BRAZIL: An Introduction to Bankruptcy/Restructuring

Although the Brazilian Bankruptcy Law (BBL) was only enacted in 2005, it became clear in the following years that several amendments would be necessary to improve the Brazilian insolvency system. With this in mind, the former Ministry of Finance formed a multi-disciplinary group of experts to discuss and propose amendments. After two years of discussions in congress with the participation of the private sector, Law 14,112/2020 was enacted on 23 December 2020, amending the BBL.

In the two years since the provisions introduced by the reform came into force, it is clear 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 reorganisation proceedings and liquidations in bankruptcy did not happen, although a growing economic crisis has been brewing in many sectors of the Brazilian economy. More recently, inflation, an increase in the base interest rate to 13.75%, disturbances caused by the war in Europe, and the unexpected insolvency of the giant Americanas group, affecting all credit markets, have caused a slew of businesses – large, middle market and small – to recognise financial troubles, requiring debt renegotiations and new filings.

New government support measures are being contemplated to mitigate the current woes. The reform of the BBL is leading to an increase in creditors’ protection in the country and allowing companies to face the crisis in a more efficient manner. It has also stimulated the participation of investors in distressed markets by protecting and shielding them from the liabilities of debtors when purchasing assets in restructuring proceedings and granting super-priority in debt-in-possession financings.

Decreased Litigation – Paradigm Shift  

The Brazilian courts are known for being among the busiest in the world, reflecting a litigious culture. With a view to co-ordinating interests in insolvency proceedings, to allow companies to restructure in a faster and more organised 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 will be held before a specialised mediator, who will ensure the parties are negotiating in good faith and report the developments of the mediation to the court, where 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 the 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 reorganisation proceeding.

Not only do these new provisions allow companies to negotiate their debt and other conflicting matters before filing for reorganisation, but in more complex cases, they also prevent filings or facilitate the drafting of a reorganisation plan acceptable to creditors.

Investors’ and Creditors’ Protection  

Before the reform, the BBL did not have any specific provisions regarding debtor-in-possession (DIP) financing and the absence of rules led to a level of legal uncertainty. The reform introduced provisions determining that the amounts provided during the reorganisation in the terms provided by the BBL would 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 reorganisation. In Grupo Moreno’s reorganisation, for example, the companies obtained two DIP loans of several hundred million reais, which allowed payment in advance of all the creditors, so the group could 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 may allow the company to emerge from bankruptcy as a viable business.

The BBL also recognised 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 incentivising the activities of distressed asset funds as well as investments by strategic buyers.

Creditors’ rights in the reorganisation proceeding were also addressed by the reform, and the shift now allows creditors the right to present their own restructuring plan if the plan submitted by the debtor is not approved within 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 with a baseline alternative which will also positively affect court reorganisations 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 recognised international rules, creating an important tool to deal efficiently with such insolvencies.

All of these changes are positive and allow for more efficient proceedings to resolve insolvency matters, an area in which time is of the essence.

Looking Ahead  

Despite the importance of the issues addressed by the reform, the enforcement of some of the new provisions is still uncertain. Although positive, certain improvements introduced by the reform have not yet been sufficiently tested by the courts, which means that greater legal certainty will come only when more cases are submitted to the courts for review. The changes implemented to prepack proceedings are a good example of this.

Nonetheless, the impacts of the reform are already being felt by insolvency practitioners. The maturing of the NPLs market and the emergence of large distressed asset funds are playing an increasingly greater role in the Brazilian economy.