.e. if the contracts are more favourable to the shareholders, partners or executives than a contract entered into by any other market player).

Unsecured claims are affected by bankruptcy liquidation 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 liquidation or judicial reorganisation proceedings, such as administrative expenses, DIP loans, post-petition claims, advances on foreign exchange contracts and certain bank loans relating to export finance.

ii Policy

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 for its preservation and the continuity of the business.

Although it is recommended that companies resort to judicial reorganisation at the earliest signs of financial hardship, it is not uncommon for companies to use this instrument as a way to postpone bankruptcy liquidation, dragging creditors and stakeholders down a long and tortuous road paved with little economic activity, plummeting revenue and even more debt.

Extrajudicial reorganisation, on the other hand, 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; extrajudicial reorganisation has recently gathered interest from companies undergoing financial difficulty and has been improved by the fresh modifications brought by Statute No. 14,112/2020.

Finally, the main objectives of bankruptcy liquidation 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 going concern, 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, if it fulfils the other legal requirements. However, the plan may be validated if more than 50 per cent of the encompassed claims approve the plan, in which case it shall bind the remaining creditors that did not approve its terms, according to the new quorum provided by Statute No. 14,112/2020; previously, confirmation of the plan required approval of three-fifths of the amount of claims.

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 objections, if any. With the resolution of any potential objection, the bankruptcy court may validate the plan, after which it will start taking effect.

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

Judicial reorganisation proceedings

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

At the time of filing, the debtor does not need to submit a judicial reorganisation plan, and there are usually very few ongoing negotiations with creditors. Once the petition is filed, all existing claims, except for those mentioned previously, 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 reduced 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:

  1. the petition must explain the causes of the company's financial hardship and the grounds for restructuring;
  2. 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;
  3. the petition must also be accompanied by a list of creditors and employees, as well as a list of the company's non-current assets;
  4. the controlling shareholders and management must provide a list of their private assets; and
  5. 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, renewable for another 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 non-current assets but does not need any previous authorisation to run the business.

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 is held, and creditors may present objections to the plan before the vote.6 Originally, the Bankruptcy and Reorganisation Act provided that only the debtor was allowed to submit a reorganisation plan, but with the modifications introduced by Statute No. 14,112/2020, creditors may also submit alternative reorganisation plans, once the debtor's exclusivity period expires or if the general creditors' meeting rejects the debtor's plan. It is also common for the debtor and its creditors to submit modifications to the plan at the general creditors' meeting, to be reviewed, discussed and voted by the creditors.

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:

  1. 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;
  2. 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 (usually, a piece of the company sold as a going concern);
  3. a conversion of debt to equity in the company; and
  4. 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 (on-site or virtually) 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 confirm the plan through cramdown, allow creditors to submit an alternative plan, or declare the debtor's bankruptcy liquidation.

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 more than 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 may remain under the supervision of the court and the judicial administrator for up to two years. If all the plan's obligations, within that period, are duly satisfied, the judicial reorganisation proceeding is terminated. If any obligations are defaulted within the supervision period, the bankruptcy court may declare the debtor's bankruptcy liquidation, though, recently, courts have allowed for a debtor to submit an amendment to the plan for creditor approval, before declaring the company bankrupt.

Bankruptcy liquidation proceedings

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. The judicial administrator is required to submit a liquidation plan within 60 days of appointment and carry out the sale of the estate's assets within 180 days of their seizure.

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 as a going concern (the factory and everything needed for it to operate), whichever generates more resources to pay 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. The assets may be sold through an English auction, or any other organised auction proceeding authorised by the bankruptcy court or approved by the creditors. The winning bidder will acquire the property free and clear 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 creditors according to the classification of their claims. If all creditors are paid in full (which is extremely unusual), the remaining balance is transferred to shareholders, pro rata. The judicial administrator then presents a report of its accounts to the bankruptcy court 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 liquidation proceeding.

Notwithstanding the above, the debtor is discharged of its obligations: (1) if all claims are satisfied completely; (2) if more than 25 per cent of the unsecured claims without preference or privilege have been paid; (3) three years after the declaration of bankruptcy liquidation; or (4) on the date the bankruptcy liquidation proceeding is terminated. Statute No. 14,112/2020 altered the situations under the debtor may be discharged to create an environment that privileges fresh start and fosters entrepreneurship.

iv Starting proceedings

Judicial and extrajudicial reorganisation proceedings

Only the debtor may file for judicial or extrajudicial reorganisation (its creditors are not legally allowed to do so), and provided it:

  1. has been in activity for at least two years prior to the filing;
  2. has not been declared bankrupt or, if it has, was discharged by a final decision of the bankruptcy court;
  3. has not been granted judicial reorganisation in the previous five years;
  4. has not been granted special judicial reorganisation (for small business entities) in the previous eight years; and
  5. 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, supplementary pension companies 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. Recently, Statute No. 14,112/2020 introduced provisions to specifically regulate the judicial and extrajudicial reorganisation of corporate groups, in procedural or substantive consolidation.

