Brazil: Restructuring & Insolvency

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Brazil.

This Q&A is part of the global guide to Restructuring & Insolvency.

For a full list of jurisdictional Q&As visit

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    Among the several types of security over immovable and movable property in Brazil, the most common are mortgages (security over real property), pledges (security over movable assets) and fiduciary liens.

    In case of mortgages and pledges, the debtor encumbers an asset to secure the performance of an obligation, which is subject to reorganization and insolvency proceedings (as secured creditors), meaning that the ownership of the asset remains with the debtor after constitution of the mortgage or the pledge. These kinds of securities create a priority over the asset that can be opposed to unsecured creditors.

    In case of the fiduciary lien the debtor must transfer the ownership over an asset to the creditor to secure the payment of the debt and, in the event of default, the creditor may consolidate ownership over the asset to repossess further and sell it to satisfy the credit. If the debtor is under any reorganization or liquidation proceeding, the creditor may still repossess and sell the asset, as long as this type of creditor is not subject to the effects of such proceedings.

    To be enforceable all securities must be executed in writing through a private or public deed and, under the penalty of not being valid, shall be registered in the proper Public Register in Brazil and state the amount of the debt; the term fixed for payment, the interest rate, if any, and the property given as security..

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    In an event of default, a secured creditor not subject to the debtor reorganization or insolvency proceeding is entitled to file an enforcement proceeding against the debtor seeking collection of the secured credit.

    However if the credit is subject to the liquidation or reorganization of the debtor, such as the creditor holding a pledge or a mortgage, there are limitation to enforce the security. In a liquidation proceeding the court will order a permanent stay of the enforcement proceeding, while in a judicial reorganization the enforcement proceedings filed against the debtor will be stayed for a period of 180 days, counting from the granting of the processing of the judicial reorganization and only if the assets under a fiduciary lien are considered essential to the debtor’s business. In out-of-court proceedings, creditors subject to the reorganization plan, duly homologated, are prevented from enforcing their rights.

    Creditors with a fiduciary lien as well as financial lessors can continue with the enforcement proceeding during and after the suspension period mentioned above.

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    To be eligible for voluntary liquidation proceeding, the debtor whose business is no longer economically available may file for its judicial liquidation attaching certain documents set forth in Article 105 of the Brazilian Reorganization and Bankruptcy Law (Federal Law 11,101, dated 9 February 2005 – “BRBL”), as follows:

    • “accounting statements for the last three financial years and those specially drawn up to support the petition, prepared in strict accordance with applicable corporation law and consisting necessarily of (i) the balance sheet, (ii) accrued income statement, (iii) income statement as from the last financial year, (iv) cash flow report;
    • a nominal list of creditors, stating their address and the amount, kind and rating of the respective claims;
    • a list of properties and rights constituting the assets, with the respective estimate of the amount and documents evidencing ownership;
    • evidence of his status as businessman, articles of association or by-laws, or, if there are none, a list of all partners, their addresses and their personal assets;
    • the mandatory books and accounting documents required by law;
    • a list of officers during the last five years, with their respective addresses, offices and corporate holdings.”

    Although advisable, when the debtor cannot overcome its financially distressed situation, the debtor is not obliged to file for an insolvency proceeding in any event as the insolvency judicial proceeding is a prerogative that can be exercised at the debtor’s convenience. Therefore, no penalties can be applied if the debtor fails to do so.

    However, pursuant Article 94 of the BRBL, any creditor may file for the debtor’s liquidation, if the debtor (i) without relevant reason, does not pay on the due date a liquid obligation, the amount of which exceeds the equivalent of 40 minimum wages; (ii) being demanded on a collection action for any net and certain amount, does not pay, does not deposit and does not appoint sufficient assets for attachment; and (iii) performs any of the following acts, unless they are part of a judicial reorganization plan:

    • liquidates its assets precipitately or resorts to ruinous or fraudulent means to make payments;
    • carries out, or by unequivocal acts attempts to carry out, with the object of delaying payments or defrauding creditors, a simulated transaction or the disposal of part or all of its assets to a third party, whether or not a creditor;
    • transfers as security to a third party, whether or not a creditor, without the consent of all the creditors and without retaining sufficient assets to settle its liabilities;
    • simulates the transfer of its principal establishment with the object of circumventing the law or inspection or to harm a creditor;
    • gives or increases a guarantee to a creditor for a debt previously contracted without keeping sufficient assets free and clear to settle its liabilities;
    • absents itself without leaving a qualified representative with sufficient funds to pay creditors, abandons an establishment or attempts to hide its place of domicile, the locality of its headquarters or principal establishment; or
    • fails to perform, within the established term, an obligation assumed under the judicial reorganization plan.
  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    Pursuant the BRBL, the insolvency may be voluntary or compulsory. Its main premise is that the debtor’s business is no longer economically available and, due to this, its liquidation will seek to optimize the productive use of the property, assets and productive resources of the business.

