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What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?
Insolvency and restructuring procedures in Brazil are governed by the Bankruptcy Law (Federal Law 11.101/2005).
On an international spectrum, is your jurisdiction more creditor or debtor friendly?
Brazil is a debtor-friendly jurisdiction.
Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?
Yes – special regimes govern the corporate insolvencies of, for example, financial institutions, insurers, health plan operators and pension funds entities.
Are any reforms to the legal framework envisaged?
Yes, a major reform was sent to Congress by the president in May 2018. However, the law-making process in Brazil is cumbersome and it is thus unclear when this will be voted on or if it will be approved in the near future.
Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
As a rule, the Bankruptcy Law sets out that managers and parent companies of an insolvent limited liability company or corporation are not liable for the company’s debts and suffer no restrictions.
However, according to Section 82, the shareholders, controllers or directors of an insolvent company can be declared liable for the company’s debts in the event of wrongful or abusive conduct.
In addition, directors, controllers and parent companies may be held liable if the bankruptcy judge pierces the corporate veil, based on a disregard of the legal entity theory. In short, in cases of abusive use of corporate personality or fraud, the bankruptcy court may accept an incidental procedure to lift the veil of the corporate entity within the bankruptcy procedure.
Finally, other statutes in Brazil (eg, labour and employment laws) set out circumstances under which directors, shareholders and parent companies can be held liable regardless of whether such company is insolvent.
What defences are available to a liable director or parent company?
According to the Brazilian legal system, a person is presumed innocent until proven guilty. Hence, the burden of proof regarding fraudulent, wrongful or abusive conduct rests with the plaintiff attempting to extend the liability to the director or parent company.
What due diligence should be conducted to limit liability?
Comprehensive due diligence prior to an acquisition is advisable – especially regarding labour and tax-related liabilities. In addition, shareholders and directors should be well informed about the company’s activities and follow expert advice, especially in relation to compliance with the local legislation.
Position of creditors
Forms of security
What are the main forms of security over moveable and immoveable property and how are they given legal effect?
In Brazil, the most common forms of security and liens are:
- penhor – a collateral over moveable property;
- hipoteca – a collateral over immoveable property; and
- alienação fiduciária – a kind of security interest that can be used on both moveable and immoveable properties.
The main difference is that while in penhor or hipoteca agreements title to the property remains with the debtor, in alienação fiduciária agreements, title is transferred to the creditor until the debt is fully paid, which allows the creditor to have better treatment in insolvency procedures.
The perfection of such guarantees or security interests depends not only on the execution of agreements or public deed, but also on its registration on the competent public register.
In addition, in relation to properties located inside the Brazilian territory, the security must be governed by Brazilian law.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
In bankruptcy liquidation, creditors will be ranked and paid under Sections 83 and 84 of the Bankruptcy Law.
According to Section 84, the liabilities incurred by the bankruptcy estate and the debtor-in-possession (DIP) financing granted during an in-court restructuring procedure have super priority over the rest of the creditors. Such creditors will be paid in the following order:
- liquidator’s fees and expenses relating to the performance of its duties, as well as labour-related credits with triggering events that occur after bankruptcy has been declared;
- loans made by creditors to the bankruptcy estate;
- expenses relating to the bankruptcy procedure;
- court fees relating to any judicial procedure in which the bankruptcy estate must pay; and
- DIP financing granted to the debtor during the in-court restructuring procedure preceding the bankruptcy and tax liabilities relating to triggering events that occur after bankruptcy has been declared.
If, after all of the super priority creditors listed above are fully paid, there are still funds remaining, the creditors listed in Section 83 will be paid in the following order:
- labour-related credits (including those derived from court decision) up to a cap of 150 times the Brazilian minimum wage (approximately $40,000) per employee (the amounts that exceed such cap will be considered unsecured credits for payment purposes);
- secured credits, up to the limit of the value of the guaranty (the unpaid balance will be considered unsecured credit);
- tax liabilities (except fines);
- creditors with special privilege and amounts due to small companies;
- creditors with general privilege;
- unsecured creditors;
- fines relating to any credit (including tax fines); and
- subordinate credits and amounts due to shareholders and managers.
