Insolvency Law at Brazil
Insolvency law in Brazil is governed by the Brazilian Bankruptcy and Restructuring Law (Lei de Falências e Recuperação Judicial), which is codified primarily in the Law No. 11,101/2005. This law regulates bankruptcy and judicial recovery (reorganization) procedures for both individuals and corporations facing insolvency or financial distress.
Brazil’s insolvency law has undergone important reforms, particularly in 2017, to strengthen mechanisms for corporate restructuring and increase the chances of recovery rather than liquidation. The system emphasizes business recovery, aiming to allow viable businesses to reorganize and continue operating, and only resorts to liquidation in cases where recovery is not possible.
Key Aspects of Insolvency Law in Brazil:
Types of Insolvency Procedures:
Judicial Recovery (Recuperação Judicial): This process allows companies in financial distress to negotiate with creditors and attempt to restructure their debts and operations. It provides a moratorium on creditor actions (such as lawsuits or asset seizures) while the company prepares a recovery plan.
Extrajudicial Recovery (Recuperação Extrajudicial): This is a more streamlined procedure that allows companies to negotiate directly with creditors without going through the courts, provided there is broad creditor support for the restructuring plan. If creditors approve the plan, it becomes binding.
Bankruptcy (Falência): If judicial recovery is not possible or successful, a company may enter into bankruptcy, which leads to the liquidation of assets to pay creditors. This process is designed for companies that are no longer able to continue operating.
The Judicial Recovery Process:
Filing for Recovery: A company can file for judicial recovery when it is in financial distress but still has the ability to continue operations. It can file for judicial recovery voluntarily, with the approval of its management.
Court Supervision: The court supervises the recovery process and appoints an administrator to oversee the company’s financial restructuring.
Debt Restructuring Plan: The debtor company is required to submit a recovery plan to its creditors. The plan includes proposals for debt restructuring, such as debt reductions, deferments, and rescheduling of payments.
Creditor Approval: Creditors (divided into classes such as secured creditors, unsecured creditors, and labor creditors) must approve the plan. If creditors approve it, the court can confirm the recovery plan. The approval requires a supermajority of creditors in each class to vote in favor of the plan.
Stay Period: Once judicial recovery is granted, the debtor is given a stay period, usually lasting for 180 days, during which creditors cannot file lawsuits or take enforcement actions, giving the company time to propose and negotiate its restructuring plan.
The Bankruptcy Process:
Filing for Bankruptcy: If a company cannot recover under the judicial recovery process, creditors or the company itself can petition for bankruptcy. The court orders the liquidation of assets, and the appointed trustee manages the sale of assets and the distribution of proceeds to creditors.
Asset Liquidation: Once a company enters bankruptcy, its assets are liquidated in an orderly fashion, and the proceeds are distributed to creditors according to a specific order of priority.
Creditor Priority: The law outlines the order of priority in which creditors are paid. Secured creditors (those with collateral) are paid first, followed by labor claims, tax authorities, and other unsecured creditors.
Reorganization vs. Liquidation:
Reorganization (Recuperação Judicial): The focus is on rehabilitating the company and avoiding bankruptcy. It provides businesses with an opportunity to return to profitability by reorganizing their operations and restructuring debts.
Liquidation (Falência): If reorganization is not feasible, the company is liquidated. The liquidation process may involve selling the company’s assets, terminating its contracts, and distributing the proceeds to creditors. The goal is to maximize the value of the assets for the benefit of creditors.
Types of Creditors:
Secured Creditors: These creditors hold collateral and are typically the first to be paid in a bankruptcy process.
Unsecured Creditors: Creditors who do not have collateral fall into this category. They are paid after secured creditors.
Labor Creditors: Employees of the company have special protection in Brazil’s insolvency laws. They have higher priority than other unsecured creditors.
Tax Creditors: Tax obligations are prioritized above most other debts in the insolvency process, although not above labor creditors.
Insolvency Reform (2017):
In 2017, Brazil introduced important reforms to improve its insolvency regime. Key changes include:
Extended Period for Debt Restructuring: The reforms extended the period for businesses to present a recovery plan, allowing more time for negotiations.
Improved Protection for Creditors: The law improved creditor participation in recovery procedures, allowing for more effective negotiations.
Possibility of Pre-Packaged Bankruptcy: In some cases, companies may use pre-packaged bankruptcy, where a recovery plan is negotiated and agreed upon with creditors before filing for judicial recovery, making the process more efficient.
Better Framework for Small and Medium Enterprises (SMEs): The reforms aimed at making the insolvency process more accessible for SMEs by providing simpler procedures for debt restructuring.
Debtor’s Management During Recovery:
In the judicial recovery process, the debtor can continue managing the company during the restructuring process, although the court-appointed trustee monitors activities. This is seen as a way to ensure continuity of business operations and preserve value.
The company’s management must act in good faith and work towards the restructuring plan, otherwise, the court may revoke the recovery proceedings and convert them to bankruptcy.
International Insolvency:
Brazil’s bankruptcy law also has provisions regarding international insolvency, in line with the UNCITRAL Model Law on cross-border insolvency. This means that if a company with international operations faces insolvency, Brazil recognizes the need to cooperate with other jurisdictions in managing the proceedings, particularly for the distribution of assets and creditor claims.
Reorganization Plans:
The debtor’s plan must be approved by the creditors, and typically, this involves a restructuring of financial obligations, including debt reductions, extensions of payment deadlines, and sometimes partial debt forgiveness.
Creditors have the right to negotiate and challenge the terms of the reorganization, but ultimately, if the plan is accepted by a majority, it is binding on all creditors.
Liquidation Process:
If recovery is not feasible, the company’s assets are liquidated, and the proceeds are distributed according to the priority scheme mentioned earlier.
After liquidation, the company is dissolved, and it ceases to exist as a legal entity.
Conclusion:
Brazil’s Insolvency Law (Law No. 11,101/2005) provides a structured process for companies and individuals to resolve financial distress. The law prioritizes judicial recovery and debt restructuring as means of rehabilitating businesses, with bankruptcy (liquidation) serving as a last resort. The 2017 reforms improved protections for creditors, streamlined reorganization processes, and made the system more efficient for small and medium-sized businesses. The goal of Brazil’s insolvency framework is to balance the interests of creditors with the potential for restructuring viable companies, promoting economic recovery and business continuity over liquidation.
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