- 1.What actions are available to creditors prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceeding?
The Brazilian legal system provides for different judicial measures that can be taken against the debtor to ensure fulfilment of a given obligation.
If the debt is represented by certain debt instruments specified by law (eg, promissory notes, cheques, recognition of debt signed by the debtor and two witnesses), the creditor could file an expedited collection procedure. This is a faster proceeding, since there is no need to obtain prior judicial recognition of the credit. If the debtor does not pay the amount due within three days, its assets become subject to attachment.
In case there is no debt instrument that authorises the expedited collection proceeding, but rather another evidence of indebtedness, the creditor could file a summary collection proceeding. The action begins with the debtor being summoned to pay within 15 days. If the debtor complies with the payment order within the specified term, the debtor is released from paying court expenses and court-awarded legal fees. If the debtor fails to pay and does not present a defence within the specified term, a judgment will be immediately entered against the debtor with respect to the amount claimed by the creditor. The creditor is then allowed to enforce the judgment in order to collect its credit. The ordinary collection lawsuit is the remaining option available to the creditor that does not hold a debt instrument authorising the filing of expedited collection proceedings, or a documentary evidence of its credit authorising the filing of summary collection proceedings. Therefore, the creditor will need to obtain judicial recognition of its credit through a specific judgment entered upon conclusion of the lawsuit. In fact, the creditor is actually a plaintiff who must win a case against the defendant in order to be considered a true creditor.
- 2.What duties do directors or officers of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? is there a standard of care towards third parties? in what circumstances can officers and directors be found liable for continuing to operate a company in financial difficulties? Can they be found criminally liable?
Article 158 of Law 6,404/76 (the Brazilian Corporations Law) establishes that there are two basic hypotheses of civil liability of managers of corporations: (i) for damages caused to the corporation by virtue of negligence or wilful misconduct, even within their powers; and (ii) for action beyond their authority, that is, exceeding the powers granted to them, or contrary to the provisions of the law or the company’s by-laws.
Also, article 50 of Law 10,406/02 (the Brazilian Civil Code) provides for the disregard of the corporate veil in order to enable attachment of the manager’s assets in case of deviation of the company’s purposes or commingling between the company’s and the manager’s assets. As to tax liability, managers may be held liable for tax obligations of the legal entity in the event of:
- its irregular dissolution;
- action beyond their authority; or
- actions contrary to the law or the company’s by-laws.
Managers can face criminal liability only if their actions fall within the specific definition of a given crime established by Brazilian laws, including certain bankruptcy-related crimes (eg, providing false information during reorganisation proceedings with the intention of misleading the court or creditors).
- 3.Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? if so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?
Secured creditors are allowed to foreclose on the collateral by means of a judicial sale and, in certain circumstances (eg, when the pledge agreement so authorises, or in the case of fiduciary transfers by way of security), through private sales.
In judicial sales, the relevant assets are appraised and the court will not accept sales for a disproportionate lower value. In private sales there are no specific legal provisions as to the sale price, but debtors may challenge abusive or unjustified sales conditions accepted or created by the creditor. In practice, some creditors voluntarily create private bidding proceedings to generate a proper sale price.
Lenders are allowed to transfer their debt claims. In order to be effective against the debtor, any such transfer must be notified to the debtor. Effectiveness against third parties is achieved through registration of the transfer with the appropriate public registry. Security agreements cannot give the creditor the right to keep the underlying collateral in the event of default. However, after a default has been verified, the creditor and debtor may agree on the creditor keeping the collateral to satisfy its credit.
- 4.What types of insolvency proceedings are available in your jurisdiction? are different insolvency proceedings available for individuals and companies? is there any distinction made between ‘preventative’ insolvency proceedings and ‘actual’ insolvency proceedings?
The Brazilian Bankruptcy and Restructuring Law establishes three major mechanisms that may apply to troubled businesses (including business companies and individual businessmen):
- bankruptcy;
- judicial reorganisation; and
- out-of-court reorganisation.
Bankruptcy applies in case of insolvency when the business is no longer viable. It is a court procedure that may be requested by the company itself or by a creditor of the company. On the other hand, the mechanisms of judicial or out-of-court reorganisation shall be used when a particular business, although facing difficulties, is still viable and may overcome its financial crisis.
