BRAZIL: An Introduction to Bankruptcy/Restructuring

The 2020 Reform of the Brazilian Bankruptcy Law

The Brazilian Bankruptcy Law (Law 11,101/2005, or BBL), despite having been enacted in 2005, is still a relatively young piece of legislation, especially considering the significance of the new features it introduced (mainly through the creation of a system, hitherto unprecedented, of corporate restructuring) and the usual longevity of laws that deal with bankruptcy. Despite this, in its relatively short lifespan, the BBL has already been subject to several changes.

The most recent and relevant of these was brought about by Law 14,112/2020 (the “2020 Reform”), which, amid the devastating effects of the COVID-19 pandemic, changed many key provisions of the BBL to eliminate interpretative uncertainties, some of which had been apparent for some time, and to try to make the entire insolvency system more efficient and accessible – which was especially important given the economic situation caused by the pandemic.

More than three years after the 2020 Reform came into force, its results are still uncertain. The market has continued to experience further changes, with a recent increase in the number of insolvency filings (which, contrary to initial expectations, decreased during the pandemic), and it is still not clear whether all the changes made by the 2020 Reform were correct from a conceptual point of view or have achieved the expected results. Especially in the wake of new large-scale insolvency cases (such as a new judicial recovery of the Oi Group, as well as the giant Americanas case), it is still unclear whether Brazilian companies feel more comfortable using judicial mechanisms for treatment of their insolvency, or whether the success rates of companies that do so have been positively impacted in any way.

Currently, the main ongoing discussions regarding the BBL have moved away from reorganisation to focus on bankruptcy liquidation. Discussions on the duration of the liquidation proceeding, the effectiveness of the rules for conserving the value of assets, the decision-making power to be attributed to creditors during the proceeding, and even the mechanisms for rehabilitation of the debtor, are more frequent than ever. So much so that a controversial bill to further amend the BBL is currently being discussed – the content of which was not well received by most practitioners and scholars on the subject, despite its growing traction within the legislative branch.

However, although the quality of its results is still uncertain, the 2020 Reform certainly had a meaningful impact on the practice of business restructuring. Extrajudicial restructuring and conflict resolution mechanisms have been more widely used. Financing operations and acquisition of assets from insolvent companies are safer today, with the distressed investing market responding positively to the new incentives contained in the Law. Finally, liquidation instruments for insolvent companies have been viewed with increasing attention by the market as good investment opportunities, as well as viable mechanisms for conserving and distributing value among creditors.

Decreased litigation  

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 2020 Reform introduced the possibility of conducting mediation proceedings before or during an insolvency proceeding. 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.

Another important measure carried out by the 2020 Reform was the reduction of the quorum required for the confirmation of pre-packaged reorganisation plans, which fell from 3/5 to 1/2 of all classes of impaired claims. The 2020 Reform also allowed companies to file for bankruptcy protection with the support of only 1/3 of the classes of impaired claims, committing to obtain the support of the remaining creditors within 90 days.

Investors and creditors’ protection 

Before the 2020 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 2020 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), as well as protecting the DIP lender’s rights even if the Bankruptcy Court order authorising the deal is subsequently reformed by the Court of Appeals. These new provisions have already impacted the DIP financing market, as some significant amounts have been provided for companies under reorganisation.

The 2020 Reform 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 2020 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.

Attention paid to the bankruptcy liquidation proceeding

The 2020 Reform also made some important changes in the bankruptcy liquidation proceeding to make it quicker and more efficient. The most relevant of these changes was the inclusion of a 180-day deadline for the bankruptcy trustee to sell all the seized assets, which, as expected, would present creditors with a concrete baseline alternative for recovery and positively affect the terms of court reorganisations in general. The change, however, does not seem to have had such a positive impact on the liquidation proceeding, since, despite creating a lot of pressure on the bankruptcy trustee to sell assets quickly (and not necessarily in the best market conditions), the 2020 Reform did not address the delay in other parts of the procedure that prevented creditors from having access to the money more quickly than before.

Currently, a number of discussions are taking place concerning the reasons for the chronic inefficiency in liquidation proceedings, as well as discussing the role of bankruptcy trustees in it. A controversial bill (PL 3/2024) is currently under discussion within the legislative branch, amending the BBL to introduce changes to the liquidation procedure, which deeply impact the tasks and workflow of bankruptcy trustees, to the point of allowing creditors to appoint a “fiduciary trustee” to replace them, regardless of the will of the Bankruptcy Court. Due to the nature of its changes, and especially the details surrounding the restrictions to the role of bankruptcy trustees, the bill was not well received by insolvency practitioners and scholars alike – despite their criticisms having been received with a certain disdain by the lawmakers responsible for the bill. What comes next, including the concrete impact of the bill (if approved) on the Bankruptcy Courts and practitioners, is yet to be seen.

Looking ahead 

Despite the importance of the issues addressed by the last BBL reform, the concrete impact of these changes remain uncertain. Although positive, certain improvements introduced by the 2020 Reform do not seem to have achieved their goals, especially when it comes to changes in the liquidation procedure (which, by its very nature, will always act as a counterbalance to the conditions set forth in court reorganisations in general). Although some important and necessary discussions have been taking place recently, the lack of time for deep discussion and analysis of the problems being faced should encourage lawmakers to exercise care in approving any further reforms.

Nonetheless, the current state of the discussions is a sign of a much-needed development and maturity in Brazil’s insolvency system as a whole. Some important questions are being asked, as the impact and shortcomings of the 2020 Reform are becoming clearer. The maturing of the non-performing loans market and the emergence of large, distressed asset funds are, more than ever, proof of the growing maturity of Brazil’s insolvency system and its importance to the wider Brazilian economy.