Creditors - Organize! Alignment Of Interests In Brazilian Judicial Reorganization Procedures.

The judicial reorganization or recovery (recuperação judicial) provided for in the Brazilian Bankruptcy and Reorganization Law (Law 11.101/05) ("BRRL") is comparable to the Chapter 11 of the United States of America Bankruptcy Code. The goal of the Judicial Reorganization is stated in Section 47 of Brazilian Bankruptcy Act as follows:

"Article 47. - The purpose of the judicial reorganization is to make it possible for the debtor to overcome its economic and financial crisis in order to be able to maintain the production source, employment of workers and interests of the creditors, thus contributing to preserve the company and its social function and to foster economic activity." We will not discuss the benefits of keeping the company alive, instead of forcing its liquidation, particularly when its creditors believe in the company capacity to revert the financial difficulties it is facing.

One of the most common approaches to rescue any company in financial risk/peril, is the re-sizing of the company with the sale of certain plants and business units, the injection of capital either by investors or even by its creditors, aiming to gain more (or loose less) from the restructuring as opposed to an asset liquidation.

However, such initiatives require a certain stability, which the present scenario of the conduction of Judicial Reorganization ("JR") in Brazil does not offer.

The JR procedure is usually long, expensive and quite emotionally demanding by creditors and debtors, renegotiating in long and tense sessions discoursing about the company's feasibility and the great disparity between the creditor's expectations and the debtors' proposals under the Judicial Reorganization Plan ("JRP").

Add to such scenario the costs with legal and additional advisers hired by various parts individually, negotiating on the best interest of their individual clients, interests which frequently are conflicting. Not uncommonly those negotiations take longer than the legal stay period of 180 days .

Ad Hoc groups of creditors trying to form an influent force in the process usually fail, because the negotiations do not depart from a joint approach to the problem of the recovery but from an individual point of view. They fail because creditors hold credits with different seniority, because certain creditors do not wish to assume the cost of a joint counsel representation or a joint financial consultant to conduct the negotiations, and for any number of reasons, whose grounds are the inability to compromise among themselves. And such compromise is necessary to find common solutions to present to the debtor.

Also, government development banks, such as BNDEs (Brazilian National Economic and Social Development Bank) and BANRISUL (state of Rio Grande do Sul) have limitations to agree to certain flexibilities towards the debtor. Therefore, they tend to contribute for the inefficiency of negotiations.

Another fact that adds to the inefficiency of the JR is that suppliers of the...