Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.

Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

Bankruptcy liquidation may be filed by the debtor (voluntary bankruptcy) or by creditors (involuntary filling).

The Bankruptcy Law applies only to individuals or entities considered entrepreneurs. Further, in accordance with Article 966 of the Civil Code, an entrepreneur is a person or entity that “runs a business professionally”.

In addition, special regimes govern the insolvency procedures of state-owned companies, banking institutions, insurers, health plan companies and pension funds entities.

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

Bankruptcy liquidation is the primary procedure to liquidate an insolvent company.

As mentioned, the procedure may be started by the debtor (voluntary bankruptcy) or by creditors (involuntary filing).

Voluntary bankruptcy is regulated by Article 105 of the Bankruptcy Law. It provides that any debtor facing financial distress that is unable to pay off its debts and is ineligible to file a restructuring procedure can enter into voluntary in-court liquidation.

After the petition has been filed, and provided that all documents comply with the Bankruptcy Law, the judge will usually declare the debtor bankrupt within a short timeframe, as in these cases it is usually the debtor announcing its insolvency.  

Alternatively, involuntary bankruptcy is initiated by a creditor that has not been paid on time. The creditor must file a lawsuit requesting that the judge declare the debtor bankrupt. In this case, since the debtor has not declared its own insolvency, it can challenge the creditor’s claim. Judges usually apply a greater level of scrutiny before declaring bankruptcy these cases.

During an involuntary bankruptcy procedure, when served, the debtor can avoid bankruptcy by paying the fees owed to the creditor that initiated the procedure, along with attorney’s fees and court expenses. For this reason, creditors tend to use this procedure as an alternative collection system, since collection proceedings in Brazil are time consuming. The debtor can also avoid bankruptcy by filing an in-court restructuring within 15 days of the date on which it was served the notice of involuntary bankruptcy.

How are liquidation procedures formally approved?

After bankruptcy has been declared, the court-appointed liquidator will propose all liquidation procedures, subject to the court’s approval.

What effects do liquidation procedures have on existing contracts?

Subject to some exceptions, once bankruptcy has been declared, the court-appointed liquidator can terminate existing contracts or maintain their effectiveness. The decision to terminate a contract will be based on what is best for the bankruptcy estate’s interests.

The main aim is to preserve contracts that can be profitable, or those whose termination can potentially harm the bankruptcy estate.

What is the typical timeframe for completion of liquidation procedures?

Bankruptcy liquidation is a complex proceeding. Hence, it is hard to indicate a reasonable timeframe. That said, regular proceedings are typically completed in five to eight years.

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

The liquidator is appointed by the judge and entrusted with powers to:

  • catalogue all of the debtor’s assets and promote their evaluation and sale on public bids;
  • help the judge to create list of creditors of the bankruptcy estate;
  • represent all of the bankruptcy estate’s interests;
  • hire eventual employees that will render services to the bankruptcy estate (eg, lawyers, accountants and other agents); and
  • decide which contracts will be maintained and which ones will be terminated.

The effectiveness of the procedure relies on the liquidator’s ability to address this multitude of different tasks.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

The court has a high level of involvement in liquidation procedures, as judges monitor all important activities executed by the liquidator and must approve all liquidation measures.

The court’s involvement brings more credibility and legal certainty to the procedure, but also slows the procedure.

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

Creditors play a minor role in bankruptcy liquidation. They can challenge any liquidation measure taken by the court-appointed liquidator and create a creditor’s committee to supervise the liquidator’s activities.

In addition, creditors are stayed from taking any actions over the debtor’s assets.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

Directors’ and shareholders’ involvement does not go beyond an ordinary duty to collaborate and provide all documents and information requested by the judge or liquidator.

Click here to view the full article.