Fábio Rosas and Luciana Faria Nogueira of TozziniFreire Advogados assess the bankruptcy and insolvency regime in Brazil

Section 1: processes and procedures

1.1 What reorganisation and bankruptcy processes are available for financially troubled debtors?

The Brazilian Bankruptcy and Restructuring Law (BRL) establishes three major mechanisms that may apply to troubled companies: (i) judicial reorganisation proceedings; (ii) out-of-court reorganisation proceedings; and (iii) bankruptcy or forced liquidation. As one of its main features, the BRL offers the corporate debtor flexibility and continuity of management and an opportunity for rehabilitation.

The mechanisms of judicial reorganisation and out-of-court reorganisation, which replaced the old concordata (a court-relief system for debtors), are used when a particular business, although facing difficulties, is still viable and may overcome its financial crisis. In these situations, it is deemed that the preservation of going-concerns would ensure the survival of productive businesses and better serve the interests of employees, creditors, and society as a whole.

Bankruptcy or forced liquidation proceedings apply when a particular business is no longer viable. In this case, the debtor is removed from its activities and the existing assets are collected and sold. Any proceeds derived from the sale of assets are distributed among the creditors according to a preference order established by law.

Any debtor facing financial difficulties (insolvent or not) and meets certain conditions specified in the BRL not directly related to accounting tests (such as not have been in another judicial reorganisation proceeding for the past five years) may apply for judicial reorganisation proceedings. The request must be accompanied by several documents and information, including: explanations about the financial difficulties faced by the debtor, financial statements, a list of creditors and a list of employees.

Out-of-court reorganisation is simply a private arrangement between a debtor and some of its creditors. Any debtor that meets the same requirements for judicial reorganisation proceedings specified by law may propose and negotiate with its creditors an out-of-court reorganisation plan, and request its ratification.

Debtors that are facing a financial crisis and do not meet the conditions to benefit from judicial reorganisation or out-of-court reorganisation proceedings should request the declaration of their own bankruptcy. In addition, any creditor may request the forced liquidation of a debtor in certain circumstances.

In a judicial reorganisation proceeding, the court appoints a judicial administrator (trustee) in charge of supervising the company's activities and accomplishment of the reorganisation plan. The judicial administrator is named by the court, and the debtor and the creditors do not have any power to select it. The judicial administrator does not manage the company.

In the course of judicial reorganisation proceedings (the main mechanism used in Brazil) there should be no change in the management of the debtor company. Therefore, the managers of the debtor will retain their positions, although working under the supervision of the creditors committee (if any) and the judicial administrator appointed by the court.

In certain circumstances, however, managers will be removed from their positions, including when: (i) there are signs of bankruptcy crime; (ii) they have acted with willful misconduct or engaged in fraudulent schemes against creditors; (iii) they have made personal expenditures that are not compatible with their income; or (iv) their removal is specified in the reorganisation plan.

1.2 Is a stay on creditor enforcement action available?

In a judicial reorganisation proceeding, with respect to all credit subject to it, a suspension of 180 days will apply to all legal proceedings under way against the debtor. On the expiration of such term, all creditors will automatically regain the right to initiate or proceed with their lawsuits against the debtor. However, it is relatively common for courts to extend this period, on the grounds that the expiration of the stay would bring considerable challenges for the recovery of the company, thereby harming the group of creditors considered as a whole.

There are two exceptions to the 180-day suspension rule: lawsuits where there are no pre-defined amounts being claimed, and labour claims, which will continue their course in the Labour Courts until the amount of labour credits are defined. In these two cases, once such amounts are finally determined, they will be included as credits in the reorganisation proceedings.

1.3 What are the key features of a reorganisation plan and how is it approved?

In judicial reorganisation, the debtor should submit a reorganisation plan (or be declared bankrupt) within 60 days of the publication of the court order authorising the initiation of the proceeding. Debtors are not allowed to present a plan.