Bankruptcy liquidation proceedings

The commencement of bankruptcy liquidation proceedings may be a result of a request from a debtor or one of its creditors. When a debtor files for bankruptcy liquidation, the petition must be accompanied by essential information and documents (much like a petition filed for judicial reorganisation):

  1. the company must submit a special financial statement (made exclusively for the bankruptcy liquidation petition), as well as financial statements for the past three years, a cash flow report, and its bank statements;
  2. the company's articles of incorporation, with the indication of its shareholders, their addresses and a list of their assets;
  3. a list of the company's assets and properties, with estimated values and the necessary documents to prove ownership;
  4. 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;
  5. an updated list of creditors; and
  6. the company's books and accounts, as required by law.

If a creditor petitions for a company's bankruptcy liquidation, it has the burden of proof regarding the 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:

  1. without relevant reason, the company defaulted on an obligation corresponding to more than 40 minimum wages at the time of the petition;
  2. 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
  3. 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 liquidation, judicial reorganisation and extrajudicial reorganisation proceedings are held before the bankruptcy court where the company's principal place of business is situated, where the company conducts most of its business activities. 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, among other things: (1) determine whether the company fulfils the requirements for its admittance into judicial or extrajudicial reorganisation; (2) if the reorganisation plan meets the legal requirements and, with the approval of the majority of creditors, grant judicial reorganisation; (3) analyse requests for bankruptcy liquidation and, if need be, declare a company bankrupt; and (4) determine whether the proceedings may be terminated.

It is also an attribution of the bankruptcy court to appoint a judicial administrator in the case of bankruptcy liquidation, 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 the case of bankruptcy liquidation, 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, according to their classification.

vi Special regimes

Financial institutions and insurance companies are subject to extrajudicial intervention and liquidation 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 liquidation proceeding that is governed by the Bankruptcy and Reorganisation Act.

Electrical power companies, as public service providers, are governed by a special regime introduced 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. This special regime is not applicable to the holding company, which is still subject to the Bankruptcy and Reorganisation Act.

vii Cross-border issues

Through Statute No. 14,112/2020, Brazil has adopted the UNCITRAL Model Law on Cross-Border Insolvency and has a specific chapter to regulate cross-border insolvency proceedings. The Bankruptcy and Reorganisation Act originally adopted the principle of territorialism, which determines the jurisdiction of the country where the company's assets are situated. With the recent changes, territorialism gave way to mitigated universalism (embraced by the UNCITRAL Model Law on Cross-Border Insolvency), which asserts that insolvency proceedings should commence in the jurisdiction of the company's centre of main interests and encourages cooperation between different countries.

Before the enactment of Statute No. 14,112/2020, case law allowed for judicial reorganisation proceedings to encompass foreign companies, if they were 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, usually in tandem with Chapter 15 proceedings before US bankruptcy courts. 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. Now, the Bankruptcy and Reorganisation Act is better equipped to deal with cross-border cases like many other countries across the globe.

Insolvency metrics

Between 2004 and 2014, Brazil's gross domestic product (GDP) grew 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 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, Congress approved the Proposed Amendment to the Constitution, aimed at reducing the social security deficit in approximately 800 billion reais over the course of 10 years. The Social Security Reform was 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. However, the reformist agenda was abruptly interrupted by the covid-19 pandemic, and did not advanced in 2020 and 2021, while the legislative and executive branches focus on measures intended to reduce the impact of the global coronavirus crisis.

Brazil's GDP increased by 1 per cent in 2017, 1.1 per cent in 2018, 1.1 per cent in 2019, and it decreased 4.1 per cent in 2020, because of the covid-19 pandemic, and is expected to increase 5.26 per cent in 2021.17 The rate of inflation in 2017 was 2.95 per cent, 3.75 per cent in 2018, 4.31 per cent in 2019, 4.52 per cent in 2020, and is expected to be 6.11 per cent in 2021.18 In light of these changes, the base interest rate was lowered to 2 per cent on 20 January 2021 (a record low) and has since been increased to 3.5 per cent on 5 May 2021, with economists expecting an increase to 6.63 per cent by the end of 2021.19

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.

