The New Bankruptcy Law

By Walter Douglas Stuber and Analúcia L. O. C. Carloni1

I - Introduction

Law nº 11101, of February 9, 2005, the New Bankruptcy Law, was finally enacted after eleven years of congressional action, and it is also known as the Corporate Recovery Law. This law prioritizes the recovery of companies rather than the bankruptcy, which may maintain job positions and safeguard the interests of creditors, by preserving the company, its social-interest role and encouraging economic activities, provided that the continuance of the debtor's operations is viable.

The new law governs the recoveries in and out of court and the bankruptcy of the individual businessperson, of the business company, including the companies performing in the aeronautic industry, whose certificate of formation provides for the exploration of air services of any kind and of aeronautic infrastructure.

The new law will not apply to:

i. Governmental and public-private companies; and

ii. Financial institutions, whether public or private; credit cooperatives; layaway and pension fund companies; health care companies; insurance companies; capitalization and other companies that legally equalize to those companies.

II - The New Law and the figures it creates.

2.1 The court-appointed trustee (administrador judicial)

According to article 21 of the new law, the court-appointed trustee will be appointed by the court and he/she must be an honest professional, preferably a lawyer, economist, business administrator or accountant.

The court-appointed trustee can be a specialized corporate entity with skills to handle the assignment, such as an accounting firm.

2.2 The judicial manager (gestor judicial)

The judicial manager is appointed by a General Meeting of Creditors where the debtor is removed from the company's management.

The removal of the debtor from the management of the company will occur when:

(i) debtor has been convicted of crime during the judicial recovery or bankruptcy proceedings or convicted of larceny, crime against the welfare or the economic policy, as provided in the current law;

(ii) there is indisputable indication that debtor has committed fraud against creditors;

(iii) debtor has acted with malice, simulation or fraud against the creditors' interests;

(iv) debtor has incurred in excessively and unequivocally high personal expenses;

(v) debtor has incurred in unreasonable expenses, as determined by their nature or amount, in relation to the capital, the flow of operations and other like circumstances;

(vi) debtor has caused unreasonable capital loss or engaged in transactions that jeopardized its regular operation;

(vii) debtor has simulated or concealed credits in the list of creditors;

(viii) debtor has denied providing information requested by the court-appointed trustee or other members of the Committee; and

(ix) debtor has his/her removal provided for in the judicial recovery plan.

2.3 General Meeting of Creditors

The General Meeting of Creditors will be called by the court, by way of notice to be published on the State Official Gazette and on mass circulation newspapers, and will convene with the creditors present at the place and time indicated on the notice.

The duties of a General Meeting of Creditors are the following:

In the judicial recovery: (i) the approval, refusal or amendment to the plan; (ii) the creation, selection and replacement of the members of the Creditors Committee, which has a supervisory role; (iii) approval of the request from debtor to disaffirm the judicial recovery plan; (iv) the appointment of the judicial manager; and (v) any other matter as it may impact the creditors' interests; and

In bankruptcy: (i) the creation, selection and replacement of the members of the Creditors Committee; (ii) employment of methods to realize assets; and (iii) any other matter as it may impact the creditors' interests.

2.4 Creditors Committee

The Creditors Committee will made of: (i) one representative designated by the labor creditors; (ii) one representative designated by the creditors with security interest and special privileged debt; and (iii) one representative designated by unsecured creditors and creditors with general privileges, all of them being entitle to designate two alternates.

Where one of the representatives fail to be designated, the Committee will not be precluded from operating with a lower number than the above.

The Committee will play a supervisory role, essentially, with respect to the court-appointed trustee's and debtor's actions, and will ensure the proper development of the judicial recovery plan.

III - Judicial Recovery

3.1 The concept:

The judicial recovery, which replaces the preventive reorganization (concordata preventiva), is a modality that can be filed for by the debtor itself, the surviving spouse, the heirs, the estate administrator or surviving partner, and aims at rendering the economic-financial recovery possible and therefore avoids the adjudication of bankruptcy.

Judicial recovery may convert in bankruptcy, by the court, when: (i) a General Meeting of Creditors makes such a decision; (ii) the debtor fails to submit a recovery plan no by the deadline set in the law; (iii) the court does not approve the recovery plan submitted by the debtor; or (iv) the debtor fails to satisfy any of its obligation under recovery plan.

The debtor may drop the judicial recovery, provided that General Meeting of Creditors so approves.

3.2 Requirements:

For a debtor, individual business or business company (micro- and small-sized companies) to be eligible for judicial recovery, the following conditions apply:

(i) operations have been ongoing for over two years;

(ii) it is not bankrupt and, if bankrupt, a valid and final court ruling exists ceasing all the liabilities resulting from such a condition;

(iii) no judicial recovery benefit has been granted within the preceding five years;

(iv) has not been convicted or has no officer or controlling partner that has been convicted of any of the crimes provided in the new Law;and

(v) no judicial recovery benefit has been granted under a special plan allowed for micro- and small-sized companies over the preceding eight years.

3.3 Ways to Recover in Court

Alternatives to recover in Court provided in the new law are:

(i) allow reasonable time and special conditions to satisfy obligations overdue or to become due;

(ii) spin off, merger, consolidation or conversion of company, establishment of a wholly-owned subsidiary, or assignment of quotas or shares, due respect being given to the rights of the partners;

(iii) change of shareholding control;

(iv) replacement of all or some of members of the debtor's top management or change of their administrative bodies;

(v) granting to the creditors of right to separately appoint members of the management and power to veto certain matters in the plan;

(vi) increase of capital;

(vii) conveyance or lease of establishment, even to company organized by the employees themselves;

(viii) salary reduction, compensation or reduction of working hours by way of collective agreement;

(ix) make payment or seek novation using debts items in the liabilities, with or without posting security of their...