- 5.On what grounds may a debtor company be placed into an insolvency proceeding? who may do this? what are the grounds for a voluntary proceeding? if an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? what effect, if any, does a filing have on a subsidiary or affiliate of the debtor? are there any grounds for consolidating or coordinating insolvency proceedings involving related parties? are inter-company or affiliate claims treated differently in terms of recovery or voting?
Bankruptcy
Debtors that are facing a financial crisis and do not meet the conditions to benefit from judicial reorganisation proceedings should request the declaration of their own bankruptcy. In addition, any creditor may request the bankruptcy of a debtor in certain circumstances, including the following:
- failure by the debtor to comply with payment obligations in excess of 40 times the prevailing minimum wage, provided that a protest with a public registry has been lodged with respect to the corresponding indebtedness. In order to reach the above threshold, two or more creditors can combine their credits;
- the existence of debt collection proceedings against the debtor where no assets have been attached or no money has been deposited to secure payment of the relevant obligations;
- the debtor has engaged in actions such as unjustified sales of assets or fraudulent schemes against the interests of creditors; and
- failure by the debtor to comply with obligations under a judicial reorganisation plan.
Creditors requesting the bankruptcy of a debtor will have to pay usual court fees. Liability will not attach to such creditors simply because they used their legal right to institute bankruptcy proceedings against the debtor. Liability may attach if it is proven that creditors caused damages to the debtor by filing a groundless bankruptcy request. In principle, the debtor’s subsidiaries and affiliates are treated as separate entities not affected by the filing. Shareholders of the bankrupt company, as well as affiliates, controlled or controlling entities, may participate in general meetings of creditors, but they are not allowed to vote.
Judicial reorganisation
Only the debtor itself may file for judicial reorganisation proceedings. This proceeding shall involve all existing credits at the date of the filing, matured or not, except for:
- tax credits;
- credits secured by fiduciary transfers of assets, resulted from lease agreements, irrevocable real estate purchase agreements with instalments payments, and sale of goods with title retention; and
- credits with claims deriving from advancements in foreign exchange agreements. The request requires the submission of a series of documents including explanations about the financial difficulties encountered by debtor, financial statements, list of creditors and list of employees.
Debtors shall submit a judicial reorganisation plan within 60 days from the publication of the court order authorising the initiation of the relevant proceedings. If the plan is not submitted, debtors shall be declared bankrupt.
Any judicial reorganisation plan must be approved by the following three categories of creditors in a general meeting of creditors:
- labour creditors and creditors from accidents at work;
- secured creditors; and
- unsecured creditors, creditors with special or general preference, and subordinated creditors.
Shareholders of the company under judicial reorganisation, as well as affiliates, controlled or controlling entities may participate in general meetings of creditors, but they are not allowed to vote.
Out-of-court reorganisation
As the name indicates, an out-of-court reorganisation plan is simply a private arrangement between a debtor and some of its creditors. In this sense, any debtor that meets certain conditions specified by law may propose and negotiate with its creditors an out-of-court reorganisation plan.
- 6.What notifications and meetings are required after the company has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? what must they show to prove their ownership interest in the underlying debt?
There are no specific legal requirements in relation to meetings and notifications in out-of-court reorganisations, and these matters can be regulated by the relevant reorganisation plan.
In a bankruptcy, a public notice is published containing the bankruptcy decree. Such decree will specify, among many other matters, the term during which creditors will submit their claims and whether a general meeting of creditors shall be held for the creation of a creditors’ committee.
In reorganisation proceedings, different public notices are published, among other things, to:
- inform creditors that the court has authorised the implementation of the reorganisation proceedings;
- enable creditors to submit their claims;
- enable creditors to challenge the proposed reorganisation plan;
- call the general meeting of creditors that will deliberate on the reorganisation plan; and
- make available the list of creditors with the indication of their corresponding credits, as prepared by the reorganisation trustee.
Although the law does not specifically regulate the participation of bondholders, they should, as a matter of principle, be permitted to collectively participate in the proceedings through the indenture trustee. In one specific legal precedent, such participation was allowed as the court likened the indenture trustee to the fiduciary agent provided by Brazilian law in relation to issuances of debentures. Since, in this scenario, the bondholders would be represented by the trustee, they would not prove directly their ownership interests to the court.