In-court reorganisations have no rankings for payment purposes. However, creditors are divided into four different classes:
- labour-related creditors;
- secured creditors;
- unsecured creditors;
- unsecured creditors classified as ‘small companies’ under Brazilian Law.
The restructuring plan will provide the payment terms for each class. The only restriction with regard to payment terms is that labour-related creditors will be paid for no longer than 12 months; this is counted from the date on which the plan was approved, with no discount.
Can this ranking be amended in any way?
What is the status of foreign creditors in filing claims?
Foreign and domestic creditors are treated equally. However, foreign creditors may be required to present a judicial bond to initiate a lawsuit.
Are any special remedies available to unsecured creditors?
Unsecured creditors play a limited role in both bankruptcy liquidations and in-court reorganisations. However, they have the right to:
- vote in any creditors meeting (which can be a considerable advantage, depending on the creditors’ stake over the total debt); and
- create an unsecured creditors’ committee, entrusted with powers of inspecting debtors’ and liquidators’ activities.
By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?
Creditors can file collection claims in court to recover unpaid debts.
Is trade credit insurance commonly purchased in your jurisdiction?
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.
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.
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.
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.
What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?
Only the debtor may file for reorganisation, meaning that the Bankruptcy Law prohibits a creditor from initiating a restructuring procedure on behalf of the debtor.
State-owned companies, financial institutions, insurers, health plan operators, pension fund operators and non-profit entities cannot initiate restructuring procedures.
What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?
There are two main restructuring procedures in Brazil:
- in-court reorganisation; and
- out-of-court reorganisation.
In-court reorganisation stays creditors’ rights against the debtor, allowing time to reorganise and negotiate a reorganisation plan.
Filing for in-court reorganisation does not grant an automatic stay to the debtor. Instead, the stay over the creditor’s rights depends on the court’s acceptance of the procedure.
Once acceptance of the procedure has been made public, the debtor will have 60 days to file a judicial restructuring plan. The plan will first be submitted to the creditors by the judge, and a general creditors meeting will be scheduled if any creditor disagrees (for any reason) with the debtor’s proposed reorganisation. At the general meeting, the creditors will vote to approve or reject the plan.
If the plan is approved (and subject to the debtor’s compliance with other legal requirements), the judge will grant the reorganisation. If the plan is rejected, the reorganisation procedure will be converted into a liquidation.
In addition, if the debtor fails to honour any obligation provided in the restructuring plan in a two-year period following the date on which the reorganisation was granted, the judge will convert the reorganisation into liquidation.
Out-of-court reorganisation is a pre-package deal. The restructuring plan is submitted to creditors before the filling and, after it has the written acceptance of at least 60% of the creditors for each class, it will be filed in court for the judge’s recognition.
Among all of the creditors that can be affected by an out-of-court restructuring procedure, the debtor can choose specific groups to be subject to the restructuring provisions. For example, a debtor may restructure only the amounts due to financial institutions, leaving the suppliers unharmed. However, out-of-court reorganisations cannot reorganise labour contingencies, which are difficult to deal with in Brazil.
Unlike in-court reorganisations, out-of-court proceedings have no creditors’ general meeting. Once the filing has been made public, creditors will have 30 days to challenge it, and such challenge can refer only to:
- the non-fulfilment of the minimum approval percentage (60%);
- a breach of any other legal requirement; or
- illegal actions performed by the debtor (eg, defrauding creditors).
After all of the challenges have been filed, the judge will grant a final decision. If the judge rejects all of the challenges, the out-of-court reorganisation will be granted and bind all of the creditors listed in the plan.
How are restructuring plans formally approved?
