By: Aaron Hemmings
Brazil recently enacted significant amendments to its Bankruptcy and Reorganization Act through Federal Law No. 14,112/2020, which introduced substantial changes to the provisions laid out in Federal Law No. 11,101/2005. This legislation was initially crafted to facilitate the restructuring of insolvent businesses under court supervision, taking inspiration from the United States' Chapter 11 Bankruptcy.[1] Chapter 11 serves as a blueprint for Brazil's Bankruptcy and Reorganization Act, focusing on the reorganization of a debtor's business affairs, debts, and assets. The primary objective of companies filing Chapter 11 bankruptcy is to secure time for debt restructuring and initiate a fresh start.[2] The recent revisions in Brazil, driven by the goal of fostering economic growth, encompass critical areas such as cross-border insolvency, debtor-in-possession (DIP) financing rules, enhancements to asset sale procedures, the introduction of creditors' alternative reorganization plans, provisions related to tax claims, and improvements in bankruptcy liquidation proceedings.[3]
A pivotal change contained in Federal Law No.14, 112/2020 is how cross-border insolvency is handled in Brazil, made possible through UNCITRAL Model Law. The Model Law is designed to assist states in reforming and modernizing their laws on arbitral procedure so as to consider the particular features and needs of international commercial arbitration.[4] Originally, the 2005 version of Brazil’s Bankruptcy and Reorganization Act did not have any provision to handle cross-border issues.[5] This new provision allows for insolvency proceedings that occur in foreign countries to now occur in Brazilian court, allowing assets in Brazil to be guarded from creditors.[6] This ability mirrors the United States’ Chapter 15 which allows for cooperation between U.S. courts and foreign courts when foreign bankruptcy proceedings touch upon U.S. financial interests,[7] while still pursuing Chapter 11. Ultimately, this places Brazil in a position to cooperate in cross-border cases involving companies originating in the EU, U.S., or other countries.
The Bankruptcy and Reorganization Act underwent further amendments to incorporate Debtor-in-Possession (DIP) provisions for companies in judicial reorganization. Articles 69-A through 69-F establish a framework that enhances legal certainty for lenders, potentially fostering a DIP funding market in Brazil.[8] This addition to the Act encompasses several features, including, but not limited to, the authorization for any person or entity associated with the corporation to provide collateral for DIP financing, irrespective of their involvement in the reorganization.[9] It also allows the debtor to offer a subordinated guarantee on assets to the lender without the original guarantor's consent, limited to the sale balance after the primary creditor is satisfied.[10] Moreover, if the reorganization transitions to bankruptcy before full fund disbursement, the financing agreement automatically terminates.[11]
A primary objective of amending the Act was to improve on the sale of assets.[12] In theory, this improvement appeases both the debtor and creditors side in the bankruptcy because it aims to maximize the value of the assets being sold. The amended law now permits assets to be sold “free and clear” of the sellers’ liabilities, obligations and contingencies supported by the change to Article 60.[13] The amendment now provides a clearer and more expansive framework for the sale of assets, and a safer environment for investors.[14] For example, debtors can now sell shares in new entities known as “isolated business units.”[15] These units have the flexibility to house various assets, including the entire business as a going concern. In these sales, creditors, who would not be impacted by the judicial reorganization proceeding under normal circumstances, must retain the right to receive payments under conditions that are no less favorable than what they would receive in a liquidation scenario.[16] Ultimately, the amendment creates a new structure for the sale of assets, which is seen in modifications to Articles 66, 142, and 143 which in turn creates a more dynamic marketplace for distressed assets.[17]
Much like Chapter 11 bankruptcy proceedings, once a company initiates judicial reorganization, its top management and executives engage in discussions with primary creditors regarding the framework of the reorganization plan. Subsequently, this plan is presented for negotiation and voting during the general creditors meeting. The original Act made it so that only the debtor was capable of submitting a reorganization plan, but with the implementation of Federal Law No. 14,112/2020 creditors can now share in the process.[18] Though this practice may not be a common occurrence it still adds another layer that makes the amendment more robust.
Federal Law No. 14,112/2020 also addresses the longstanding challenge of tax claims in insolvency in the insolvency process.[19] While the amendments provide restructuring options for federal tax claims, the landscape remains complex. Ongoing debates and interpretative challenges continue, particularly concerning the applicability of these provisions to state and municipal tax claims. The effectiveness of these changes will likely unfold as jurisprudence evolves and clarifications emerge. It will be up to the Brazilian Superior Court of Justice to resolve issues that occur.
A final major component to the amendment is the consideration it pays to individual entrepreneurs. The amended law now allows entrepreneurs to now expedite the ending of their unviable business activity, hand over the assets they own to the satisfaction of their creditors, and see their obligations discharged.[20] This drastically differs from the previous version of the law which would allow bankruptcy liquidations to be prolonged for many years.[21] This is accomplished through the procedures behind the sales of assets for sales, better defined deadlines for these sales, and new scenarios to allow for the discharge of a debtors obligations.
In sum, the modified version of Brazil’s Bankruptcy and Reorganization Act establishes a path to economic resurgence. Federal Law No. 14,112/2020 tackles a plethora of layers of insolvency proceedings by creating more modern approaches that mirror U.S. bankruptcy laws. As the years follow, the impact of this change in law will be easier to analyze as the business world in Brazil adapts to the changes. Brazil's path towards a more adaptable bankruptcy law is beginning, and the global business community will closely observe the outcomes of this transformative initiative.
Aaron Hemmings is a Staff Editor at CICLR.
[1] John R. Knapp, Jr., Brazil’s Reorganization Law Finds a Way During the Pandemic, Am. Bar Assoc. (Mar. 26, 2021), https://businesslawtoday.org/2021/03/brazils-reorganization-law-finds-way-pandemic/[https://perma.cc/WY6U-97NB].
[2] Maya Dollarhide, Chapter 11 Bankruptcy: What’s Involved, Pros & Cons of Filing, Investopedia (Feb. 13, 2023), https://www.investopedia.com/terms/c/chapter11.asp [https://perma.cc/48UU-FHM4].
[3] Isabel Picot Franca & Rodrigo Saraiva Porto Garcia, Brazil Overhauls 15-Year Old Bankruptcy and Reorganization Act, Latin Lawyer (Oct. 20, 2023), https://latinlawyer.com/guide/the-guide-restructuring/third-edition/article/brazil-overhauls-15-year-old-bankruptcy-and-reorganisation-act [https://perma.cc/FG4B-UMY9].
[4] UNCITRAL Model Law on International Commercial Arbitration (1985).
[5] See Franca & Garcia, supra note 3.
[6] See Knapp, Jr., supra note 1.
[7] Adam Hayes, Chapter 15 Bankruptcy: Meaning, Purpose, History, Investopedia (May 31, 2022), https://www.investopedia.com/terms/c/chapter-15.asp [https://perma.cc/3ZR9-S4J4].
[8] See Franca & Garcia, supra note 3.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] See Franca & Garcia, supra note 3.
[14] Id.
[15] Id.
[16] See Knapp, Jr., supra note 1.
[17] Decreto No. 14.112, de 24 de Dezembro de 2020, Diário Oficial da União [D.O.U.], 23 de 24.12.2020, arts. 66, 142, 143 (Braz.).
[18] Id.
[19] Decreto No. 14.112 (Braz.).
[20] See Knapp, Jr., supra note 1.
[21] Id.