    In the liquidation procedure an independent trustee is appointed by the Court (“judicial administrator” according to the Law), which must be a reputable professional — preferably a lawyer, economist, business manager or accountant — or a specialized legal entity. The trustee takes control of all the company`s affairs and its main obligation it is to collect all its assets to pay the debtor`s creditors according to the payment order provided by the BRBL.

    The debtor forfeits the right to manage its assets or dispose them, however, the debtor, stakeholders and managers have the right to monitor the administration of the insolvency and request measures as may be necessary to preserve its rights and assets within the bankrupt estate.

    The bankruptcy court is the only one competent to hear all lawsuits involving the bankrupt party’s assets, interests and business excluding labor and tax suits. In this regard, all lawsuits, including those excepted here, shall proceed under the trustee. However, the debtor, stakeholders and managers retain the right to intervene in all proceedings in which the bankruptcy estate is a party and may require whatever may be rightful.

    It is extremely difficult to precise how long the procedure will take, since it depends on several stages. A liquidation proceeding takes place in two phases: informative and executive. In the informative phase, the bankrupt estate’s assets and liabilities are determined, property and documents are collected, and creditors are determined and classified, culminating in the publication in the general list of creditors. In the executive phase, the debtor’s assets are realized and the liabilities are paid. Once all assets have been realized and the proceeds have been distributed among the creditors, the trustee must submit his or her accounts to the court within 30 days and, after evaluation, a final report is submitted indicating the value of the assets and the payments made to the creditors. Only them the court then issues a judgment concluding the proceeding.

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    Pursuant Article 83 of the BRBL, the payment of creditors in the insolvency proceeding must obey the following rank:

    • “labor-related claims, limited to 150 minimum wages per creditor and labor accident claims;
    • secured claims;
    • tax claims, except for tax fines;
    • special privileged claims, such as those (i) described in Article 964 of the Brazilian Civil Code, (ii) so defined in other civil and commercial laws and (iii) whose holders are vested with retention right;
    • general privileged claims, (i) those under Article 965 of the Brazilian Civil Code and (ii) unsecured claims held by goods or service suppliers subject to judicial reorganization who continue to provide them normally after the judicial reorganization;
    • unsecured claims;
    • contractual penalties and fines for breach of a criminal or administrative law, including tax-related fines; and
    • subordinated claims, such as (i) those so provided for by law or contract and (ii) the claims of partners and officers without an employment bond.”

    Moreover, the following are considered with “super priority” over the credits listed above, in order of priority:

    • fees payable to the trustee and his/her assistants and labor-related claims or occupational accident claims refer-ring to services rendered after the liquidation;
    • sums provided to the bankrupt estate by the creditors;
    • expenses for schedules, management, asset realization and distribution of the proceeds, as well as court costs of the bankruptcy proceedings;
    • court costs regarding the actions and executions in which the bankrupt estate is defeated; and
    • obligations resulting from valid juristic acts performed during the judicial reorganization or after the decree of liquidation (such as DIP loans).
  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    According to Article 129 of the BRBL, the following acts can be challenged and will be considered ineffective “whether or not the contracting party was aware of the debtor’s condition of economic and financial crisis and whether or not the debtor intended to defraud creditors:

    • payment by the debtor within the legal term of debts not yet fallen due, by any means of extinguishment of the credit right, including by discount of the actual instrument;
    • payment made within the legal term of debts fallen due and enforceable, in any way not provided for under the contract;
    • constitution of in rem guaranties, including lien, within the legal term, in the case of a debt contracted previously;
    • if the assets given in mortgage are the object of other subsequent ones, the bankrupt estate shall receive the part that should apply to the creditor of the revoked mortgage;
    • acts performed free of charge during the two years preceding the decree of bankruptcy;
    • waiver of inheritance or legacy during the two years preceding the decree of bankruptcy;
    • sale or transfer of an establishment without the express consent of, or payment to, all creditors existing at the time, sufficient assets not having remained to the debtor to settle its liabilities, unless, within 30 days, there is no opposition by creditors after being duly notified, either judicially or by deeds and documents registry office;
    • registration of in rem rights and of property inter vivos, for a consideration or free of charge, or an annotation of a real property made after the decree of bankruptcy, unless there is a previous annotation.”

