The Brazilian Business Insolvency Act In A Nutshell

An Introduction to Insolvency Law in Brazil

Introduction

Brazilian business insolvency law offers debtors, their creditors as well as potential investors in distressed assets a broad range of options. The advisability of either informal corporate workouts (out-of-court debt restructuring), judicial or extrajudicial recovery, liquidation or regular winding up outside insolvency proceedings depends on the outcome of a profound legal and financial analysis of the distressed company's extent and reasons of indebtedness and the respective interests of the stakeholders involved in individual cases.

In this light, Brazilian insolvency law is of crucial importance to debtors, creditors and investors doing business in Brazil, particularly in exit, turnaround, debt collection and distressed asset investment scenarios.

The Current Insolvency Situation in Brazil

With the Brazilian economy in recession in both 2015 and 2016, and a corresponding surge in the number of filings for liquidation and judicial recovery in insolvency proceedings, Brazilian insolvency law is undergoing a serious acid test.

Companies in the oil and gas as well as construction and engineering sectors in particular are currently common subjects of insolvency proceedings. This is largely due to the decline in oil prices and sanctions around the criminal system "Petrolão" and the investigations concerning lava jato (car wash).

The following figures published by the Brazilian credit bureau Serasa Experian illustrate the dimension of the current insolvency situation in Brazil.

Steady Growth of Liquidation in Insolvency Proceedings

There appears to have been a rather steady growth in the number of liquidations in insolvency proceedings in the last two years: In 2015, 1,783 applications for proceedings were registered, in comparison to 1,661 in 2014, representing a slight increase of 7.3%. Even in 2016, a similarly modest increase has been maintained compared to 2015, with 1,852 applications for liquidation in bankruptcy proceedings, implying a progression of 4% in comparison to the same period in 2015 (1,783 applications).

Judicial Recovery Proceedings at Record Levels

At the same time, judicial recovery in insolvency proceedings are developing at record levels. In 2015, 1,287 debtors applied for such proceedings, compared to 828 in 2014, representing a striking rise of 55.4%. So far, this trend has continued in 2016 with 1.863 applications, representing a further increase of 44.8 % compared to 2015 (1,287 applications).

The Statutory Framework of Insolvency Law in Brazil

The Brazilian Business Insolvency Act of 2005

The year 2005 saw a complete reform of the Brazilian law on insolvency and recovery of companies and individual entrepreneurs in financial distress, which was particularly inspired by US and European models. The central provisions governing liquidation and recovery in insolvency proceedings of entrepreneurial debtors are contained in the "Lei que regula a recuperação judicial, a extrajudicial e a falência do empresário e da sociedade empresaria (lei nº 11.101 de 9-2-2005)" (hereinafter "LFRE" or "Brazilian Business Insolvency Act"). This Act comprises a total of 201 articles and can be divided into a general part (Chapters I and II) and a special part (Chapters III to VIII).

Last Reform in 2014

The Act was most recently amended in 2014 by lei complementar nº 147/2014 de 07/08/2014, which introduced rules aiming to improve the position of micro companies or small companies as creditors (Articles 26 IV, 41 IV, 45 (2), 83 IV d) LFRE) as well as limiting the remuneration of insolvency trustees in cases where the debtor qualifies as a micro or small company (Article 24 (5) LFRE).

Recent Reform Proposals

At the end of 2016, a special working group of insolvency experts under the direction of the Brazilian Ministry of Finance, developed several proposals to reform the Brazilian Business Insolvency Act. Main points considered in need of reform are the privileged treatment of credits secured by chattel mortgages, the limitation of the duration of the recovery process as well as the administrators' remuneration. The working group's first report is expected to be concluded until the end of February, the final report, which will serve as a basis for the reform law, until April 2017.

Concerning the treatment of credits with chattel mortgage, the experts point out the importance of integrating them into the procedure to enhance the restructuring process (The Brazilian Business Insolvency Act from 2005 explicitly excludes them). This proposal is enforced by the fact that, following experts, in most of the cases those credits represent more than 50% of the companies' debts. In this connection, the group also discusses a more flexible parceling of tax liabilities.

The second central proposal is a more specific determination and limitation of the...