SECTION 1: Market overview
1.1 What have been the recent bankruptcy and reorganisation
trends or developments in your jurisdiction?
Law 11,101 dated February 9 2005 (the Bankruptcy Act)
continues to be the most important statute on insolvency.
Rescue continues to be favoured over liquidation, and
reorganisations continue to be heavily favoured over pre-packs
among available rescue mechanisms.
Several large entities have chosen to deal with their
creditors out of court, as banks have been more flexible and
willing to reschedule debt maturity dates and enter into
standstill agreements than in the past.
Publicly-traded telecom carrier Oi, with debt in excess of
R$65 billion ($21 billion), made the largest-ever Brazilian
insolvency filing. Oi's struggles stem from factors ranging
from bad M&A deals to regulatory hurdles by telecoms
watchdog Anatel. This is a very complex matter that also
involves aspects of cross-border insolvency (with non-main
proceedings in the UK, US, Netherlands and Portugal).
The real estate industry has been severely affected by poor
macroeconomic conditions, translating into low credit
availability, retraction in the number of new enterprises and a
surge in early terminations of purchase agreements by buyers.
Publicly-traded property developers and high-rise building
constructors Viver and PDG have petitioned for reorganisation.
These cases have garnered a lot of public interest because
delays in ongoing construction works could affect thousands of
1.2 Please review some recent important cases and their
impacts in terms of precedents or shaping current
Courts have reaffirmed the principle of preservation of the
business (article 47 of the Bankruptcy Act) to the detriment of
creditors' freedom to oppose rescue.
The Superior Court of Justice (STJ) has found that the
majority may vote to suppress security over an asset and bind
the relevant secured creditor (article 50, §1, of the
Bankruptcy Act sets forth that consent by the creditor is
The São Paulo State Court of Appeals (TJSP) entered
two important opinions in the Schahin matter: first, that votes
by syndicated banks against the plan were deemed abusive and
disregarded on the grounds that the debtor is still generating
revenue and immediate liquidation would only favour the banks
to the detriment of workers; and second, that funds that had
bought a claim to which contractual step-in rights were
attached must be deemed indirect controlling shareholders of
debtors and may not vote the restructuring plan.
The Rio de Janeiro State Court of Appeals (TJRJ) found that
Abengoa is allowed to present a consolidated plan, to be voted
by creditors to each debtor at separate meetings; this is a
middle-ground approach to substantive consolidation.
SECTION 2: Processes and procedures
2.1 What reorganisation and insolvency processes are
typically available for financially troubled debtors in your
The Bankruptcy Act contemplates three types of
- A judicial reorganisation
(recuperação judicial) is a
debtor-in-possession (DIP) proceeding. An automatic stay
applies; a court-appointed administrator oversees the conduct
of business; the debtor presents a restructuring plan and
this plan is voted by creditors at a meeting; creditors are
divided into up to four classes (labour/employment, secured
debt, unsecured debt, small-sized enterprises); and claims
are novated as a result of approval.
- In a pre-pack
(recuperação extrajudicial), the
debtor strikes a deal with creditors out of court and then
may submit it for court homologation. The deal may
contemplate unsecured claims, secured claims or both (tax and
labour/employment claims are excluded). If the deal
encompasses more than 60% of the claims and is submitted to
the court, then it binds the remaining claims if it is
homologated. The proceedings end upon homologation and there
is no further interference with debtor's activities.
- In a liquidation
(falência), the debtor is removed from
management of the business immediately upon adjudication and
an administrator is appointed to manage the estate. The
administrator finds and sells all assets of the estate and
then uses the money to pay the estate's creditors according
to a ladder of priorities.
Personal bankruptcy (insolvência civil) is
regulated by Law 5,869 dated January 11 1973 and is rare.
