Brazil Overhauls Bankruptcy Law

Fabio Luis Celli.

29/09/2005 Legal Week

Having discussed a draft bill regulating the ‘recovery and liquidation of legal entities and individual debtors carrying out economic activities’ since 1983, the Brazilian Government has finally enacted new legislation providing a raft of significant amendments to Brazilian bankruptcy and insolvency law.

Until the publication of the new legislation, bankruptcy processes in Brazil were excessively delayed and did not include provisions for adequate participation and supervision of the interested creditors.

The result of this was often a further deterioration of the failed company, frequently translating into significant losses for the creditors and damaging consequences for society as a whole.

A major factor for this was the severity and lack of flexibility of the instruments previously available, meaning that it was difficult to promote the effective recovery of troubled companies.

The new law was enacted in order to modernise regulations set forth in the existing legislation and to add more flexibility by means of the creation of a range of alternatives to face the economic and financial difficulties of the debtor company.

The aim was to enable a fast and efficient solution for the bankruptcy process, maintaining productive companies and jobs.

The new amendments see the elimination of the former voluntary concordata proceedings, to be replaced by two voluntary proceedings — judicial business reorganisation ( recuperacao judicial) and extra-judicial business reorganisation ( recuperacao extrajudicial).

Amendments are also made to the regulation of straightforward bankruptcy ( falencia), updating the procedure for the collection of the debtor’s assets and the settlement of his debts.

Judicial business reorganisation

In order for the debtor to be authorised to carry out a judicial business reorganisation, the conditions established in article 48 of the new legislation — referring to the absence of insolvency situations involving the debtor and to the lack of unfavourable judgments relating to any of the crimes set forth in that law — must be fulfilled.

The debtor must also provide evidence that rehabilitation and reorganisation of his business is possible.

The debtor initiates proceedings for the judicial business reorganisation by filing the corresponding petition with the court and, if the petition is accepted, submitting a plan of recovery within a 60-day period.

The admission of the petition suspends the creditors’ right to file legal actions against the debtor, or to continue those already initiated, for a 180-day period, during which time the debtor must submit a business reorganisation plan to the creditors.

If the creditors approve the plan, in accordance with the quorum set forth in the new law for each type of creditors, the plan will finally be passed by the court.

If the creditors do not approve the plan then individual legal actions against the debtor may be filed and the proceedings already initiated may continue.

The business reorganisation plan issued by the court must subsequently be complied with.

Creditors are no longer entitled to file legal actions against the debtor or to continue any legal actions or liquidation proceedings previously initiated.

However, should the debtor not comply with his obligations under the plan, the court can declare the straightforward bankruptcy of the debtor.

Extra-judicial business reorganisation

A business reorganisation plan negotiated with creditors representing at least 60% of each type of credits must be filed by the debtor with the court.

The conditions set forth in article 48 of the new law must also be fulfilled.

Creditors who do not agree with the plan are not bound by such a plan and are therefore entitled to exercise their rights and to file legal actions against the debtor.

Creditors may file objections to the business reorganisation plan within 30 days of the courts publishing the plan.

Straightforward bankruptcy

The trustee of the straightforward bankruptcy, formerly known as the receiver ( sindico), is now called the judicial administrator.

The remuneration of the judicial administrator will from now on classify as a separate debt from the credits included in the liquidation proceeding.

The term for the debtor to reply to a bankruptcy application has been extended from 24 hours to 10 days, while straightforward bankruptcy can now only be requested from the court if the outstanding debts exceed 40 times the minimum wage.

The perishable assets of the debtor, and the assets which are subject to depreciation or which are expensive or risky to maintain, can be placed before the other assets with the approval of the court.

In addition to the auction and the proposal, new proceedings for the sale of the debtor’s assets ( pregao) have been created, while the order for payment of preferential credits has also been amended.

The new bankruptcy law also establishes the maximum amount of the preferential credits.

Yet despite reaching the purpose of enhancing the chances of restructuring distressed business and credit recovery, as well as optimising the results of bankruptcy proceedings, the new law still has some defects.

For instance, the 60-day term for the debtor to submit a plan of judicial recovery, counting from the date when the court accepts the debtor’s petition, may well be insufficient to properly address the company’s underlying difficulties.

Nevertheless, the new legislation undoubtedly represents a significant step forward with a number of major benefits for Brazilian companies — and their creditors.