The creditors usually approve the restructuring plan at the creditors’ general meeting, during which they will be divided into four different groups:
- labour-related creditors;
- secured creditors;
- unsecured creditors; and
- unsecured creditors classified as ‘small companies’ under Brazilian law.
To be approved, the plan must be accepted by the majority votes of each existing group, according to the following criteria:
- secured and unsecured creditors – affirmative vote of both the attending creditors holding more than half of the total amount of credits and the simple majority of the attending creditors, cumulatively; and
- labour-related creditors and unsecured creditors classified as small businesses – headcount, regardless of the value of the credits held by each creditor.
If the plan is approved (and subject to the debtor’s compliance with other legal requirements), the judge will confirm the reorganisation. If the plan is rejected, the debtor will be placed into bankruptcy liquidation.
The plan must be approved by creditors holding at least 60% of the credits in each class; such approval must be granted prior to the filing.
What effects do restructuring procedures have on existing contracts?
There is no specific provision on the effects of restructuring procedures on existing contracts. Since it is a debtor-in-possession (DIP) procedure, the contracts generally remain effective.
Notably, debtors are successfully challenging contractual provisions that give a party the right to terminate a contract if the other party files any insolvency procedure, especially if the contract is vital for debtor’s financial recovery.
What is the typical timeframe for completion of restructuring procedures?
Around three years.
What is the extent of the court’s involvement in restructuring procedures?
The court has an important role in both restructuring procedures, since all steps of the proceedings depend on a judge’s approval. For example, after the creditors approve a restructuring plan, it needs the court’s homologation to become effective. Further, any sale of assets by the debtor requires the court’s prior approval.
What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?
The most important role that creditors play in any of the restructuring proceedings mentioned herein is the approval of the restructuring plan. Considering that rejection of an in-court reorganisation will cause the debtor to go into bankruptcy liquidation, the creditors have good leverage to negotiate.
Besides approving the plan, creditors have the right to create a creditor’s committee to supervise the debtor’s and the judicial administrator’s activities.
Subject to some exceptions, both types of restructuring proceeding stay creditors’ rights against the debtor when the court formally accepts the proceedings. During the stay period, creditors cannot proceed with their collection rights against the debtor, which includes the seizure of guaranties.
Under what conditions may dissenting creditors be crammed down?
In Brazil, there are cram-down provisions only for in-court reorganisation. If the restructuring plan in not approved by the creditors in accordance with the ordinary quorum provided in Article 45 of the Bankruptcy Law, the judge may cram-down the dissenting creditors. However, to cram-down dissenting creditors, the judge must first verify that:
- creditors representing more than 50% in amount of all claims present at the general meeting have voted in favour of the restructuring plan;
- at least two classes of creditor have approved the plan, in accordance with the ordinary quorum provided in Article 45;
- more than one-third (in number for labour-related creditors and small companies and in both number and amount of credit for secured and unsecured classes) in the dissenting class have voted in favour of the plan; and
- there is equal treatment among the creditors listed in the dissenting classes.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in restructuring procedures?
Unlike what happens in bankruptcy liquidation, where all of the company’s administration is dismissed once the proceedings have commenced, both restructuring procedures are DIP – that is, they allow management to remain in control during the restructuring.
Although the firm’s relevant directors and shareholders normally lead the negotiating with creditors, the law does not require them to play a specific role in the procedure, apart from cooperation.
Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?
There are no specific legislation regulating informal work-outs. Nonetheless, it is always possible for the debtor to renegotiate its obligations alongside its creditors, in a completely out of court fashion.
However, there are risks involved in taking such an approach.
For example, if debtor later falls into bankruptcy liquidation, the new agreement may be declared automatically ineffective in relation to the bankruptcy estate, under Article 129 of the Bankruptcy Code.
Moreover, the transaction may also be challenged with the filing of a clawback complaint, on the grounds that such transaction sought to defraud creditors.
Setting aside transactions
What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?
Articles 129 and 130 of the Bankruptcy Law govern the setting aside of transactions executed by an insolvent company.
