The Brazilian Restructuring and Bankruptcy Law (Law Nr. 11.101 of 2005) is expected to be amended within the year. Supporters of the amendments hope to accelerate the insolvency process and equalize the bargaining power between equity and debt holders. The idea is to create a bankruptcy regime that will lead to a more efficient credit market and promote enterprise rehabilitation. The proposed amendments are likely to create sharp differences of opinion between debtor and creditor interests and for now they are just that – proposals.
These are some of the potential amendments currently under discussion:
Wider Scope of the Bankruptcy Law
Judicial recovery would be extended to cover any “economic agent”. This would include any state-owned company (sociedade de economia mista) such as Petrobras or Eletrobras.
Credits secured by alienação fiduciária (a type of in rem financing widely used in real estate and automobile finance) and currency exchange contract advances (adiantamento de contrato de câmbio(ACC) – an important source of financing for exporters) would be subject to judicial restructuring, whereas they are exempt under present law. In the event of liquidation, credits secured by alienação fiduciária would, like other secured debt, enjoy second rank right of payment (after essential bankruptcy administration expenses) and ACC´s would be considered unsecured debt.
Tax credits would become the only credits not subject to judicial restructuring.
Labor liabilities (i.e., credit rights arising from labor laws or indemnities owed due to labor accidents) could also be negotiated in extrajudicial restructurings. Under present law they may only be addressed in in-court proceedings.
DIP financing could be used to finance debtor operations, restructuring costs or to preserve the value of debtor assets. Credits arising from DIP financing would gain elevated repayment priority (after secured debt), though there are no provisions for cross-collateralization or roll-ups and DIP loan priming would only be available with the express consent of secured creditors.
Once a public notice of a DIP financing proposal has been issued, the proposal would be presented to a Creditors’ Meeting for approval only if, within five days after such public notice, at least five percent of creditors call for such a Creditors’ Meeting, failing which the proposal would be deemed automatically approved. A DIP lender would also be allowed to advance up to ten percent of the proposed financing prior to the Creditors’ Meeting. DIP loan advances would have repayment preference in the event of liquidation.
The debtor would now have 90 (instead of 60) days to present a Judicial Recovery Plan (“JRP”), counted from the date the court allows the judicial restructuring to proceed. This time extension would allow the debtor the opportunity to design a more commercially viable reorganization that would be more likely to obtain approval at the Creditors’ Meeting. On the other hand, the Creditors’ Meeting would need to be held 120 (rather than 150) days after such date. Furthermore, the judicial restructuring would be deemed closed once the judge ratifies the duly approved JRP. The two year judicial monitoring period following ratification would be abolished and debtors that fail to comply with the JRP will face liquidation.
There would be no successor liability for any goods or rights of any kind sold by the debtor pursuant to a duly approved JRP, including branches and isolated productive units. This would extend to any debtor liabilities for taxes, labor claims or criminal fines and sanctions. Such sales could also be made by capitalizing new entities with debtor assets and selling the newly-created entities.
Substantive and Procedural Consolidation
Subject to new cram-down provisions, substantive consolidation of separate debtors could be granted if approved at the Creditors’ Meetings of each separate debtor. As a result, the assets and liabilities of the entire economic group would be consolidated into a single proceeding. Judges could also order substantive consolidation in instances of fraud or where assets and liabilities have been co-mingled.
One Judicial Administrator could be appointed to manage separate but related proceedings even where each debtor has its own JRP and there is no consolidation of assets and liabilities.
The debtor would be free to establish the makeup of each creditor class in the JRP, though labor claims would need to remain in a separate class. The current Restructuring and Bankruptcy Law mandates that creditors vote in four, specifically defined classes: (1) labor claims, (2) secured creditors, (3) unsecured creditors and (4) micro-business creditors.
Subject to new cram-down provisions, each of the creditor classes would need to approve the JRP. Approval would require the favorable vote of creditors representing more than half of the value of the credit of the class and a simple majority of the creditors present at the meeting.
Judicial Restructuring Plan
Even if the JRP is not approved by all of the creditor classes, it could be ratified by the presiding judge if it were approved by at least one class and the JRP would not subject the creditors of the dissenting classes to a greater loss than what they would suffer in the event of liquidation and the JRP provides for “reasonable economic treatment” of the dissenting classes.
A judge could also order substantive consolidation even when it is not approved at the Creditors’ Meeting of each separate debtor if it is approved by at least one of the Creditors’ Meetings by creditors representing at least two thirds of the total credits present at the meeting and substantive consolidation was approved by creditors representing at least one fifth of the credits present at each of the Creditors’ Meetings that rejected substantive consolidation.
Creditors’ Meetings and Voting Procedures
Call notices for Creditors’ Meetings could be published electronically by the presiding judge and on the website of the judicial administrator.
A number of new creditor voting procedures could be implemented, including (1) voting by written resolution, (2) electronic voting, and (3) the possibility of individual bondholders voting directly and not via indenture trustee (a codification of a practice that has already been permitted in some cases).
With certain modifications, Brazil would adopt the UNCITRAL Model Law on Cross-Border Insolvency and non-Brazilian creditors would be treated equally with Brazilian creditors.
Allen Moreland, Brazil based U.S. attorney specializing in cross-border financing transactions. Graduate of Columbia University School of Law