If, by virtue of the indenture trustee, bondholders are able to severally pursue their credits, they would have to submit enough evidence to that effect to the court. In this case, they would be subject to the same conditions applicable to any other creditor.
Since there are very few precedents dealing with bondholders, and given that Brazilian courts may not be familiar with all corresponding structures, certain difficulties may arise and will have to be addressed on a case-by-case basis.
- 7.How are contingent creditors dealt with? How are inter-company claims handled? if so, has this been challenged and with what result? are there special rules for certain contracts?
In a bankruptcy, any debts, whether matured or not, are accelerated (if applicable) and included in the proceedings.
In reorganisation proceedings, all existing credits, whether matured or not, are included in the reorganisation, except for:
- tax credits;
- credits secured by fiduciary transfers of assets, resulted from lease agreements, irrevocable real estate purchase agreements with instalments payments, and sale of goods with title retention; and
- credits with claims deriving from advancements in foreign exchange agreements.
In a bankruptcy, claims from shareholders will rank as subordinated credits (the last class in the payment order). In reorganisation proceedings, inter-company creditors are included in the reorganisation plan and will be subject to the payment and other conditions established by the plan. The inter-company creditors will not be able to be part of the creditors’ committee, according to article 30, section 1 of the Law. Also, they are allowed to attend the general creditors’ meetings, but are not allowed to cast a vote, and they will also not be considered in terms of quorum for the installation of the meeting, according to the article 43 of the Law. These restrictions are also valid for specific relatives of the company’s administrators, controlling partner or legal representatives.
- 8.What effect does the commencement of an insolvency proceeding have on the debtor and its operations? is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?
A company under a reorganisation procedure may continue its ordinary activities unless otherwise ordered by the court. In principle, company managers retain positions, although working under the supervision of a creditors’ committee and trustee appointed by the court.
After a judicial reorganisation is accepted by the court, a suspension of 180 days (stay period) shall apply to existing lawsuits against the debtor, except for tax proceedings (which are not affected by out-of-court and judicial reorganisation proceedings). Upon expiry of the stay period, all creditors automatically regain the right to initiate or proceed with their lawsuits against the debtor.
In the context of out-of-court and judicial reorganisations, companies will not have a specific right to terminate or reject contracts other than normally available rights under contract law.
In bankruptcy proceedings, the law establishes that not all agreements are automatically terminated. With respect to bilateral agreements (where both parties have mutual obligations to be performed), the trustee of the bankruptcy estate may decide not to terminate the agreement if he or she understands that the continuation of the agreement will benefit the estate. Nevertheless, it is generally understood that the agreement will be deemed terminated if there is a specific clause providing for termination in the event of bankruptcy.
- 9.How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? How are unsecured creditors treated? How are equity holders treated? Could an equity holder recover prior to creditors being paid in full?
In judicial reorganisation proceedings, creditors are organised by categories and voting in the general creditors’ meeting is divided according to each category. Secured creditors comprise a specific category, and each secured creditor is listed in such category to the extent of the security it holds. Any use or disposal of collateral should be approved by the relevant secured creditor. Unsecured creditors also comprise a specific category. All the categories of creditors are paid according to what is established in the judicial reorganisation plan.
In bankruptcy proceedings, secured credits rank behind labour credits (limited to 150 times the prevailing minimum wage) and credits deriving from accidents at work, but ahead of tax credits and unsecured credits. The credits of equity holders are classified as subordinated credits and they are the last in the order of payment of credits.
- 10.What is the effect of an insolvency proceeding on current and retired employees?
In case of a judicial reorganisation proceeding, employees may be maintained in their jobs, in accordance with the reorganisation plan. In addition, employees will represent a separate category of creditors and will be entitled to vote as such in the general creditors’ meetings. In a bankruptcy, the judicial manager will decide whether the debtor shall continue to fulfil its contractual obligations and, therefore, the employees, or part of them, may be maintained in their jobs.
As far as the bankruptcy preference order, employees rank ahead of any creditor, with a limit of 150 times the prevailing minimum wage per employee. In principle, the insolvency proceedings do not cause any effects on retired employees.
- 11.Do directors or officers of companies in insolvency proceedings suffer any consequences?
In case of a judicial reorganisation proceeding, in principle there will be no change in management. Therefore, the managers of the debtor will retain their positions, although working under the supervision of the creditors’ committee (if any) and the judicial administrator appointed by the court.
