Recent Developments of the Reform to the Brazilian Bankruptcy Law
Liv Machado (partner) and Ananda de Oliveira Vicentini (associate) from Tauil & Chequer discuss the recent reform to the Brazilian Bankruptcy Law, the related cases, and its effect on sale of assets, financing and insolvency proceedings.
Background
Brazilian insolvency proceedings, judicial reorganisation (JR), extrajudicial reorganisation (EJR) and liquidation are regulated by Federal Law No 11,101 enacted on 9 February 2005 (the “Brazilian Bankruptcy Law” – BBL), which is applicable only for companies and individual entrepreneurs.
The BBL was subject to a major reform by Law No 14,112, which came into force in 2021 with the following effects:
- introducing important topics, such as the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, the possibility for creditors to submit plans and a chapter dedicated to debtor-in-possession (DIP) finance;
- adopting certain rules that were already applied by courts’ precedents – eg, the possibility of better treatment, by the JR plan, for critical vendors that continue to supply or render services to the debtor; and
- modifying certain proceedings, such as the flexibility and legal certainty brought to the sale of assets.
Ultimately, the goal of the reform was to encourage financing for the debtor and the sale of assets, and to increase certainty and efficiency of proceedings in general, creating a scenario that is more attractive for distressed investments in Brazil. This article comprises a practical analysis of some of the main modifications of the reform, regarding sale of assets, financing and EJR.
Sale of Assets and Isolated Productive Units
The BBL allows the sale of assets organised into “isolated productive units” (IPUs). The amendment of the BBL included a definition of an IPU, clarifying that it may encompass assets or rights of any nature, tangible and intangible, including equity interests. The text of the reform was improved to provide that the sale of IPUs be free and clear of liabilities of any nature, including environmental, regulatory, administrative, criminal, anti-corruption, labour and tax liabilities.
“…the expectation is that the search for distressed assets in Brazil will become more frequent, providing more possibilities to restructuring companies and investors…”
Pursuant to precedents of Brazilian courts, a sale is free and clear as long as it is made through a competitive process. The modalities of competitive proceedings have also become more flexible, as the law now encompasses:
- any type of auction (electronic, face-to-face or hybrid);
- sales made by a specialised agent; or
- any other type provided in the JR plan or authorised by the JR court, after hearing the judicial administrator and the creditors committee, if any.
As an example of the new rules, within Laboratórios Baldacci’s JR proceeding (Case No 105708957.2020.8.26.0100), the plan (approved by the creditors and confirmed by the court) provided for the sale of two IPUs through a competitive proceeding, which was carried out by a specialised agent through invitation letters to the potential buyers.
Debtor-in-Possession Financing (“DIP Financing”)
Previous to the amendment of the BBL, there were no specific provisions on financing companies under JR. However, the amended BBL now provides that DIP lenders will have super-priority and will be paid only after urgent expenses and salary-related claims due three months prior to the bankruptcy decree, to a limit of five minimum wages per worker.
There were also discussions on the requirement of creditor’s approval of the DIP, which caused a lot of uncertainties for investors. For example, in OAS’s JR proceeding (Case No 1030812-77.2015.8.26.0100), an interested investor, Brookfield, withdrew from the transaction (a DIP financing of BRL800 million, guaranteed by the shares of the fiduciary lien of Invepar – OAS’s subsidiary) due to resistance by some creditors, who filed appeals to the São Paulo State Court of Appeals challenging Brookfield’s right to match the highest bid in the future sale of Invepar. However, since the amendment of the BBL, no approval by the creditors is required.
The court, after hearing the committee of creditors, which is rarely formed in Brazil, can authorise the DIP financing and also the granting of guarantees in favour of DIP lenders, including fiduciary liens, pledges and mortgages of other ranking preferences, without the consent of the previous secured creditors.
In April 2023, in Oi’s JR proceeding (Case No 0090940-03.2023.8.19.0001), the Seventh Corporate Court of Rio de Janeiro authorised Oi to constitute a fiduciary lien of its shares on V. Tal – Rede Neutra de Telecomunicações SA, in order to receive an emergency DIP financing in the amount of up to USD275 million by some of its financial creditors.
In accordance with the modified language of the BBL, DIP lenders may be:
- family members;
- shareholders; and
- entities of the debtor’s economic group.
In February 2023, in Americanas Group’s JR proceeding (Case No 0803087-20.2023.8.19.0001), the Fourth Corporate Court of Rio de Janeiro authorised the companies’ shareholders to grant a DIP financing in the amount of up to BRL2 billion.
Since the amendment of the BBL, which only came into force in 2021, it is already possible to observe an increase of DIP finance cases as a consequence of the related changes.
Extrajudicial Reorganisation
The amendment of the BBL included a provision stating that the debtor may file the EJR with the support of only one third of creditors subject to the proceeding, and later prove the support of the remaining creditors necessary for the approval or the reorganisation plan. The quorum for the approval of the plan was reduced from three fifths to more than one half.
In September 2022, for example, when Log & Print (Case No 1002692-49.2022.8.26.0659) filed for extrajudicial reorganisation, it only had the support of one third of the group of creditors affected by the plan. The court granted the processing of the EJR and, in December 2022, within the 90 days provided for in the BBL, the debtor filed the plan as well as proof of the necessary adhesion of one half of the subject creditors.
The reform also included a stay period of 180 days for EJRs, which has led to an increase in the number of filings of such proceedings. For instance, the relevant cases of the Andrade Gutierrez Group (Case No 5209787-06.2022.8.13.0024) and the Ocyan Group (Case No 0334340-20.2022.8.19.0001) were filed in 2022, and only included claims held by bondholders’ groups.
Since the new amendment of the BBL, the expectation is that the search for distressed assets in Brazil will become more frequent, providing more possibilities to restructuring companies and investors interested in such assets.
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