    In those cases, the ineffectiveness may be declared ex officio by the bankruptcy court and may be alleged in defense or claimed through a specific lawsuit or even incidentally during the proceedings.

    Also, any acts performed with the intent to injure creditors may be revoked, as far it is proved the fraudulent collusion between the debtor and the third party contracting with him and the loss suffered by the bankruptcy estate.

    The revocation suit can be filed by the trustee, by any creditor or by the Public Attorney’s Office within three years as from the decree of insolvency and the decision that considers the revocation suit well founded shall order that the assets be returned to the bankrupt estate in kind, with all accessories, or the market value, plus loss and damage.

  7. What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?

    As previously mentioned, the decision that decrees the debtor’s insolvency stays the course of the statute of limitation and of all procedures and executions against the debtor, no matter where the procedures and executions are being processed, with the exception of procedures that claims a non-fixed amount, which may continue at the same court where they are proceeding, including proceedings outside Brazilian jurisdiction.

  8. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    The BRBL provides that the debtor in an economically distressed situation may file for a judicial or out-of-court reorganization procedure, in order to make possible for the debtor to overcome its economic and financial crisis, thereby maintaining the debtor’s business as a source of production and employment, and the protection of creditors’ rights.

    To be eligible for judicial reorganization relief, the debtor must fulfill several conditions required by law, including being in business for at least two years and not having obtained a granting of judicial reorganization within the last five years. Moreover, in an application for judicial reorganization proceeding, the debtor must also make a statement of the reasons for the economic and financial crisis, and must attach the following documents in the request: (i) accounting statements for the last three financial years and those drawn up to support the petition; (ii) a full nominal list of creditors; (iii) a full list of employees; (iv) a certificate of regular standing of the debtor at the Company Public Registry, updated articles of association and minutes of appointment of current officers; (v) list of assets of the debtor’s controlling partners and officers; (vi) statements of the debtor’s bank account and any financial investments of any kind; (vii) certificates of the protest offices in the debtor’s headquar¬ters and branches; and (viii) a list signed by the debtor of all legal actions to which it is party with an estimate of the respective amounts claimed.

    Once the decision ordering the judicial reorganization has been taken, an independent trustee is appointed by the Court whose the main task is to monitor the debtor’s activity and also the accomplishment of the reorganization plan (presented by the debtor and approved by its creditors), as in the judicial reorganization procedure the debtor and his managers remains in possession of its assets and shall continue to lead the corporate activities under the supervision of the appointed trustee.

    The debtor must elaborate and submit the judicial reorganization plan, which can entail any kind of agreement permitted or not forbidden by the law, within 60 days of publication in the Official Gazette of the decision to process the judicial reorganization plan. It is extremely common for creditors to file an objection to the reorganization plan and, pursuant the BRBL, the judge must call a general meeting of creditors to deliberate on the matter.

    The general meeting of creditors will deliberate about several issues, including approval of the reorganization plan, constitution of the creditors’ committee, etc. The judge may grant the judicial reorganization of a debtor whose plan has not been rejected by any creditor or has been approved by all classes of creditors (labors, secured creditors, unsecured creditors and micro and small companies) at the general meeting of creditors. The general rule states that, to be approved, the plan must be accepted by secured and unsecured creditors representing more than half of the total value of credits at the meeting and by the majority of the creditors present. Labor and micro and small corporation creditors will vote per head regardless of the amount of their claims. If approved, all creditors will receive their credits as per the judicial reorganization plan, but if the general meeting of creditors rejects the reorganization plan and the conditions to cram down are not fulfilled, the judge must decree the debtor liquidation. Once approved, the plan must be homologated by the court and, after that, will bind all creditors subject to the judicial reorganization.

    On the other hand, the out-of-court reorganization enables private agreements between the debtor and its creditors thus providing favorable and faster conditions for restructuring a company in financial distress. Such agreements must be reflected in a reorganization plan that under specific circumstances can be filed only by the debtor for judicial homologation.

    Therefore, out-of-court reorganization is much swifter and less expensive than judicial reorganization, since there is no need for a general meeting of creditors and there is no trustee to supervise the debtor’s activity. More than that, the role of the bankruptcy court is just to homologate the plan if and when required by the debtor, circumstance in which binds all creditors encompassed by the out-of-court plan since it is signed by creditors representing over 3/5 of all claims encompassed in the plant.