See section 2.9 for rules applicable to financial
2.2 Is a stay on creditor enforcement action
A statutory 180-day stay is triggered upon the court
accepting the petition for reorganisation. Courts grant
extensions on a case-by-case basis, usually for an additional
60 or 90 days (some precedents have allowed the stay to remain
in force until the plan is voted), provided that the debtor has
not caused the proceedings to drag. Courts may prevent a
creditor from enforcing collaterals at any time if the
underlying assets are essential for the business (for example,
seizing production line machinery).
The TJSP has found that automatic stay also applies to
pre-packs notwithstanding article 161, §4, of the
Bankruptcy Act to the contrary.
As a rule, creditors may not pursue claims over the course
2.3 How could the reorganisation and/or insolvency
processes available in your jurisdiction be used to implement a
A non-exhaustive list of measures that restructuring plans
may contemplate is as follows: a debt renegotiation (including
rescheduling, haircuts and grace periods, among other
mechanisms); the sale of assets, either piecemeal or bundled as
autonomous business units; payments in kind; corporate mergers
and spin-offs; and capital increases; and DIP financings.
Although claims not affected by reorganisation (such as
taxes) are usually very sizeable, negotiation with unions,
banks and trade creditors may provide effective ways for
debtors to avoid liquidation, thereby preserving the business
and the interests of stakeholders.
2.4 How can a creditor or a class of creditors be crammed
As a rule, each existing class of creditors must approve the
restructuring plan, as follows:
- labour/employment: creditors in attendance
(headcount), regardless of claim value in attendance;
- secured debt: headcount plus claim
- unsecured debt: headcount plus claim
- small-sized enterprises: headcount,
regardless of claim value.
Dissenting creditors and classes may be crammed down if the
plan has been approved cumulatively by more than half of the
global claim value in attendance, at least two classes and more
than a third of each class that has rejected the plan.
On top of statutory cram-down, the TJSP and the TJRJ have
occasionally scrapped abusive votes, in the sense that
creditors failed to provide convincing reasons why liquidation
would be a better overall alternative to rescue. These
precedents basically found that creditors' selfish interests
may be trumped by the principle of preservation of business for
generation of revenues to pay workers and taxes. The STJ has
not yet addressed the matter.
2.5 Is there a process for facilitating the sale of a
distressed debtor's assets or business?
A debtor under reorganisation may only sell fixed assets as
contemplated in the approved plan, or if the court finds that
the sale is useful for the business. Assets may be bundled
together and sold as a standalone business unit; if the unit is
sold through a court-supervised auction, buyer will not be
liable for prior debts.
There is a preferential order for sale of assets on
liquidation: transfer of the whole business; separate transfer
of each branch and business unit; sale of assets that comprise
a specific branch or unit; and piecemeal asset sale. Auction is
mandatory. The winning bidder is not liable for prior debts.
2.6 What are the duties of directors of a company in
Directors' duties under Law 10,406 dated January 10 2002
(the Civil Code) and Law 6,404 dated December 15 1976 (the
Corporations Act) are generally the same whether or not the
company is in financial difficulty. The Bankruptcy Act imposes
additional duties (for example, assisting the court and the
administrator and providing information and financials
Directors are not statutorily required to call a
shareholders' meeting, ask for capital contributions or make an
insolvency filing in case of distress. However, they may be
held personally liable for the business debts in case of an
irregular shutdown (ceasing to do business and pay creditors
and taxes without formal winding-up).
2.7 How can any of a debtor's transactions be challenged on
Preferential transfers are prohibited on liquidation. The
administrator, the public prosecutor or any creditor may sue to
void transactions the objective of which is to harm creditors'
interests (ação revocatória);
claimants must prove that the debtor and the counterparty to
the transaction had a fraudulent intent and that the estate
suffered losses as a result of the transaction. They may also
petition to the court, or sue, to render certain transactions
within the suspect period ineffective (for advance repayment of
debt, repayment of outstanding debt in noncompliance with the
contract or granting of new security for prior debt); the
suspect period is usually the 90-day period prior to the
petition for liquidation (or for reorganisation later converted
into liquidation, as the case may be); it is not necessary to
prove fraudulent intent.