The plan must contain: (i) a detailed description of restructuring mechanisms to be used, which may include debt rescheduling, corporate reorganisation, transfer of corporate control, partial sale of assets, leasing of going-concerns, and a series of other measures; (ii) a demonstration of the economic feasibility of the debtor's business; and (iii) a report on the debtor's assets prepared by an expert appraiser or company. The plan should provide that overdue labour credits and credits deriving from accidents at work will be paid in no more than one year.

Creditors will be informed about the reorganisation plan and the applicable term to challenge the plan through a public notice. If any objection to the proposed plan is submitted by any creditor, the court will call a general meeting of creditors (GM). In the meeting, creditors may: (i) approve the plan as originally proposed; (ii) approve a modified version of the plan, as long as there is no opposition from the debtor and no harm to absent creditors; or (iii) reject the plan, in which case the debtor should be declared bankrupt.

Any reorganisation plan must be approved by the following categories of creditors in a GM: labour creditors and creditors related to accidents at work; secured creditors; unsecured creditors, creditors with special or general preference, and subordinated creditors; and, small businesses.

In the first and last class of creditors (labour-related claims and small businesses), approval is achieved with the favourable vote of the majority of creditors present at the meeting, regardless of the amount of their credits. In the other two classes, approval is achieved with the favourable vote of both: creditors representing more than half of the credit amounts represented at the meeting; and, the majority of creditors present at the meeting.

If certain vote combinations specified in the BRL are recorded in the GM, the court may approve the reorganisation plan even if it was not approved under the quorum requirements (cram-down).

1.4 Can a creditor or a class of creditor be 'crammed-down'?

Yes, a creditor or a class of creditor can be crammed-down. In a judicial reorganisation proceeding, for a reorganisation plan to be approved, it should be accepted by the four classes of creditors present at the GM: the majority of labour creditors; the majority of small business creditors; the majority of secured creditors and the majority of secured credits; the majority of unsecured creditors and the majority of unsecured credits.

However, if all requirements are not fulfilled, the BRL provides that the court may still ratify the reorganisation plan if, at the GM: (i) half the total amount of credits at the meeting approved the plan; and (ii) two classes of creditors approved the reorganisation plan or, if there are only two classes, at least one of them approved the plan; and (iii) in the classes of creditors that rejected the reorganisation plan, at least one-third of the creditors voted in favour of the reorganisation plan.

For out-of-court reorganisation, the plan must be ratified by a court in order to produce effects to all creditors contemplated in the plan, including those that have not expressly adhered to the plan.

In order to be ratified, the plan must have been approved by creditors representing more than three-fifths of credits in each category of creditors contemplated by the plan. This is considered a crucial provision of the BRL, since it permits the full application of an out-of-court reorganisation plan, even when it has not been approved by all affected creditors.

Creditors that did not adhere to the plan may challenge the ratification. Nevertheless, any challenge may be based solely on an alleged illegality or a failure by the debtor to comply with all necessary legal requisites or formalities.

1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?

According to the BRL, a reorganisation plan presented by a debtor company may provide for a judicial sale of branches or business units belonging to the debtor. A judicial sale, also according to the BRL, may: (i) take the form of an auction; (ii) be effected through proposals submitted in sealed envelopes; or (iii) be a combination of these two methods.

Once a judicial sale is effected in accordance with the BRL, the relevant branch or business unit will be free and clear of any liens and encumbrances, and the purchaser will not succeed the debtor with any indebtedness. As a consequence, creditors of a debtor that is subject to judicial reorganisation are not able to claim any amounts from the purchasers of branches or business units, and the corresponding assets cannot be enforced upon to satisfy the debt. Instead, creditors simply retain their original claims against the debtor.

There are no stalking-horse bids. However, an evaluation provides for a minimum value for the sale of an asset (first section) or, if the auction is not successful in the first section, the law forbids the sale to be performed at a token price.

1.6 What are the duties of directors of a company in financial difficulty?

In Brazil, directors and officers have no duties directly to creditors of the insolvent company or third parties. They have duties to shareholders of the company, even though the company is facing financial difficulties. Nevertheless, the actions of the directors and officers in relation to the company may be analysed if they harm other parties. Article 158 of Law 6,404/76 (the Brazilian Corporations Law) establishes that there are two basic hypotheses of civil liability of managers of corporations: for damages caused to the corporation by virtue of negligence or willful misconduct, even within their powers; and, for actions carried out beyond their authority, or contrary to the provisions of the law or the company's by-laws.