  9. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    The debtor in a restructuring proceeding may obtain new financing and all new money injected or lent to the debtor during the judicial reorganization procedure is considered post-petition claim and have priority over the credits subject to the Judicial Reorganization in an event of insolvency.

  10. Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?

    The restructuring proceeding will not suspend or release claims against non-debtor parties and guarantees extended by third parties would still be enforceable.

  11. Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?

    The BRBL provides that is possible to be formed a committee of creditor, which will have several duties including: (i) to supervise the activities and examine the accounts of the administrator; (ii) to monitor the course of the proceedings and performance of the law; (iii) to inform the judge if it detects any violation of the rights or injury to the interests of the creditors; (iv) to verify and issue an opinion on any complaints by interested parties; (v) to request the judge to call general meetings of creditors; (vi) to pronounce in the events established in the BRBL.

    Moreover, in the judicial reorganization proceeding, the committee will also: (i) supervise the management of the debtor’s activities and submit a report on his situation every thirty days; (ii) supervise the performance of the judicial reorganization plan; and submit for authorization by the judge, when the debtor is removed from the management in the events provided in the BRBL, the alienation of fixed assets, the establishment of in rem and other guarantees, as well as acts of indebtedness required for the continuation of corporate activities during the period preceding approval of the judicial reorganization plan.

    The Committee may hire advisors, usually lawyers and financial advisers, in order to negotiate the best terms with the debtor and to make sure that the plan feasible. The committee’s members fees will not be defrayed by the debtor, but expenses incurred to perform any of the acts provided in the BRBL shall be reimbursed if duly evidenced and authorized by the court

  12. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?

    There are still discussions in the legal doctrine on the matter, especially in situations where the parties have included a termination clause in the event of reorganization proceeding. However, in principle all contracts entered into by the debtor before the judicial reorganization will remain in full force during the proceeding, unless the BRBL or the approved judicial reorganization plan specifically determines otherwise.

    Whenever an approved judicial reorganization plan entails the judicial sale of branches or separate unit’s production, the asset of the disposal shall be, in theory, free of any encumbrance and the buyer shall not succeed to any debtor’s obligations. In the event of any security exist over the asset the respective creditor must first agree with the release of the security in order to the asset to be sold.

    Creditors may buy the debtor’s assets at a fair market value; however, in principle, they are not allowed to pay for the asset with their credits under the penalty of jeopardizing the collective reorganization proceeding, as far as the creditor would be receiving its credit prior to the other creditors and not per the approved plan.

    According to the BRBL, the asset disposal may be by auction, via oral bidding; by sealed bids; or by public proclamation. However, the court may authorize, under exception conditions, other judicial modalities of disposal if duly substantiated by the trustee or the committee.

    In insolvency proceedings the existing contracts may continue being performed by the judicial administrator, through Committee authorization, if the performance reduces or prevents an increase in the liabilities of the bankrupt estate or is necessary to maintain and preserve its assets.

  13. What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?

    See above.

  14. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?

    In principle, a company’s liquidation does not extend to its partners. Nevertheless, pursuant the Brazilian Civil Procedure Code, in cases of abuse of legal personality, characterized by the misuse of the legal entity’s distinct personality or confusion of assets between the legal entity and another person (whether natural or legal), the court can pierce the corporate veil in order to extend certain obligations to the personal property of the legal entity’s directors, officers, shareholders or partners.

    Therefore, directors, officers, shareholders or partners of a limited liability company under liquidation can be subject to civil and penal liabilities. Their liability is restricted to acts that have caused loss or damage to the company while it was under their control or management, by reason of negligence, fraud or acts contrary to the law or the company’s by-laws or articles of association.

    Moreover, if there is evidence that the administrators or controlling shareholders performed acts harmful to creditors’ interests, the creditors may bring an action for damages against them, even though they are no longer part of the bankrupt company.

    As for criminal liability, which is expressly provided for in Articles 168 et seq of the BRBL, the administrators, manag¬ers and liquidators of the company are equated to the debtor or bankrupt company for the purposes of the criminal provisions of the BRBL, each to the extent of his/her fault. The criminal sanctions are borne by the person or persons who managed the company and who committed the criminal act in the company’s name.

