BRAZIL: An Introduction to Bankruptcy/Restructuring

The 2020 Reform of Brazilian Bankruptcy Law

More than four years after Law 14,112/2020 (“the 2020 Reform of the 2005 Brazilian Bankruptcy Law – BBL” or “the 2020 Reform”) entered into force, its results remain uncertain. The market continues to undergo changes, with a recent increase in the number of insolvency filings, which are currently at an all-time high. Brazil has also recently seen some large-scale insolvency cases, such as the second judicial reorganisation of the Oi Group and the judicial reorganisation of the Odebrecht/Novonor Group construction branch, and the highest number of judicial reorganisation filings in any year since the enactment of the BBL were recorded in 2024. However, even if these numbers appear to show that Brazilian companies may now be more comfortable using judicial procedures to treat insolvency, it is still uncertain whether the success rates of companies that do so have been, or will be, positively affected.

Currently, the main discussions in progress regarding the BBL have shifted away from reorganisation to focus on bankruptcy liquidation. Dialogue is more frequent than ever around: i) the duration of liquidation proceedings; ii) the effectiveness of the rules for conserving the value of assets; iii) the decision-making power to be attributed to creditors during proceedings; and iv) the solutions for rehabilitation of debtors. So much so that a controversial bill to further amend the BBL is being discussed, the content of which was not particularly well received by most practitioners and scholars on the subject, despite its initial traction within the legislative departments.

However, the 2020 Reform certainly has had a meaningful impact on the practice of business restructuring over the last four years. Extrajudicial restructuring and conflict resolution solutions have been more widely used, and are increasing in application in comparison to their judicial counterparts. 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.

Declining litigation

The Brazilian courts are known for being among the busiest in the world, reflecting a litigious culture. With a view to coordinating 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 insolvency proceedings. 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 feature of the mediation proceedings is that they can be initiated by the company before any insolvency proceedings are filed, and they give the company an initial stay of 60 days, which prevents dissenting creditors from seizing or constricting the company’s assets during negotiations. Some companies have already benefited from this protection, gaining time to negotiate with their creditors before, or instead of, filing for judicial reorganisation proceedings.

The 2020 Reform reduced the quorum required for the confirmation of pre-packaged reorganisation plans, from three-fifths to half of all classes of impaired claims. It also allowed companies to file for bankruptcy protection with the support of only a third of the classes of impaired claims, with a commitment to obtain the support of the remaining creditors within 90 days.

Investor and creditor 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 some degree of legal uncertainty. The 2020 Reform introduced provisions determining that the amounts provided during the reorganisation under 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 overturned by the Court of Appeals. These new provisions have already affected 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 entire insolvent companies with their debt restructured. These features have incentivised the activities of distressed asset funds as well as investments by strategic buyers.

Creditors now have 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.

Focus on bankruptcy liquidation proceedings

The 2020 Reform also made bankruptcy liquidation proceedings faster and more efficient. A 180-day deadline for the bankruptcy trustee to sell all the seized assets was included, which gave creditors a concrete baseline alternative for recovery, and positively affected the terms of court reorganisations in general. However, the change does not appear to have had such a positive impact on liquidation proceedings since, despite creating significant pressure on the bankruptcy trustee to sell assets fast (and not necessarily in the best market conditions), the 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.

Discussions continue on the chronic inefficiency in liquidation proceedings as well as the role of bankruptcy trustees. A controversial bill (PL 3/2024) is being considered 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. The bill was not well received by insolvency practitioners and scholars alike. What comes next, including the concrete impact of the bill (if approved) on the Bankruptcy Courts and practitioners, remains to be seen.

Looking ahead 

Although positive, certain improvements introduced by the 2020 Reform do not appear to have achieved their goals, particularly 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 much-needed development in Brazil’s insolvency system. 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.