Judicial Restructuring Does Not Proscribe Collection Against Guarantors Or Co-Obligors

Brazil's Superior Court of Justice (STJ) Forth Panel recently upheld that the approval of a financial restructuring plan does not benefit guarantors or co-obligors. Creditors may collect in full from third parties that insured the obligation or from co-obligors.

Pursuant to the judicial restructuring procedure in Brazil, the company undergoing judicial restructuring can renegotiate its debt with creditors by way of a financial restructuring plan. Typically, such plans provide for extension of debt terms and/or partial debt forgiveness. As provided for under the Brazilian Bankruptcy and Reorganization Law (Law n. 11.101, 9 February 2005), once the plan is approved by a certain group of representative creditors it binds all creditors, including those not having agreed with the plan.

From this process, however, a question arises: if the company that is undergoing judicial restructuring is not the sole debtor should the other debtors benefit from the enforcement of the financial restructuring plan?

The query has its origins from interpretation of the language of the Law n. 11.101/05 itself under which approval of the financial restructuring plan results in a "novation".

As defined by the Brazilian Civil Code, novation has the...