    Although liquidation in itself is not a crime, certain acts committed prior to bankruptcy are considered by law to be criminal, such as:

    • fraud against creditors;
    • failure to record entries in accounting books;
    • destruction or concealment of required accounting documents or accounting or business information;
    • sham with respect to the composition of the company’s capital;
    • falsification of required bookkeeping material;
    • keeping a double set of books; and
    • violation of confidential business information.

    In the Judicial Reorganization officers and directors can be overthrown if (i) have been sentenced for a crime committed under previous judicial reorganization or bankruptcy or for a crime against property, public welfare or economic policy; (ii)demonstrates clear indications of having committed a bankruptcy crime; (iii) have acted with willful misconduct, simulation or fraud against creditor’s interests; (iv) have refused to provide information requested by the trustee or the committee; (v) have their dismissal provided for in the judicial reorganization plan; (vi) have been engaged in any of the following acts: (a) incurring in excessive expenditures in relation to its financial condition; (b)incurring expenses that cannot be justified by the business; (c) decapitalizing the company with no justification; (d) carry out transactions that impair the regular functioning of the company; (e)simulating or omitting claims on submitting the list of creditors.

  15. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    See previous question.

  16. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency been adopted or is it under consideration in your country?

    Unfortunately, Brazil still does not have a legal structure to handle, with the due legal certainty, transnational restructuring or insolvency proceedings. Also, Brazil is not a signatory to any international treaty relating to insolvency and does not follow the insolvency model adopted by EC regulations or UNCITRAL.

    The BRBL adopted a purely territorialist approach and Brazilian courts will only enforce a restructuring or insolvency proceeding if the proceeding occurs in the district of the debtor’s main place of business, meaning that Brazilian Courts will not recognize foreign bankruptcies procedures if the mains the debtor’s main place of business is Brazil .

    In Brazil, a bankruptcy decision by a foreign court must, like any other foreign decision, be first recognized by the Superior Court of Justice to be considered enforceable in Brazil, which can make the enforcement of the decision in Brazil slow and lengthy.

    Pursuant to the Federal Constitution, Resolution No 9 of the Superior Court of Justice, the Code of Civil Procedure and the Law of Introduction to the Civil Code, to be recognized by the Superior Court of Justice, a foreign decision must:

    • be in compliance with Brazilian public policy, sovereignty and good moral principles;
    • be rendered by a competent authority;
    • have had a valid service of process on the parties or duly certified default of the defendant party, in the country where each party needs to be summoned;
    • be final and binding, and vested with all the formalities necessary for execution in the place in which it was issued; and
    • be certified by the Brazilian consul residing in the country where the decision was issued, together with a sworn trans¬lation of the decision or award in Portuguese.

    Moreover, when filing for homologation before the Superior Court of Justice, the party must attach to the request a certified copy of the case records, a certified and legalized copy of the judgment, and a certified and legalized copy of the document attesting that the judgment is final and binding. The Superior Court of Justice only analyses the formal aspects of foreign judgments or awards; the merits of the decision are not the object of examination.

  17. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    As previously mentioned, the BRBL adopts the territoriality principle, meaning that the court of the place of the principal establishment of the debtor or the Brazilian branch of a company headquartered outside Brazil is the one competent to ratify out-of-court plans, grant judicial reorganizations or decree insolvency.

    Despite the lack of legal provision on the matter, there are several Brazilian precedents in which foreign companies were included in restructuring or insolvency proceedings in Brazil under the argument that the “COMI” (center of main interest) of such companies is in Brazil and, therefore, the proceeding should be submit to Brazilian jurisdiction.

    In this regard, according to BRBL the sole court with jurisdiction to (i) declare a company insolvency/liquidation, (ii) ratify out-of-court reorganization plans or (iii) grant judicial reorganization is the court of the debtor’s COMI. However, in most of the cases such foreign companies were considered financial vehicles to fund the Brazilian companies.

  18. How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

    In a liquidation scenario, intercompany claims are considered subordinated and are the last to receive compensation under the ranking established in Article 83 of the BRBL. The legal doctrine explains that there is a presumption in the insolvency regime (i.e., in a liquidation) that any funding provided by shareholders – directly or indirectly through other controlled entities – shall be treated similarly to an equity stake and therefore shall be paid only after all other creditors of the debtor.

    However, this presumption does not apply to a judicial reorganization, since this proceeding does not entail the liquidation of the debtor's assets, but rather allows the debtor to propose payment conditions to the creditors with a view to restructure its activities and continue operating. Therefore, under a judicial reorganization proceeding, intercompany claims will receive compensation according to the type of the credit and to the judicial reorganization plan.

