Insolvency And Corporate Reorganisation Report

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 nonmain 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 buyers.

1.2 Please review some recent important cases and their impacts in terms of precedents or shaping current thinking.

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 required).

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 who 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 jurisdiction?

The Bankruptcy Act contemplates three types of processes.

A judicial reorganisation (recuperação judicial) is a debtor-inpossession (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...