BRAZIL: An Overview of Bankruptcy/Restructuring
The landscape surrounding bankruptcy and restructuring in Brazil has been subject to much discussion over many years. The enactment in 2005 of the Brazilian Bankruptcy Law (Law 11,101) was a major step forward towards business continuity and the balance of interests between debtors and creditors. However, reality has since demonstrated a need for further amendment to the Bankruptcy Law. Spurred by the recession beginning five years ago and the almost concurrent corruption scandals, a multidisciplinary group formed by the former Ministry of Finance discussed and proposed amendments. This evolved into bill PL 6,229, which is now ready to be voted on by the Lower House, providing for a major overhaul of the Brazilian insolvency legislation. Other specialist groups were also formed to consider amendments. With the COVID-19 pandemic this year and the possibility of many large and medium-sized Brazilian companies being pushed to bankruptcy, an emergency amendment bill was also approved by the Chamber and is presently being discussed in the Senate (PL 1,397).
Fifteen years after the Brazilian Bankruptcy Law
2020 marks fifteen years in effect of the Brazilian Bankruptcy Law, a period in which bankruptcy and restructuring cases in Brazil have become more complex. These have shown that the Bankruptcy Law needs to be amended to deal with several pressing issues. One important feature is the need for the adoption of the UNCITRAL Model Law on Cross-Border Insolvency. The current Bankruptcy Law has no provisions for dealing with cross-border insolvencies and many large cases over the years, including the Odebrecht group and the Oi group, emphasise the need to have in place consistency when dealing with assets in more than one jurisdiction. Another major issue is providing certainty for and regulating debtor-in-possession (DIP) financing. The advantage of enabling a company to generate cash for its operations can be clearly seen in the current Chapter 11 proceedings in New York, in which LATAM Airlines was able to arrange crucially needed USD2.45 billion in DIP financing, to be used also for the benefit of its Brazilian subsidiaries. Yet another important issue to be addressed is the debtor’s current exclusive privilege of presenting the plan of reorganisation during the restructuring process. Allowing creditors to present a plan if the debtor is unable to get its plan approved within the given period could balance interests more evenly and enable companies to move on and recover more quickly, although this issue is still controversial.
There are many other issues (such as improving the treatment given to the free and clear sale of businesses, incentivising a specialised judiciary, treatment of tax and non-tax government credits, consolidation of assets and liabilities of all debtors within a group, and ending mandatory judicial monitoring after approval of a restructuring plan, just to name a few) that legal professionals and academics have expressed a desire to address.
The COVID-19 Emergency Bill
The International Monetary Fund has predicted that the Brazilian GDP will fall by 5 percent in 2020. The July 2020 forecast by the Independent Fiscal Institute (IFI) of the Brazilian Senate projects that Brazil’s GDP will fall by 6.5 percent. The estimated number of companies that may be forced to bankruptcy could represent a 40 percent increase compared to 2016, when the GDP dropped 3.5 percent and 1,800 bankruptcy protection requests were made.
In the face of this scenario, Representative Hugo Leal proposed on April 1, 2020 bill PL 1,397/20 before the House of Representatives to modify the Bankruptcy Law. The transitory provisions, which will become effective if the bill is approved but only until December 31, 2020, attempt to ensure the business continuity of companies facing financial difficulties in the current pandemic, without submitting to a judicial or prepack reorganisation procedure. The bill proposes a 30-day period suspending collection actions which involve debts that are overdue after March 20, 2020. During this 30-day period, a debtor may not be liquidated in bankruptcy or evicted for non-payment of rent. A new preventive negotiation procedure is also provided for after the 30-day period to debtors that can prove a 30 percent decrease in revenues, enabling such debtors to carry out restructuring with creditors during another 90-day suspension period. Debtors already under judicial or extrajudicial reorganisation are also assisted with a 120-day suspension of enforceability of obligations under plans that are already approved. Such debtors may also re-apply to submit a new plan, which could include post filing obligations.
The emergency bill is separate from that previously presented by Representative Leal in 2018 (now PL No. 6,229/2005), which had proposed wide sweeping reform to the Bankruptcy Law, including the issues previously mentioned. There are numerous other bills related to the Bankruptcy Law still being discussed in Congress and it is difficult to predict when such reforms will take place.
Relief in COVID-19 times
If PL 1,397/2020 comes into force, it will give relief to many Brazilian companies struggling to survive, particularly in the travel and tourism, building and construction, entertainment, restaurants, and non-grocery retail sectors. Among these, the highest profile and most badly affected companies are airlines and airport operators. With a huge reduction in the flow of passengers and flights since late March 2020, airport concessionaires have suffered a drastic drop in revenues. Provisional Measure 925/2020 acknowledges the situation by allowing the payment of fixed and variable contributions to the government originally due in 2020 to be postponed to the middle of December 2020. Even before the pandemic, the concessionaire of Viracopos airport in the state of São Paulo had filed for judicial reorganisation, and although a re-bidding process for the airport has been approved, this might not be sufficient to help the concessionaire. Two Brazilian airlines have already fallen victim to the pandemic. The bankruptcy of Avianca Brasil was approved in mid-July 2020. As mentioned above, LATAM Brasil recently joined the Chapter 11 filing in New York by its parent company and affiliates from Chile, Peru, Colombia, Ecuador and the US, with USD18 billion in debt to be restructured. Two other Brazilian airlines, Azul and Gol, have reported losses of BRL6.14 billion for the first quarter and BRL4.3 billion for the first two quarters of 2020 respectively.
As of July 31, 2020, emergency bill PL 1,397/20 is still subject to approval by the Senate, Presidential signature, and publication in the Official Gazette. Accelerated approval will give the Brazilian economy the breathing space it needs in the immediate term. However, in the longer term, the bankruptcy and restructuring area in Brazil needs more than just the COVID-19 inspired emergency bill. In Doing Business 2020, by the World Bank, the recovery rate (cents on the dollar), or how many cents on the dollar secured creditors recover from an insolvent firm at the end of insolvency proceedings, was reported as 18.2 for São Paulo compared to 31.2 for the region of Latin America and the Caribbean. There is much room for improvement and part of this can be addressed by reform in the Bankruptcy Law. A thoughtfully and thoroughly reformed Bankruptcy Law will provide a positive and stable framework that will encourage further investments in the country, leading to the advancement and sustained growth of the Brazilian economy.