In certain circumstances, however, managers shall be removed from their positions, including when:
- there are indicia of bankruptcy crimes;
- they have acted with wilful misconduct or engaged in fraudulent schemes against creditors;
- they have been making personal expenditures that are not compatible with their income; or
- their removal is specified in the restructuring plan.
In case of bankruptcy, the directors and officers will be removed from their positions and the judicial administrator named by the court will manage the bankruptcy estate. If any director or officer is convicted of a bankruptcy-related crime, the court may also disqualify him or her from serving as manager of other companies for a period of up to five years.
- 12.How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority?
The preference order for payments established in the Brazilian Bankruptcy and Restructuring Law is as follows:
- labour claims up to 150 times the prevailing minimum wage for each creditor, and claims deriving from accidents at work;
- secured credits up to the value of the relevant collateral;
- tax debts;
- credits with special privileges;
- credits with general privileges;
- unsecured credits;
- contractual penalties, tax penalties and fines deriving from violations of legal provisions; and
- subordinated credits.
In both out-of-court and judicial reorganisations, the provisions established in the applicable reorganisation plan will determine the payment conditions of different creditors.
- 13.Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?
According to the Brazilian Bankruptcy and Restructuring Law, and in practice, local creditors and foreign creditors are not treated differently. Foreign creditors participate in the proceedings following the same requirements as local creditors, regarding the preference order for payments established in the Law, the presentation of proof of claims and right to vote in the general creditors’ meetings.
However, some formal requirements must be followed by the foreign creditors in order to be represented in the proceedings, such as presentation of consularised, notarised and sworn translated documents, powers of attorney and by-laws.
In the restructuring proceeding, the foreign credits will be listed in the original currency, and the credit will only be converted to the national currency for voting purposes in the general creditors’ meeting. In the bankruptcy proceeding, all the foreign credits will be listed in the national currency, by the exchange rate of the date that the bankruptcy is decreed.
- 14.What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be ‘crammed down’? Are there any
substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?
Any judicial reorganisation plan must be approved by the following three categories of creditors in a general meeting of creditors:
- labour creditors and creditors from accidents at work;
- secured creditors; and
- unsecured creditors, creditors with special or general preference, and subordinated creditors.
In the first class of creditors (labour-related claims), approval is achieved with the favourable vote of the majority of creditors present at the meeting, regardless of the amount of their credits. In the other two classes, approval is achieved with the favourable vote of both:
- creditors representing more than half of the credit amounts represented at the meeting; and
- the majority of creditors present at the meeting.
If certain vote combinations specified in the Brazilian Bankruptcy and Restructuring Law are recorded in the general meeting of creditors, the court may approve the reorganisation even if the plan was not approved pursuant to the quorum requirements explained above.
- 15.May creditors trade their claims during the course of a reorganisation? what impact, if any, will it have on voting for a plan?
Creditors may trade their claims during the reorganisation proceeding. After the trade, the former and current creditors must inform the court and request the substitution of parties in the proceedings. The current creditor will only be able to participate in the general creditors’ meeting and vote on the reorganisation plan if the judge examines and approves the substitution request prior to the meeting.
- 16.Does the government tend to play an active role in insolvency proceedings? What factors determine this?
In judicial insolvency proceedings, like restructuring proceeding and bankruptcy proceedings, the government does not have an active role.
The Brazilian Bankruptcy and Restructuring Law is, in general, applicable to debtor companies who pursue economic activities. There are some entities, however, that are prohibited from filing a request for bankruptcy in any situation: government-controlled companies or public companies. Also, clearing agents and companies that deal with financial liquidation are prohibited from going bankrupt.
On the other hand, there are some entities that are only relatively excluded from the bankruptcy proceedings: insurance firms, companies that deal with health insurance and financial institutions – broadly speaking, they must be extrajudicially liquidated, but, if some special requirements are fulfilled, they can go bankrupt.
According to the Law No. 10,190/2001, insurance firms are not allowed to file a request for bankruptcy, unless, in this last case, the total amount of assets after the decreeing of its extrajudicial liquidation is not sufficient to pay at least 50 per cent of the unsecured credits or when there are traces of existence of a bankruptcy crime.
