Bankruptcy/Restructuring in Brazil
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Editor's Note: Felsberg Advogados' Thomas Benes Felsberg is one of the most respected lawyers in Brazil. He has featured in Band 1 for restructuring in Brazil for a decade. With a career spanning more than 50 years, Felsberg is also known for drafting the Brazilian legislation on bankruptcy. He continues to represent high-profile clients in landmark cases. Felsberg is also known for his leadership. He has co-authored the article below with partner Fabiana Solano, who comes as Band 4 in Chambers Brazil's restructuring rankings, up-and-coming partner Clara Moreira Azzoni and lawyer Thiago Costa. The team is part of Felsberg Advogados' Band 1 Bankruptcy/Restructuring practice. The Covid pandemic has pushed for further legislative changes in the bankruptcy area as many companies are likely to run into trouble. In the article below, the authors explain the comprehensive legislative overhaul and argue that it provides "the breathing space needed in the immediate term," but there is much more room for improvement and Brazil will need to do more.
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 in the intervening years demonstrated a need for further amendment to the Bankruptcy Law. Spurred by the recessions and the almost concurrent corruption scandals, a multidisciplinary group formed by the former Ministry of Finance discussed and proposed amendments, which evolved into bill PL 6,229. At the same time, other specialist groups were also formed to consider amendments.
With the Covid-19 pandemic and the possibility of many large and medium-sized Brazilian companies being pushed to bankruptcy, Representative Hugo Leal combined the proposal made by the working committee with a few other bills that had been presented during the past 15 years, bringing them together to present his own bill (PL 1,397/20). The bill was voted on and approved by the Brazilian Congress and then ratified by the President as Law No. 14,112/2020 on 24 December 2020.
The 2020 Reform
The 2020 reform introduced several long-awaited important changes, one of them facilitating the financing to companies in judicial reorganization (debtor-in-possession or DIP financing). The advantage of enabling a company to generate cash for its operations can be clearly seen in the example of LATAM Airlines’ current Chapter 11 proceedings in New York, in which the embattled Brazilian airline was able to arrange crucially needed USD2.45 billion in DIP financing, to be used also for the benefit of its Brazilian subsidiaries. The much-needed cash enabled the group to face the initial impact of the Covid-19 pandemic and was acknowledged by its CEO as crucial to the sustainability of the group.
Another important change reflects the desire to return the entrepreneur to business activities as soon as possible (fresh start). Law 14,112/2020 provides for a three-year discharge period of the obligations of the debtor along with facilitating the termination of the liquidation in bankruptcy procedure, ditching the unreasonable five- or ten-year period of Law 11,101/2005 that only began when all litigation had been resolved, a never-ending process.
Law 14,112/2020 also innovated by introducing the possibility of selling the company as a whole, with the debt properly restructured, to an apt investor interested in maintaining the business activities. The sale of the company as a whole was previously generally disallowed by the Courts, but the reform recognizes that the transfer of the business to another investor can be a valuable tool for promoting the preservation of the business activity, provided that this has been approved by the creditors.
Another issue addressed by the 2020 reform is the debtor’s previous exclusive privilege of presenting the plan of reorganization during the restructuring process. On the one hand, allowing creditors to present a plan if the debtor is unable to get its plan approved within the given period or when it is rejected by a meeting of creditors could balance interests more evenly and enable company activities to move on and recover more quickly, something that is regarded positively by foreign investors. On the other hand, there is concern that the negotiation dynamics in the judicial reorganization may end up excessively unbalanced in favor of creditors, who may eventually oppose any proposal for renegotiation made by the debtor (even if reasonable) only to try and impose their own reorganization plan, hence maximizing the recovery of their credits at the expense of preserving the business activities. This issue is admittedly among the more controversial changes.
Law 14,112/2020 incorporates the UNCITRAL Model Law on cross-border insolvency, a change that is welcomed by commentators. Law 11,101/2005 had no provisions for dealing with cross-border insolvencies, a deficiency that was amplified by many large cases over the years, including those of the Odebrecht Group and the Oi Group, which emphasized the need to have in place consistency in dealing with assets in more than one jurisdiction.
In the area of procedure and motivated mainly by the need for social distancing imposed by the Covid-19 pandemic, Law 14,112/2020 provides for the possibility of replacing lengthy and costly face-to-face general meetings of creditors with similar procedures held in a virtual environment. The meeting itself may be dispensed with, if the debtor can prove, through written declarations presented by the creditors, that it already has the necessary support to reach the quorums for approval of the reorganization plan. It may be noted that the use of virtual creditor meetings was already widespread before the coming into force of Law 14,112/2020, as witnessed by the cases of Odebrecht, Renova Energy, Grupo Moreno, Livraria Cultura and many others in the last quarter alone of 2020.
President Jair Bolsonaro signed Law 14,112/2020 with six vetoes, which will go on to be analyzed by Congress. One of the vetoes was against an article that allows the suspension of the execution of labor claims. Other vetoes related to advantages in the calculation of taxes on the sale of assets and the granting of tax benefits related to renegotiation of debt. The President also vetoed the non-succession of certain of the debtor’s obligations (among them environmental, regulatory, administrative, criminal, anti-corruption, tax and labor) upon the sale of assets.
The presidential vetoes are to be reviewed by Congress in the near future and may be rejected by an absolute majority of the House Representatives and Senators.
Law 14,112/2020 brought with it changes that had been debated and desired for a long time, and it is hoped that it will give Brazilian companies and the Brazilian economy the breathing space needed in the immediate term. However, in the longer term, the bankruptcy and restructuring area in Brazil needs more. 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 with 31.2 for the region of Latin America and the Caribbean, and a much higher rate in the OECD countries. There is much room for improvement, and the 2020 reform may provide the positive and stable framework to encourage further investments in the country, leading to the advancement and sustained growth of the Brazilian economy.