During a conference held in Sao Paulo last week (25 June) by the Brazilian Chapter of the
Turnaround Management Association (TMA Brasil), Brazilian[1] and North American[2]
restructuring experts weighed in on the domestic bankruptcy legal framework in contrast
to other jurisdictions, and the reasons that have been leading Brazilian – and other Latin
American – companies to file for bankruptcy in the US. Debtwire senior legal analyst Arthur
Almeida was in attendance, and distills below the pivotal takeaways from the event.
Deciding where to file – legal certainty makes a difference, despite the costs
Panelists started the event by highlighting the predictability and effectiveness of the
restructuring tools existing under the US Bankruptcy Code (USBC), which entice many
domestic and foreign distressed companies to look to restructure their debt in the US.
Specifically, the automatic stay and the possibility of accessing a huge market of post-
petition financing were mentioned among the features that attract foreign companies to
turn to Chapter 11 and the oversight of experienced US bankruptcy courts.
According to the specialists, an established[3] set of well-tested rules provides additional
legal certainty and safeguards that (i) protect distressed companies and (ii) provide
impaired creditors with means for protecting themselves against receiving unequal
treatment. In addition, the depth of knowledge and expertise of US bankruptcy court
judges, which are often former restructuring attorneys with decades of experience, was
cited as another factor contributing to the success of the US bankruptcy system worldwide.
Furthermore, the foreigner-friendly approach[4] of the USBC incentivizes companies
incorporated abroad to commence voluntary Chapter 11 cases. Recent examples include
Brazilian airline Gol Linhas Aereas, Chilean telecommunications company WOM SA, and
Colombian non-bank financial services firm Credivalores-Crediservicios SA.
Also, by adopting the UNCITRAL Model Law on cross-border insolvency in 2005, the US
bankruptcy framework allows foreign companies to make domestic in-court restructurings
enforceable in the US via streamlined Chapter 15 recognition proceedings, thereby
providing further options and motivation to the forum choice. In practice, recognition
under Chapter 15 allows non-US debtors to bind international creditors by protecting
assets located in the US territory so that they may be administered in accordance with the
terms of an approved restructuring plan. This strategy was recently adopted by Brazilian
companies Southrock Capital, Oi SA and Americanas SA, among others.
On the flip side, bankruptcy-related costs were mentioned by the specialists as the main
downside of filing for bankruptcy in the US, and one of the factors that could disincentivize
companies seeking court oversight to implement a financial turnaround in that
jurisdiction. In short, restructuring in the US is effective, but it may be also expensive,
panelists noted.
In contrast, Brazilian governing bankruptcy law became valid in mid-2005, and was
centered around the principle of company preservation. Specifically, Section 47 focuses on
preservation of the economic activity and the public interest resulting from reorganization
processes, such as the maintenance of jobs, tax collection and circulation of goods,
products and services, as well as the rights of creditors.
Panelists explained that the goal was to replace a system that governed insolvency law for
almost six decades, in which distressed companies had, in practice, very few chances to
emerge from financial crises, with a more attractive insolvency legal framework for
debtors and creditors that would incentivize both foreign and domestic companies to
commence reorganization proceedings in Brazil.
A relatively recent initiative to create specialized bankruptcy courts (which has not yet
reached all districts of the country), along with a major law reform that was passed in early
2021, have both contributed to the development of the country’s insolvency regime,
panelists said. However, it takes some time for case law to develop and for practitioners to
become familiar with novel, complex statutory guidance, by either fixing mistakes or
filling in gaps in the law.
In the meantime, a controversial bill for another large reform in the bankruptcy law was
recently approved by the country’s Lower House and is currently pending with the Senate.
The Brazilian Panelists praised the original ideas of the bill, centered mainly around
proposals to improve the liquidation proceeding via increasing the power of creditors, but
strongly criticized the amended version that was approved by the Chamber of
Representatives, which introduced several new items related to both liquidation and
reorganization proceedings, and the role of judicial managers.
Further discussions included the benefits and disadvantages of filing for bankruptcy to
restructure defaulted debt in Brazil, rather than implementing out-of-court renegotiations
to emerge from financial crises, with special emphasis on the role of local courts to bridge
a gap among stakeholders.
Among other topics related to this issue, the panelists commented on the pros and cons
regarding asset sales, noting that companies undergoing an in-court restructuring process
lose their autonomy and need to obtain court authorization to sell their assets. On the other
hand, filing for bankruptcy allows distressed companies to segregate part of their assets as
an Isolated Business Unit and sell that unit via auction proceedings free of charges and
liabilities for the purchaser, provided that certain law requirements are achieved.
In this context, the panelists concluded the event mentioning that some reorganization
proceedings are filed not only to restructure defaulted claims, but also to implement
substantial asset sales under more attractive conditions for potential investors.
Footnotes:
[1] Isabel Picot, partner at Galdino & Coelho, Pimenta, Takemi, Ayoub Advogados;
Francisco Satiro, naming partner at Satiro Advogados and Professor at Universidade de Sao
Paulo (USP); Fabiana Solano, partner at Felsberg Advogados; and Adriana Pugliesi,
Professor at CEU Law School and at Fundacao Getulio Vargas (FGV).
[2] Rachel Smiley, Chair at Ferguson Braswell Fraser Kubasta PC Law and the 2024 TMA
Global President-Elect; and Scott Y. Stuart, TMA Global CEO.
[3] The USBC was passed in 1978.
[4] The USBC allows every person or corporation that resides or has a domicile, a place of
business, or property in the US to file for bankruptcy. In addition, the “property
requirement” typically serves as the jurisdictional hook for foreign debtors, as it may be
easily satisfied by the mere opening of a bank account prior to the bankruptcy filing, or
even by the transfer of the retainer fees to the US lawyer that will represent the debtor in
the debt restructuring proceeding.
by Arthur Almeida, with RDB charts by Jayjeet Sharma
Arthur Almeida is a former restructuring attorney. Prior to joining Debtwire as a Legal Analyst,
he practiced with Passos & Sticca Advogados Associados, and worked in the legal department of
Banco Fibra S.A. Arthur’s experience includes participating in major civil litigation on credit
recovery, representing creditors such as banks and financial institutions in high-profile
restructurings. He also obtained his LL.M in Financial and Capital Markets Law from Insper
Instituto de Ensino e Pesquisa, and is currently enrolled in the Master's Program in Commercial
Law at Universidade de Sao Paulo.
Any opinion, analysis or information provided in this article is not intended, nor should be
construed, as legal advice, including, but not limited to, investment advice as defined by the
Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers
should consult with their own legal counsel for matters requiring legal advice.