Article 129 lists the transactions considered automatically ineffective in relation to the bankruptcy estate. Under Article 129, there is no need to verify the intention of defrauding creditors in those transactions. If any of the circumstances listed under Section 129 are verified, the bankruptcy court may immediately declare the ineffectiveness of such transaction, determining how to return the situation to status quo condition.
Article 130 provides clawback situations in cases other than the ones listed under Article 129. Under Article 130, any transactions that was executed by the insolvent company with the intention of defrauding creditors can be set aside. However, in those cases, it is necessary to undergo a complete clawback procedure.
A clawback procedure starts with the filling of a clawback complaint, which may be presented by the liquidator, creditors or by the State Attorney’s Office within three years from the beginning of the liquidation.
The decision that upholds the clawback filing will determine the return of the assets to the bankruptcy estate, or the market value thereof, plus damages.
Operating during insolvency
Under what circumstances can a company continue to conduct business during an insolvency procedure?
All Brazilian restructuring procedures are debtor-in-possession (DIP), meaning that management continues to run the business’s operations during the reorganisation. The only restriction imposed over management during an in-court reorganisation is that it cannot sell fixed assets without the bankruptcy court’s approval (Article 66 of the Bankruptcy Law).
In bankruptcy liquidation, all business is ceased while managers and controllers are removed from control and a court-appointed liquidator is put in charge. However, in some (rare) cases, the court may authorise the liquidator to temporarily continue running the business after the liquidation starts.
Stakeholder and court involvement
To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?
Restructurings procedures are DIP, which means that, during the procedure, shareholders and directors will continue to operate the business.
Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?
In an in-court or out-of-court reorganisation, it is possible to obtain further credit, since the debtor is expected to recover at the end of the procedure.
The major problem in obtaining loans during reorganisation procedures is that, even though the DIP loaner is considered a super creditor, ‘senior’ super creditors (eg, the liquidator’s fees or the post-petition tax credits) must be paid first.
The Bankruptcy Law does not regulate DIP loans. The only existing provision in this regard is that DIP loaners are considered super creditors, in case the restructure fails and is converted into liquidation.
However, on liquidation, although being converted into a bankruptcy estate is irreversible, loans and other forms of financial aid may be provided to the debtor in exceptional cases.
Effect of insolvency on employees
How does a company’s insolvency affect employees and the company’s legal obligations to employees?
This varies depending on the insolvency procedure under analysis.
Former employees who hold a credit against the debtor will be listed on the procedure and, if the plan is approved, they must be paid in full within 12 months of the approval. Current employees are unaffected, as their salaries must be paid.
Out-of-court reorganisations do not affect work-related liabilities.
In the case of liquidation, employees will be dismissed by the liquidator and listed as creditors.
Recognition of foreign proceedings
Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?
The Bankruptcy Law is silent in such regard. Hence, for a foreign decision to be effective in Brazil, it must undergo an enforcement procedure before the Superior Court of Justice.
Winding up foreign companies
What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?
In accordance with Article 3 of the Bankruptcy Law, the courts have the power to wind up foreign offices established in Brazil only in relation to conduct in Brazil. Notwithstanding that, court powers are limited to within the territory.
Centre of main interests
How is the centre of main interests determined in your jurisdiction?
According to Article 3 of the Bankruptcy Law, the centre of main interests is determined based on:
- where administrative decisions are taken;
- the more profitable office; and
- where most of the assets are located.
What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?
Brazil has no legal provisions addressing the cross-border insolvencies issue.
Article 6 of the Civil Procedure Code provides a general duty of collaboration to all parties involved in a procedure, including different courts.
Further, Article 26 of the code sets out the principles for international collaboration, including:
- Brazil’s adherence to international treaties; and
Congress has received a project which aims to alter the Bankruptcy Law. It contains some provisions regulating cross-border cooperation which are similar to those provided in the United Nations Commission on International Trade Law Model Law.