YearNo. of bankruptcy proceedings1 Variation (per cent)No. of judicial reorganisation proceedings2 Variation (per cent)
20052,876110
20061,977-31.25252129.09
20071,479-25.192696.75
2008969-34.4831215.98
2009908-6.30670114.74
2010732-19.38475-29.09
2011641-12.435158.42
20126887.3375746.98
20137468.4387415.45
2014740-0.80828-5.26
201582912.031,28755.43
2016721-13.031,86344.76
20179282.711,420-23.775
20189300.211,408-0.84
2019919-1.181,387-1,49
2020690-24.911,179-14.99
2021³241-3.21⁴371-21.23⁵
1 Total number of companies declared bankrupt.
2 Total number of judicial reorganisation requests.
3 The numbers account for bankruptcy and judicial reorganisation proceedings until May 2021.
4 Calculated considering the number of companies declared bankrupt until May 2021 (241) and the same time frame in 2020 (249).
5 Calculated considering the number of judicial reorganisation proceedings until May 2021 (371) and the same time frame in 2020 (471).
Source: www.serasaexperian.com.br

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 liquidation 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.

The information in the table does not show the even deeper economic recession caused by the covid-19 pandemic, which shall pose a greater challenge to Brazilian businesses and considerably raise the number of bankruptcy liquidation and judicial reorganisation proceedings in the coming months and years.

Plenary insolvency proceedings

i Odebrecht Group

On 17 June 2019, 20 companies of the Odebrecht Group, one of Brazil's largest conglomerates with businesses in the fields of engineering, construction, chemicals, and petrochemicals, among others, filed a 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 group filed the first version of its reorganisation plan on 26 August 2019, which proposed to creditors a debt exchange for profit-sharing bonds. The group filed new versions of the reorganisation plan, with similar proposals, on 19 December 2019 and on 20 March 2020. A virtual general creditors' meeting took place on 22 April 2020, in respect of the restrictions imposed by the government on public gatherings due to the covid-19 pandemic, in which six of the 20 companies approved substantive consolidation and a consolidated plan; six other companies did not approve substantive consolidation and voted to approve individual plans; and the eight remaining companies voted to postpone the meeting. After several postponements, five of the remaining eight companies approved their respective plans, and the remaining three companies have yet to approve a reorganisation plan, with creditors' meetings scheduled for 15 July 2021 and 26 August 2021.

After approval of the consolidated plan (encompassing six companies of the Odebrecht Group in substantive consolidation), certain creditors submitted interlocutory appeals to the São Paulo Court of Appeals. On 24 February 2021, when ruling on one of these appeals, the appellate court found that the consolidated plan filed by the six companies with the proposed payment through profit-sharing bonds was illiquid and did not allow creditors to know, ahead of time, how much they would receive. The appellate court ordered the companies to submit a new payment proposal within 60 days – an order that was suspended on 15 April 2021, pending judgment of the remaining appeals against the bankruptcy court's confirmation order for the consolidated plan.

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 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 before 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 eight 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 one of the entities until the Brazilian courts decide whether it 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. The covid-19 pandemic, with its effects on the oil and gas sector, led the group to reach an agreement with certain creditors to amend specific terms of its reorganisation plan, on two separate occasions (July 2020 and March 2021), without submitting a formal amendment to its plan and voting on its terms in a general creditors' meeting. However, the impacts and general toll of the covid-19 pandemic significantly altered the group's ability to continue executing its reorganisation plan, pushing the group to request the bankruptcy court to approve the suspension of the current plan and a deadline to submit an amendment to the plan for a formal vote. The bankruptcy court authorised the submission on 7 April 2021 and the Rio de Janeiro Court of Appeals subsequently ordered the submission of the plan within 90 days of the bankruptcy court's ruling, with the general creditors' meeting to be scheduled in the following 60 days.

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, namely Oi Brasil Holdings Cöoperatief UA (FinCo) and Portugal Telecom International Finance BV, and subject to the Brazilian reorganisation proceeding, according to a decision from the Brazilian bankruptcy court.

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 for the Southern District of New York and the Dutch court overseeing the bankruptcy proceeding of the foreign subsidiaries.

Because of unforeseen difficulties and over-optimistic projections (not entirely related to the coronavirus crisis), the reorganisation plan that was originally approved needed to be modified and, on 15 June 2020, an amendment to the plan was submitted by Oi Group. The amendment provides for the sale of relevant assets, to streamline the group's business and focus on more efficient and lucrative areas. On 8 September 2020, the group's creditors approved the amendment to the reorganisation plan, which was subsequently confirmed by the bankruptcy court, on 5 October 2020. To this date, Oi Group has raised 17.39 billion reais from asset sales, approved in its amended plan, and is expected to raise 20 billion more.

iv Samarco

On 9 April 2021, Samarco, an iron-ore joint venture between Vale and BHP Billiton, filed for judicial reorganisation to restructure 50.56 billion reais in debt, the third largest reorganisation proceeding in Brazil. The company was at the centre of an environmental disaster when a dam collapsed in the city of Mariana in 2015, resulting in the suspension of Samarco's operating licence; the company has resumed operations only recently and below capacity. The breaking point for the filing of judicial reorganisation was enforcement proceedings and lawsuits that would strangle the company's ability to meet its financial obligations.

