Bankruptcy in Brazil
Editor's note: Brazil's young anti-corruption law has been recently amended and its new provisions are still being tested by the courts. Chambers Life-Time Achievement 2022 recipient Thomas Benes Felsberg, who has given a significant contribution to the development of the insolvency practice in Brazil, provides the overview below. He co-authors the article with Felsberg Advogados partners Fabiana Solano, Clara Moreira Azzoni and Thiago Dias Costa.
Although the Brazilian Bankruptcy Law (BBL) was enacted only 17 years ago (in 2005), it became clear over the years that several amendments would be necessary to improve the Brazilian insolvency system. Having that in sight, the former Ministry of Finance formed a multidisciplinary group of experts to discuss and propose amendments, which, after two years of discussions in Congress with the participation of the private sector, resulted in the enactment of Law 14,112/2020 on December 23, 2020, amending the BBL.
One year after the provisions introduced by the reform came into force, it is certain that the reform has substantially altered the insolvency scenario in Brazil. The expectation that the COVID-19 pandemic would cause a major increase in the number of judicial reorganization proceedings and liquidations in bankruptcy was not met, although a growing economic crisis has been brewing in many sectors of Brazilian economy.
Currently debt renegotiations and government support measures have influenced the decision of stakeholders to continue business without court intervention and support under the new BBL. The reform brought about some important changes to the Brazilian insolvency system that will lead to an increase in investors’ protection in the country and allow companies to overcome crisis in a more efficient manner.
Decreased Litigation - Paradigm Shift
Brazilian justice is known for being one of the busiest in the world, which reflects a litigious culture. With a view to coordinating interests in insolvency proceedings to allow companies to restructure in a faster and more organized manner, the BBL reform introduced the possibility of conducting mediation proceedings before or during an insolvency proceeding.
The BBL now sets forth that such mediation may include creditors, partners, shareholders, and state entities and shall be held before a specialized mediator, who will ensure the parties are negotiating in good faith and report the developments of the mediation to the court, when applicable.
The most innovative characteristic of the mediation proceeding set forth in the BBL is that it can be initiated by the company before any insolvency proceeding is filed and it gives the company an initial stay period of 60 days, which prevents dissenting creditors from seizing or constricting company’s assets during the negotiations. Some companies have already benefited from this protection, obtaining time to negotiate with their creditors before or instead of filing for a judicial reorganization proceeding.
Not only do these new provisions allow companies to negotiate their debt and other conflicting matters before filing for reorganization, but in the more complex cases, they also prevent filings or facilitate the drafting of a reorganization plan acceptable to creditors.
Investors and Creditors’ Protection
Before the reform, the BBL did not have any specific provisions regarding debtor-in-possession or DIP financing. The absence of rules led to greater legal uncertainty. The reform introduced provisions determining that the amounts provided during the reorganization in the terms provided by the BBL shall have priority over the impaired claims and collateral agreed among the parties, although priming is still not allowed in Brazil. These new provisions have already impacted the DIP financing market, as some significant amounts have been provided for companies under reorganization. In Grupo Moreno’s reorganization, for example, the companies obtained two DIP loans of several hundred million reais, which allowed the payment in advance of all creditors to successfully exit the court proceeding. In the Renova case, DIP financing allowed the completion of a gigantic wind farm, thereby ensuring a stream of revenue which will allow the company to emerge from bankruptcy as a viable business. In both cases, the two companies now present healthy financial ratios, better than most competing companies.
The BBL also recognized to a greater extent the importance of free and clear sales of distressed assets or even the sale of insolvent companies as a whole with their debt restructured. These features have been incentivizing the activities of distressed asset funds as well as investments by strategic buyers.
Creditors’ rights in the reorganization proceeding were also addressed by the reform, and the shift now is to allow creditors the right to present their own restructuring plan if the plan submitted by the debtor is not approved withing a priority period, which may not exceed one year.
Other important changes have been introduced in the liquidation in bankruptcy proceedings which now require an expeditious sale of the bankruptcy estate’s assets, thus presenting creditors a base line alternative which will also positively affect court reorganizations in general. Before the reform, liquidation in bankruptcy was not considered an acceptable option. In addition, as a means to promote entrepreneurship, the law now facilitates a second chance for insolvent persons.
The new law adopted the Uncitral model law for cross-border insolvencies, thus aligning Brazilian law with recognized international rules, creating an important tool to deal efficiently with such insolvencies.
All of these changes are positive and will allow for more efficient proceedings to resolve insolvency matters, an area in which time is of the essence.
Looking ahead
Notwithstanding the importance of the issues addressed by the reform, the enforcement of some of the new provisions is still uncertain. Albeit positive, certain improvements introduced by the reform were not sufficiently tested by the courts, which means that greater legal certainty will come only when more cases are submitted to the courts for their review.
Nonetheless, the impacts of the reforms are already being felt by insolvency practitioners. The maturing of the NPLs market and the emergence of large distressed assets funds will play an increasingly greater role in the Brazilian economy.