Corporate Insolvency in Brazil

Author:

Thomas Benes Felsberg, Felsberg Pedretti Mannrich e Aidar Advogados e Consultores Legais, São Paulo 

The Brazilian rules applicable to corporate bankruptcy proceedings were reformed in 2005 with the enactment of Law 11,101, that revoked Decree Law 7,661 of 1945. Pursuant to the current legislation, an insolvent company may be liquidated under a falência proceeding, which may be initiated either by the debtor or by creditors. A company under financial distress may also file for a court-supervised reorganisation (recuperação judicial) or for a pre-packaged reorganisation (recuperação extrajudicial) with the purpose of restructuring its indebtedness before its liquidation is opened.

Should a liquidation proceeding be opened, the court appoints a trustee (administrador judicial) to administer the sale of the assets and the distribution of the proceeds to the creditors. The priority rule provided for by the law shall be observed, as follows: post-filing claims, labour claims (up to a limit of 150 minimum wages, roughly US$ 45,000, per creditor), secured claims (up to the limit of the collateral), tax claims, claims entitled to privilege, general unsecured claims, tax and administrative fines and subordinated claims (including claims held by shareholders of the debtor company). Creditors holding title to assets (including holders of claims secured by alienações fiduciárias em garantia and holders of ACC claims) are entitled to separate satisfaction and are not subject to the liquidation rules.

The reorganisation of companies (either court-supervised or pre-packaged) follows the structured bargaining model, based on negotiations between debtor and creditors: in these proceedings, a plan of reorganisation is proposed by the debtor, approved by the majority of creditors and confirmed by the court. Neither reorganisation proceeding encompasses tax claims and claims holding title to assets; thus, such claims are not subject to the effects of a confirmed plan of reorganisation.

Only the debtor is entitled to file for court-supervised reorganisation. Upon the opening of the proceeding, the court concedes a 180-day stay period during which all enforcement actions against the debtor are stayed and appoints a trustee with a supervisory role. The debtor-in-possession must file a plan of reorganisation within 60 days and submit it to approval by its creditors in a class-based voting which is carried out at a meeting of creditors. A plan approved by the required majorities becomes binding to all creditors (including dissenting ones) upon court confirmation.

The debtor may also opt for a pre-packaged reorganisation. In this case, the debtor submits a plan agreed by creditors holding 2/3 of the claims in a class or group of claims to court confirmation. Such a plan becomes binding to all creditors in a particular class or group upon court confirmation. Pre-packaged reorganisations are faster and simpler proceedings, as negotiations take place before the debtor files a petition in court. The pre-packaged plan is not binding to all creditors – it only binds the creditors subject to it; and, in addition to tax claims and claims secured by assets whose title is held by the relevant creditor, it may not include a class of labour claims.

Court-supervised reorganisations are far more used than pre-packaged plans. In several occasions, when the majority of the creditors agree to renegotiate their claims, the debtor may find it unnecessary to file for reorganisation to avoid its distress situation to become public. In other cases, a court-supervised reorganisation may be necessary to hinder creditors from individually enforcing their claims and from requesting the liquidation of the debtor company.

Although the law is only five years old, there are continuing discussions among academics and practitioners to reform its provisions. The aim is to improve the liquidation proceeding in order to increase the recovery rate of the creditors, notably by providing faster and more efficient means to sell assets as a going concern; to broaden the applicability of the law, by allowing civil associations, cooperatives and other entities to benefit from reorganizations; creating new rules in order to introduce qualified majorities for certain classes of  creditors to insolvency proceedings; to increase the parity in treatment of creditors belonging to the same class or group; to provide more adequate treatment for tax claims; to provide incentives for financing a debtor under financial distress; to supply efficient means for reorganizing small businesses; to allow court-to-court cooperation in cross-border insolvency cases; among others.