Also, different from regular bankruptcy proceedings, the debtor company itself may not file the request for bankruptcy, but there is an autonomous government entity (SUSEP) that is responsible for the control and supervision of the insurance market and that is authorised to request the bankruptcy proceeding of a certain insurance firm in the cases explained above (this government entity is also responsible for the extrajudicial liquidation).
Regarding the financial institutions, considering the large impact of the situation of financial institutions upon the national economy, there are several governmental strategies that might be taken in order to avoid and prevent the financial institution from a crisis and a future liquidation or bankruptcy proceeding, like the extrajudicial intervention and extrajudicial liquidation. In the first measure, there will be no board of new directors, but the Brazilian Central Bank itself will name one person to take over the management of the financial institution for the period of six months, and the mandate of the original administrator will be suspended. In the second measure, the Brazilian Central Bank may decree the extrajudicial liquidation under its own discretion, or if requested by the administrators of the financial institution, or also by the interventor (temporary administrator), and it shall be decreed only if some specific requirements take place - the Central Bank will also have some duties.
The bankruptcy proceeding of a company pursuing the public service causes the extinguishment of the concession once that company under the bankruptcy proceeding stops all its activities. Also, considering the extinguishment of the concession, some assets related to the fulfilment of the public utility shall also be reverted to the government, according to what has been established by the public notice about the concession.
In the air transport sector, the Brazilian Aeronautics Code established that air transport companies could not request for bankruptcy, since the regularity and safety of flights must prevail over the commercial interest of the company. However, the new Bankruptcy Law expressly excludes air transport companies from the prohibition to request restructuring or bankruptcy proceedings. This means that, nowadays, these companies are allowed to request it, as long as they are able to keep track, efficiently, of the maintenance of their aircraft, and also the regularity and safety of flights.
- 17.What kind of court supervision is there in each type of insolvency proceeding? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to
control operations during the insolvency proceeding? Can creditors form creditors’ committees? what formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the
trustee, receiver or other court-appointed officer?
In a judicial reorganisation, the court appoints a trustee in charge of supervising the company’s activities and accomplishment of the reorganisation plan. The trustee is named by the court and the debtor and the creditors do not have any power to select it.
The trustee does not manage the company. In principle, company managers retain positions, although they work under the supervision of a creditors’ committee (if any) and the trustee appointed by the court. However, managers may be removed in certain circumstances (indicia of bankruptcy crimes, wilful misconduct or fraudulent schemes against creditors etc). Judicial managers will then run the company.
In the event of bankruptcy, company managers are removed and the trustee appointed by the court will be empowered to: seize the company’s assets; verify the existing credits against the company and organise the creditors according to the preference order established by law; and organise the sale of seized assets.
Specialised bankruptcy and restructuring courts are available only in a few large cities. In other cases, regular courts will administer insolvency proceedings.
According to the Brazilian Bankruptcy and Restructuring Law, the creditors listed in the restructuring proceeding or in the bankruptcy proceeding can form what is called a creditors’ committee, which must be composed by one representative of each creditor class, and two substitutes for each class. The committee has several assignments, appointed by the law, such as verifying the trustee’s work and the execution of the plan, among others. It is important to highlight that the committee is not mandatory, and in the absence of the committee, the trustee and the judge will discharge its duties.
There is no possibility of competing reorganisation plans. Only one plan can operate at a time, but there is the possibility of amending the valid plan when necessary, if the requirements of the approval of a plan are followed.
- 18.May a debtor obtain financing while in insolvency will the lender enjoy special rights or preferences for providing debtor-in-possession financing?
The company under reorganisation may continue its ordinary activities unless otherwise ordered by the court, which includes obtaining financing. According to the Brazilian Bankruptcy and Restructuring Law, any credits derived from financing obtained during the course of the judicial reorganisation will not be subject to the preference order in the event of bankruptcy.
- 19.What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?
In a bankruptcy, if less than 50 per cent of unsecured credits have been paid, all debtors’ obligations will be terminated in either five years, if the debtor has not been convicted of any bankruptcy crimes, or 10 years, if the debtor has been convicted of any bankruptcy crimes.
In a judicial reorganisation, all existing credits will be novated if the reorganisation plan is approved. The applicable judicial proceedings shall remain in place until all obligations maturing within two years that are specified in the plan are fully complied with by the debtor. If the debtor fails to comply with any obligation within such period, it shall be declared bankrupt. Any obligation unfulfilled after the two-year period entitles creditors to initiate collection proceedings or request the declaration of the debtors’ bankruptcy.