A significant portion of the company's indebtedness stems from three international bonds, which prompted Samarco to file for Chapter 15 before the US bankruptcy court for the Southern District of New York, seeking recognition of the Brazilian judicial reorganisation as a plenary proceeding. On 13 May 2021, the US bankruptcy court found that the company satisfied all requirements for Chapter 15 and that there was sufficient evidence of the company's centre of main interests in Brazil.

On 10 June 2021, Samarco filed its reorganisation plan before the bankruptcy court, offering to pay creditors with a conversion of debt into equity and providing for a capital increase of 2 billion dollars. If creditors are unsatisfied with the conditions of the plan, Samarco's reorganisation proceeding may be the first high profile case wherein creditors submit an alternative plan, based on the new provisions included in the Bankruptcy and Reorganisation Act by Statute No. 14,112/2020. At the time of writing, the general creditors' meeting has not yet been scheduled.20

Ancillary insolvency proceedings

Ancillary insolvency proceedings have been recently introduced to the Bankruptcy and Reorganisation Act, with the enactment of Statute No. 14,112/2020 and the adoption of the UNCITRAL Model Law on Cross-Border Insolvency. Despite the lack of legal provisions before this reform, 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, mentioned in Section III.

A major discussion involved the Dutch subsidiaries part of the Oi Group, namely FinCo and PTIF: the Dutch court declared these companies bankrupt, and the Brazilian bankruptcy court handling Oi Group's judicial reorganisation proceeding did not acknowledge this ruling. Further, the Brazilian court imposed a fine if the trustee in the Dutch proceedings failed to respect its decision. In light of this, the trustee requested the recognition of FinCo's declaration of bankruptcy by the US bankruptcy court for 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. After Oi Group's amended reorganisation plan, the foreign courts may once again be called to confirm the amendment.

In Constellation Group's judicial reorganisation, 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, at the time the issue was presented, before the enactment of Statute No. 14,112/2020).

Trends

Aimed at boosting economic growth, Statute No. 14,112/2020 (formerly, Draft Bill No. 6,229) amended the Bankruptcy and Reorganisation Act and overhauled the 15-year-old legislation. 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 was significantly modified by the Ministry of Economy, mainly to strengthen the tax authority's privileges in judicial reorganisation proceedings. The final version of the Statute has been criticised and praised, with some relevant changes to the current legislation:

  1. DIP financing was tremendously facilitated with specific provisions allowing the encumbrance of assets after the filing for judicial reorganisation, as well as shareholder loans;
  2. specific requirements for procedural and substantive consolidation;
  3. the sale of assets in judicial reorganisation and bankruptcy liquidation has become more efficient and flexible, while providing more legal certainty and a safer environment for asset sales;
  4. although tax claims remain excluded from judicial reorganisation proceedings, new provisions aim to resolve such debts and allow the Treasury to reach an agreement with the debtor in much more favourable terms than provided by current legislation; and
  5. bankruptcy liquidation proceedings are greatly expedited and the debtor shall be discharged of its obligations in a much shorter time frame, compared to the several years-long bankruptcies currently ongoing in Brazil.

One of the most important changes in the Bankruptcy and Reorganisation Act was the previously mentioned 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.

During the legislative procedure for Draft Bill No. 6,229, and due to the covid-19 pandemic, legislators attempted to approve Draft Bill 1,379, with several emergency measures to aid businesses in distress, largely due to the economic impact of the restrictions imposed by the government to contain the spread of the disease. However, after more than 15 months from the start of the pandemic, the bill has not yet passed into law. Rather, Draft Bill No. 6,229 was amended to provide specific rules to foster mediation and allow the stay of enforcement proceedings before any formal insolvency proceeding is initiated, among other measures aimed at facilitating debt restructuring in trying times such as these – all of which were ultimately enacted in Statute No. 14,112/2020.

It is also relevant to mention that, because of Brazil's economic instability, as has been discussed, the increase in the number of judicial reorganisation proceedings in the past few years, as well as the covid-19 crisis, creditors seem more open to directly negotiating their claims with companies in debt. This creates the possibility of a greater number of workouts and extrajudicial reorganisation proceedings, the latter of which is seen by stakeholders as a way of avoiding the negative reputational effects of judicial reorganisation proceedings.

Footnotes

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.

3 Statute No. 10,406, dated 10 January 2002.

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.

6 The debtor must ensure that the plan is economically viable, presenting an economic and financial evaluation based on the company's assets and business 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.

15 ibid.

17 As of 16 July 2020.

18 As of 16 July 2020.

20 As of 16 July 2020.

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