Article 50 of Law 10,406/02 (the Brazilian Civil Code) provides for the disregard of the corporate veil in order to enable attachment of the manager's assets in case of deviation of the company's purposes or commingling between the company's and the manager's assets.

According to article 82 of the BRL, the liability of directors, officers or shareholders of a debtor company will be accurate in the Bankruptcy Court, not being relevant if the assets of the company are enough to pay the debts, and the investigated parties may have its assets frozen by the court until judgement of the case. Directors, officers and shareholders may also face criminal liability if their actions fall within the specific definition of a given crime established by Brazilian laws, including certain bankruptcy-related crimes (such as providing false information during reorganisation proceedings with the intention of misleading the court or creditors). These bankruptcy-related crimes are disposed between sections 168 and 178 of the BRL.

In the event there are signs of any act of fraud, wilful misconduct or negligence, which leads to civil liability or crime, such acts tend to be closely analysed and investigated to verify their nature and penalise the responsible parties.

1.7 What priority claims are there and is protection available for post-petition credit?

In principle, all credits existing at the date of the filing of the request for judicial reorganisation are submitted to the proceeding, even if it is not matured. Post-petition credits are not subject to the reorganisation proceeding. However, depending on their nature and characteristics, some other credits may not be submitted to the effects of the proceeding.

Tax credits are not affected by judicial reorganisation proceedings, and tax collection can continue their due course. The BRL indicates that a separate law will establish the conditions for the rescheduling of tax debts owed by debtors utilising judicial reorganisation proceedings.

Judicial reorganisation proceedings are also not applicable to: creditors secured by fiduciary transfers of assets; lessors; sellers in irrevocable real estate purchase agreements with installment payments; and sellers of goods with title retention. In all such situations, the creditor is the actual owner of the assets, even when the assets are being used by the debtor. Therefore, the original contractual arrangements and corresponding debts remain in place.

The only difference is that, for a period of 180 days from the initiation of judicial reorganisation proceedings, the sale or removal of assets that are essential to the activities carried out by the debtor is prohibited. In other words, the BRL obviously recognises that creditors remain entitled to their ownership rights, but at the same time, the debtor receives some breathing room, since essential assets will remain in the debtor's possession for 180 days, even if there is a payment default.

Any amounts disbursed to the debtor under an advancement of foreign exchange agreement, as long as the applicable banking regulations pertaining to this type of advancement are observed, are also not affected by judicial reorganisation proceedings.

1.8 Is there a different regime for banks and other financial institutions?

As creditors, banks and other financial institutions have no specific or different regime, and their ranking or classification will depend on whether there is collateral or not, and if it is submitted or not to the effects the proceeding. As debtors, considering the large impact of the situation of financial institutions upon the national economy, there are several governmental strategies that might be taken in order to avoid and prevent the financial institution from a crisis and a future liquidation or bankruptcy proceeding. The insolvency proceeding (liquidation) of these institutions is regulated in the Federal Law 6.024/1974, that also provides the intervention of the government in the financial institution or bank.

Section 2: international/cross border issues

2.1 Can bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?

There is no specific provision in the BRL regarding the application of reorganisation proceedings to foreign companies. Recently, courts have discussed the inclusion of foreign companies in proceedings together with other companies from the same economic group (in which the holding company is Brazilian), with different understandings on the matter.

2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?

The BRL does not contain any specific rule dealing with extraterritorial bankruptcy or insolvency proceedings, with no provision regarding the recognition of other countries´ statutory processes, unlike chapter 15 of the US Bankruptcy Code. Reorganisation and bankruptcy proceedings involving Brazilian companies must be necessarily administered by a Brazilian court. As a result, any effects and consequences of possible ancillary or parallel proceedings in foreign jurisdictions will have to be dealt with on a case-by-case basis, subject to applicable conflicts of law provisions in cross-border matters.