- 20.How long do restructurings last? is there a formal deadline?
Verifying that all obligations maturing within two years were fulfilled, the court shall order the termination of the judicial reorganisation proceedings. Although no longer subject to court proceedings, the debtor remains liable for all obligations specified in the plan that are still outstanding. No formal deadlines apply to out-of-court reorganisations.
- 21.Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work?
Any debtor that meets certain conditions specified by law may propose and negotiate with its creditors an out-of-court reorganisation plan. Even though being deemed “out-of-court”, the plan must be ratified by a court in order to produce effects established by law.
There are four groups of creditors excluded from out-of-court reorganisations:
- tax creditors;
- labour creditors;
- creditors secured by fiduciary transfers of assets, lessors, sellers in irrevocable real estate purchase agreements with payment in instalments, and sellers of goods with title retention; and
- creditors with claims deriving from advancements in foreign exchange agreements.
In addition to the creditors specified above, any other creditors may be left out of a particular plan negotiated by the debtor.
Ratification of the out-of-court reorganisation plan can be accomplished in one of the following two options. With the first option, the debtor requests ratification of the plan to produce effects only with respect to those creditors that have expressly adhered to the plan.
With the second alternative, the debtor requests ratification of the plan to produce effects with respect to all creditors contemplated in the plan, including those that have not expressly adhered to the plan. In order to be ratified in these circumstances, the plan must have been approved by creditors representing more than three-fifths of credits in each category of creditors contemplated by the plan.
With both options, a public notice will allow creditors to challenge the ratification. Nevertheless, any challenges may be based solely on an alleged illegality or a failure by the debtor to comply with all necessary legal requirements or formalities.
- 22.May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does it require court approval? Can creditors recover the expense of participating in the process? if so, how is that dealt with?
Creditors may generally offset debts owed to them by the debtor in an insolvency, provided that the applicable requirements for any debt offsetting are met, including certainty as to the amounts to be offset and the maturity of each reciprocal debt or credit.
The law provides that expenses incurred by the creditors for participation in reorganisation and bankruptcy proceedings cannot be passed on to the debtor, except for court fees if there is specific litigation with the debtor.
- 23.If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?
The reorganisation itself should not affect the treatment related to any tax losses the debtor company may have. Therefore, the same conditions normally applicable to the use of tax losses by companies in general will also apply to a debtor company that goes through reorganisation proceedings.
- 24.How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? if a company organised under the laws of your jurisdiction entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?
Brazilian laws do not contain any specific rules dealing with extraterritorial bankruptcy or insolvency proceedings. In fact, bankruptcy and reorganisation proceedings involving Brazilian companies must be necessarily administered by a Brazilian court. As a result, any effects and consequences of possible ancillary or parallel proceedings in foreign jurisdictions will have to be dealt with on a case-by-case basis, subject to applicable conflicts of law provisions in cross-border matters.
- 25.How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? what factors determine this?
Considering that the current Brazilian Bankruptcy and Restructuring Law (which introduced the mechanisms of judicial and out-of-court reorganisations) came into effect only relatively recently, a solid track record has not been established in terms of successful or unsuccessful reorganisations. In terms of the proceeding itself, smaller companies tend to be more successful in reorganisations, since the smaller company structure and number (and size) of creditors tend to facilitate the process. However, for both small and large companies, the financial conditions in which the company entered the reorganisation proceedings will be the decisive factor for a possible recovery.
- 26.In what circumstances could transactions that were entered into prior to an insolvency proceeding be vulnerable to challenge? By whom?
The law contains a list of actions that shall produce no effects with respect to the bankruptcy estate, regardless of whether the parties were aware of the financial difficulties facing the debtor or whether there was any fraudulent intent. Accordingly, they may be disregarded automatically by the court or at the request of any interested party.
Actions considered ineffective include, for instance:
- payment of unmatured debts during the suspect period;
- payment of overdue debts effected during the suspect period in a manner that is different from what was established in the original agreement;
- the creation of security interests during the suspect period to secure payment of pre-existing indebtedness; and
- donations and other equivalent actions effected within the period of two years preceding the bankruptcy.