    However, in any case, the debtor’s partners, as well as associated, controlling and controlled companies or those having a partner or shareholder with an interest of more than 10% of the debtor’s capital stock may not vote in the general meeting of creditors.

  19. Is it a debtor or creditor friendly jurisdiction?

    There is a pro-debtor-bias in Brazil.

    Brazilian Courts, when ruling, lends more weight to social justice principle, leaving in second place the legality principle. In this scenario, it is not uncommon to observe a willingness of Brazilian Courts to ignore contracts in order to promote social justice.

    In a study conducted in the year 2002, among members of Brazilian elite, by two Brazilian political scientists, Lamounier and Souza, it was shown that only 7% of the members of the Judiciary were prepared to rule on contracts independently of social considerations. Also, 61% of the judges interviewed answered that the achievement of social justice is enough to justify decision in breach of the contracts. This situation can be observed in an particularly acute way in the Judicial Reorganizations filed around the country, notably, because the BRBL stress the importance of the debtor to overcome its economic and financial crisis, in order to maintain the debtor’s business as a source of production and employment, thus contributing to preserve the company and its social aim and to foster economic activity. Due to that, Brazilian Courts tend to see the company as a social entity that despite its distressed situation it is still able to generates wealth.

    Also, the Judiciary’s slow pace argues strongly in favor of the debtors, increasing the difficult for creditors to enforce their rights or to repossess collateral.

  20. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    Not in fact. However, as everywhere, sociopolitical factors, obviously, have a direct impact on the financial health of the company and are relevant when taking the decision about the filing of the bankruptcy procedure.

    During the judicial reorganization the State is present through the Judiciary whose function shall be limited to the control of legality, that is, the role of the Judiciary is to guarantee that requirements of the BRBL are being observed and also that general principles that govern Brazilian legal system are being attended. In spite of some contrary interpretations, it is not up to the Judiciary to decide whether the company under judicial reorganization is economically viable or not as the BRBL clearly assigns this role to the creditors that shall decide on the viability of the company in judicial reorganization by approving or not the judicial plan that, on the other hand, is subject to the control of legality by the Judiciary. In this regard, the Judiciary will check if the deliberations of the general meeting of creditors and the provisions of the plan does not offend the law and, after that, may homologate the plan in order to bind all creditors subject to the judicial reorganization.

    In the Insolvency procedure, however, the role of the State, also exercised through the Judiciary is much broader, notably because once decreed the Insolvency the debtor is no longer considered debtor in possession and all matters related to the Bankruptcy Estate shall be handled by the Trustee appointed by the Bankruptcy Court.

  21. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    The biggest issues the parties involved in a reorganization or insolvency proceeding faces is the delay of the Brazilian judiciary, especially due to overly bureaucratic procedures and the large number of ongoing proceedings.

    Also, Brazil has not adopted Uncitral law nor the BRBL has any provisions regarding cross-border bankruptcies, instead Brazilian Courts adopt the territoriality principle meaning that Brazilian Courts have exclusive jurisdiction over the debtor and all its assets. In this regard, the lack of regulation of cross border bankruptcy procedures it is a problem especially in a civil law country as Brazil, as decisions in the transnational bankruptcies is taken by Bankruptcies Court in random basis and without any kind of predictability. However, this issue is being addressed in the one of the various drafts of Bill that are waiting for approval by the House of Representatives and Federal Senate.

    In fact, there are several drafts of Bills which deals with changes in the BRBL and are pending in the House of Representatives and Federal Senate, the most relevant being Bills No. 6.229/2005, No. 1572/2011 and No. 487/2013.

    Among other changes, these drafts includes provisions that: (i) extends the application of the BRBL to other entities, like cooperatives and rural producers; (ii) provides the possibility for creditors to submit a plan that considers more advantageous; (iii) deals with transnational insolvency, including rules that prescribe cooperation between the Brazilian and foreign courts, a reduction of formalism among judicial authorities, the existence of a main court and subsidiary courts and also respect for the sovereignty of each country; and (iv) creates new specialized courts in insolvency proceeding.

    In this regard, it seems that the intention of these drafts is to simplify and to reduce the bureaucracy and the costs of the reorganization and liquidation proceedings. However, for the moment the drafts still causes intense controversy and discussion in the legal community and its future is still unknown. However, for the moment the drafts still causes intense controversy and discussion in the legal community and its future is still unknown.