There are provisions in Brazil that allows recognition by the Superior Court of Justice of foreign decisions once legal requirements are fulfilled, but not recognition of the processes themselves.

Section 3: other material considerations

3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?

In the insolvency proceedings provided in the BRL, the government does not have a regulated active role. On the other hand, to enable a more active participation of the government in the insolvency of some entities, the BRL is only applicable to debtor companies who pursue economic activities, while some entities are prohibited from filing a request for bankruptcy in any situation. Government-controlled companies or public companies, clearing agents and companies that deal with financial liquidation are prohibited from going bankrupt under the BRL.

There are some entities that are only relatively excluded from the insolvency proceedings: insurance firms; companies that deal with health insurance; and, financial institutions. Broadly speaking, they must be liquidated out of court, but, if some special requirements are fulfilled, they can go bankrupt (forced liquidation).

Governmental or regulatory institutions may be requested to assist the court, depending on the activity developed by the debtor company.

Labour credits should be paid in within one year (term established by law) of the approval of the reorganisation plan or the definite recognition of the credit. In forced liquidation proceedings, labour credits are first in the ranking of credits submitted to it, up to the limit of 150 minimum wage salaries. Shareholders of the bankrupt company, as well as affiliates, controlled or controlling entities, may participate in the GM, but they are not allowed to vote.

Section 4: current trends

4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction.

No important amendments in the BRL are currently envisaged, and so far, the volatility in the global market and rise in corporate restructurings has had no impact on Brazil's insolvency regime. However, these events have had a significant impact on the analysis made by the courts when judging appeals related to insolvency proceedings; they have been stricter and have been taking greater control over companies.

The BRL was recently amended in relation to small businesses (categorised as such under Brazilian law based on yearly revenues).

Considering that the existing BRL came into effect relatively recently, a solid track record has not yet been established in terms of successful or unsuccessful reorganisations. In terms of the proceeding itself, smaller companies tend to be more successful in reorganisations, since the smaller company structure and number (and size) of creditors tend to facilitate the process. However, for both small and large companies, the financial conditions in which the company entered the reorganisation proceedings will be the decisive factor for a possible recovery.

Recently, the Brazilian Investigation known as Operação Lava-Jato (Operation Car Wash) led to an economic crisis f or construction companies and infrastructure sector companies involved in the investigation, with several of them requesting judicial reorganisation.


  First published by our sister publication IFLR magazine. Take your free trial today.

Fábio Rosas
TozziniFreire Advogados
São Paulo

About the author

Fábio Rosas is a partner at TozziniFreire Advogados, and leads the restructuring and reorganisation, business, corporate and tax litigation department. He has assisted creditors and investors of companies under reorganisation and focuses on the acquisition of assets in debt restructuring proceedings, representing banks, financial institutions and companies of many different economic and market sectors.

Rosas attended the Academy of American and International Law, organised by the Center for American and International Law (2007). He graduated from the Faculdade de Direito da Pontífica Universidade Católica de São Paulo (PUC-SP) and has a postgraduate degree in philosophy of law from the same university.
A member of the Fiscal Council and co-founder of the Turnaround Management Association of Brazil (TMA), Rosas is also a member of the company recovery section at the International Bar Association (IBA), co-founder of the International Insolvency Institute (III), a member of the International Association of Restructuring, Insolvency & Bankruptcy Professionals (Insol) and of the Brazilian Institute of Management and Turnaround (IGBT).


Luciana Faria Nogueira
TozziniFreire Advogados
São Paulo

About the author

Luciana Faria Nogueira is an attorney in the restructuring and reorganisation, business and corporate litigation departments at TozziniFreire Advogados. She studied instruction in US law and recent developments in US law at the Fordham Law Institute in New York (2013). She graduated from the Faculdade de Direito da Pontifícia Universidade Católica de São Paulo (PUC-SP) and specialised in civil litigation at the same university and in business law at the Fundação Getúlio Vargas (FGV).