In addition to those actions deemed automatically ineffective, any action aimed at intentionally defrauding creditors may be revoked. In this case, however, the party seeking the revocation must prove, in a separate lawsuit, that there was a fraudulent scheme arranged between the debtor and a third party, and that the bankruptcy estate actually suffered damages as a result of such scheme.
The bankruptcy legal term, also known as the “suspect period”, shall be set by the court upon the declaration of bankruptcy. The suspect period may apply retroactively up to 90 days before:
- the bankruptcy request;
- the application for judicial reorganisation proceedings later converted into bankruptcy; or
- the first protest for non-payment lodged against the debtor.
- 27.If a debtor company has debt securities, does your jurisdiction’s insolvency or securities law provide for any special treatment for an exchange of those securities?
This type of special treatment is not provided by Brazilian laws.
- 28.Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?
Although debtors often use different strategies in an attempt to improve their position during insolvency proceedings and put some pressure over creditors, this normally occurs on a case-by-case basis, rather than through a somewhat uniform course of action.
One attempt that became reasonably common in the past was related to the venue of the judicial reorganisation proceeding. Some debtors headquartered in a remote city, but with their main business location in a large commercial city, would file the proceeding with the court having jurisdiction over their headquarters knowing that this would be an inconvenient venue for creditors. However, courts have refused to accept this practice and jurisdiction is normally shifted to the company’s main business location.
- 29.Are any amendments to your jurisdiction’s insolvency laws envisaged?
No important amendments are currently envisaged.
Contributing Authors
Contributing Editors
Richard Cooper Adam Brenneman
Cleary Gottlieb Steen & Hamilton LLP
Questions
- 1.What actions are available to creditors prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceeding?
- 2.What duties do directors or officers of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? is there a standard of care towards third parties? in what circumstances can officers and directors be found liable for continuing to operate a company in financial difficulties? Can they be found criminally liable?
- 3.Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? if so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?
- 4.What types of insolvency proceedings are available in your jurisdiction? are different insolvency proceedings available for individuals and companies? is there any distinction made between ‘preventative’ insolvency proceedings and ‘actual’ insolvency proceedings?
- 5.On what grounds may a debtor company be placed into an insolvency proceeding? who may do this? what are the grounds for a voluntary proceeding? if an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? what effect, if any, does a filing have on a subsidiary or affiliate of the debtor? are there any grounds for consolidating or coordinating insolvency proceedings involving related parties? are inter-company or affiliate claims treated differently in terms of recovery or voting?
- 6.What notifications and meetings are required after the company has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? what must they show to prove their ownership interest in the underlying debt?
- 7.How are contingent creditors dealt with? How are inter-company claims handled? if so, has this been challenged and with what result? are there special rules for certain contracts?
- 8.What effect does the commencement of an insolvency proceeding have on the debtor and its operations? is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?
- 9.How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? How are unsecured creditors treated? How are equity holders treated? Could an equity holder recover prior to creditors being paid in full?
- 10.What is the effect of an insolvency proceeding on current and retired employees?
- 11.Do directors or officers of companies in insolvency proceedings suffer any consequences?
- 12.How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority?
- 13.Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?
- 14.What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be ‘crammed down’? Are there any substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?
- 15.May creditors trade their claims during the course of a reorganisation? what impact, if any, will it have on voting for a plan?
- 16.Does the government tend to play an active role in insolvency proceedings? What factors determine this?
- 17.What kind of court supervision is there in each type of insolvency proceeding? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to control operations during the insolvency proceeding? Can creditors form creditors’ committees? what formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the trustee, receiver or other court-appointed officer?
- 18.May a debtor obtain financing while in insolvency will the lender enjoy special rights or preferences for providing debtor-in-possession financing?
- 19.What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?
- 20.How long do restructurings last? is there a formal deadline?
- 21.Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work?
- 22.May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does it require court approval? Can creditors recover the expense of participating in the process? if so, how is that dealt with?
- 23.If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?
- 24.How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? if a company organised under the laws of your jurisdiction entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?
- 25.How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? what factors determine this?
- 26.In what circumstances could transactions that were entered into prior to an insolvency proceeding be vulnerable to challenge? By whom?
- 27.If a debtor company has debt securities, does your jurisdiction’s insolvency or securities law provide for any special treatment for an exchange of those securities?
- 28.Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?
- 29.Are any amendments to your jurisdiction’s insolvency laws envisaged?
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