Also, the judicial administrator, the public prosecutor or
any creditor may at any time seek to have any claims excluded
from liquidation or reorganisation, or modified in their nature
or value, on the grounds of falsehood, wilful misconduct, fraud
2.8 What priority claims are there and is protection
available for post-petition credit?
Taxes, claims secured by the fiduciary transfer of assets
(alienação fiduciária), and
certain credit arrangements like title retention sales and
closed-end leases are not affected by reorganisation; they are
de facto super-priority claims. All labour/employment claims
must be paid no later than one year after approval of the plan.
There is no other statutory priority on reorganisation since
payment is made to each class of creditors per the plan. The
plan may contemplate unequal treatment among creditors within
the same class if there is economic reason to do so (for
example, creditors who continue to trade with debtor may have
their pre-petition claims be paid ahead of other claims).
Claims are divided into tiers on liquidation, according to a
ladder of priorities that is roughly as follows:
labour/employment; secured debt; tax; construction liens,
mechanic's liens and alike; unsecured debt; administrative,
criminal and tax fines; equity and other subordinated debt.
Payments are allocated among creditors pro rata within each
tier. Administrative expenses, claims for restitution of assets
(including fiduciary transfers) and DIP financing during prior
unsuccessful rescue proceedings are super-priority claims and
must be paid without proration and with any immediately
Post-petition claims are protected from the effects of
insolvency, must be repaid on their maturity dates and are
super-priority claims both on reorganization and liquidation
(articles 67 and 84, item V, of the Bankruptcy Act).
2.9 Is there a different regime for credit institutions and
Financial institutions, insurers, pension funds and credit
cooperatives are not allowed to file for reorganisation or
pursue a pre-pack.
Distressed financial institutions may be subject to
administrative proceedings before the Brazilian Central Bank
(Law 6,024 dated March 13 1974 and Decree-law 2,321 dated
February 25 1987). An administrator is appointed to either
manage the business temporarily (regime de
administração especial temporária),
intervene to suspend its activities for up to 12 months
(intervenção) or liquidate it
(liquidação extrajudicial). If several
requirements are met, administrative liquidation may be
converted into court liquidation.
Security dealers are also subject to administrative
proceedings overseen by the Central Bank.
SECTION 3: International/cross-border issues
3.1 Can reorganisation or insolvency proceedings be opened
in respect of a foreign debtor?
Brazil has not adopted the UNCITRAL Model Law on
Cross-Border Insolvency, and the Bankruptcy Act does not
contain any cross-border rules. Upon ruling on Oi, OGX, OAS and
Tonon, local courts have established their jurisdiction over
foreign debtors as long as these are functionally part of a
corporate group the centre of main interests of which is
Brazil. In practice, special purpose vehicles incorporated
abroad to issue bonds can get court protection in Brazil first
and then seek protection/assistance abroad through foreign
3.2 Can recognition and assistance be given to foreign
insolvency or reorganisation proceedings?
Foreign decisions may only be enforced in Brazil if and
after the STJ validates them. Due process of law applies, so
the party against whom the decision was entered must be served
process and may file a defence on the grounds that the decision
violates Brazilian public policy. This could be a lengthy
Law 13,105 dated March 16 2015 (Code of Civil Procedure)
broadly provides for generic international assistance measures.
There is no law on requests for assistance from foreign
bankruptcy courts in what should otherwise be deemed foreign
main proceedings. Brazilian courts are free to act as they deem
appropriate. For instance, the Oi lower court has recently
allowed the court-appointed administrators of two Dutch
subsidiaries to join the proceedings only as representatives of
the relevant creditors but not to practice any act of
management (despite the fact that this is their role under
SECTION 4: Other material considerations
4.1 What other major stakeholders could have a material
impact on the outcome of the reorganisation?
The outcome of reorganisations depends upon negotiation
between debtor and its largest secured and unsecured creditors,
since the rejection of the plan causes immediate conversion
into liquidation. Negotiation with workers and unions is
usually not as important because conditions for payment of
labour/employment claims are largely predetermined by Article
54 of the Bankruptcy Act.
The government and its different agencies only interfere
with reorganisation in regulated sectors. The government has
been especially proactive with respect to Oi through Anatel,
the federal accountability office (Tribunal de Contas da
União) and the Ministry of Science, Technology,
Innovation and Communications.
SECTION 5: Outlook 2017
5.1 What are your predictions for the next 12 months in the
corporate reorganisation and insolvency space and how do you
expect legal practice to respond?
The government has commissioned a review of the Bankruptcy
Act. Work is underway and we expect lawmakers to address
substantive consolidation, set-off and netting, cross-border
insolvency and submission of tax claims and fiduciary transfers
to reorganisation. Also, a Commercial Code bill which addresses
cross-border insolvency is under consideration in Congress and
might be taken to vote soon.
We expect courts to further discuss the criteria to accept
substantive consolidation and to disregard abusive creditors'
votes. Oi will make headlines given the interaction between
Brazilian and Dutch jurisdictions and the anticipated showdown
between shareholders and bondholders at the creditors' meeting.
The PDG matter will also be relevant; its subsidiary PDG
Securitizadora was the first securitisation vehicle of its kind
to ever file for insolvency in Brazil and investors are likely
to dispute the filing in light of certain sophisticated
regulations on real estate-backed securities.
Although the economic forecast is not as grim as 2015 and
2016, we expect a few high-profile filings. Effects of
large-scale corruption probes like Operation Carwash and
Operation Greenfield will continue to be felt across the market
and cause companies to seek court protection, sell assets or
restructure their indebtedness out of court. Brazil will
continue to draw attention from investors specialised in
Angela Paes de Barros Di
Partner, Levy & Salomão
São Paulo, Brazil
T: +55 11 3555 5055
F: +55 11 3555 5048
Angela Paes de Barros Di Franco heads Levy &
Salomão's dispute resolution group. She has
litigated numerous matters in over 20 years at the
firm, and she has tried hundreds of cases to final
verdict. She has resolved many cases through
alternative dispute resolution forms, such as
arbitration. Her clients include Brazilian and
international corporations. She has handled matters as
diverse as shareholder actions, tax litigation,
intellectual property claims, commercial contract
disputes, land use, environmental protection matters
and debt recovery. Her cases include both
straightforward actions to enforce judgments and
complex multijurisdictional matters. She also
represents clients before administrative agencies, such
as the Central Bank and the Appellate Council of the
National Financial System. Her appellate litigation
experience includes bringing several cases before
Brazil's highest court.
She served the São Paulo state court system
as a mediator and is a featured lecturer on alternative
dispute resolution in Brazil. Appointed by her peers to
serve as an arbitrator or mediator in several cases,
she has been listed among the world's leading dispute
resolution practitioners by Chambers & Partners,
The Legal 500 and Best Lawyers.
Senior associate, Levy & Salomão
São Paulo, Brazil
T: +55 11 3555 5130
F: +55 11 3555 5048
Rafael Zabaglia is a senior associate in the firm's
dispute resolution and business restructuring
practices, and he also has extensive experience in
transactional matters. Zabaglia has been lead trial
counsel on many cases and has also represented clients
in appeals to Brazil's highest federal and state
courts. He has handled disputes involving aviation
products liability, distribution agreements, M&A
deals and other corporate arrangements, enforcement of
judgments, reorganisation and liquidation of businesses
in financial distress, and class actions brought in the
name of the people by private petitioners or the public
prosecutor. He also counsels clients on risk assessment
related to potential and outstanding litigation.
Zabaglia worked for almost two years in the firm's
M&A and corporate practice and has been seconded to
Morrison & Foerster, New York office, where he
worked at the M&A and corporate practice for almost
one and a half years. Zabaglia has been listed among
the top litigation practitioners in Brazil by Chambers
& Partners global and local rankings. He holds a
bachelor of laws from the Universidade de São
Paulo and a specialist degree in organisational
management and human resources from the Universidade
Federal de São Carlos.