Abstract

 

The new Brazilian Bankruptcy and Business Restructuring Law (“Business Restructuring Law”) – Law 11.101/2005 – was enacted on February 9, 2005.  Its judicial application, however, was only to commence 180 days after its enactment.  Thus, at less than one year from its inception as an applicable legal instrument, it has not yet been sufficiently tested to provide a comprehensive review as to its use and actual applicability.  Nevertheless, it potentially represents a significant step forward when compared to the virtually archaic legislation that since 1945 had been in force.  The bankruptcy protection process of the old legislation was referred to as Concordata Preventiva (“Concordata”)*¹.  Four specific issues are worth reviewing while comparing both decrees in order to fully understand the innovations introduced by the new bankruptcy code.   

 

1.        Scope of Process

 

The old Concordata just affected the so-called unsecured debts and in actual practice just applied to operations involving regular business suppliers and a few uncollaterized banking operations as well.  The new process for Business Restructuring*², on the other hand, encompasses practically all liabilities sustained by a debtor company with the exception of those maintained with the federal government (i.e., Treasury Department, that has its own collection processes) and some special ones already defined within the law (i.e., sales operations with reserve of title, fund advances on foreign exchange contracts).  Besides those exceptions, once a company files to enter the restructuring process, then all creditors are subjected to the conditions imposed by the new code.

 

2.        Payment Dating Terms and Other Payment Conditions for Creditors

 

The previous Bankruptcy Law conferred to the business party under the Concordata process the benefit of paying its debts (just unsecured loans, that is) in two annual installments.  A 40 percent installment payment on the first year and a 60 percent final installment payment on the second year.  The law also considered other short-term payment schedules as well.  However, the aforementioned payment structure was the one most widely used in virtually all cases.  As the remaining liabilities (all but unsecured loans, that is) followed their normal legal course outside the scope of the Concordata, the process just stopped functioning because it became truly impractical as a means to resolve the financial problems facing the companies under consideration.  This was specially true during the last two decades when periods of high and hyper-inflation in Brazil affected business operations in general and sent companies under the scope of the Concordata to an outright bankruptcy.  Those companies were either unable to cover the two annual installment payments or the excessive weight of the liabilities not considered under the scope of the Concordata were just too great a burden for said companies to continue operating.

 

Under the new Business Restructuring Law, debtors have greater capacity to find a formula that would help them meet their financial obligations and eventually liquidate their liabilities, which is at the heart of the new spirit of the law.  The new law is geared towards seeking the company’s business reorganization for the benefit of keeping jobs and producing tax-paying revenues.  Unlike the old Concordata process that offered a limited schedule for payment of companies’ liabilities, the new Business Restructuring Law demands debtors to present a business reorganization plan.  The new law, however, does not stipulate any term limits or conditions for payment of liabilities.  The business reorganization plan could propose, for instance, stretching payment terms, reducing interest rates, splitting the company if necessary, the sale or exchange of assets, or any other measures targeting the business reorganization of the company.

 

3.        Plan Approval

 

During the Concordata process, and contrary to what its own name suggested in Portuguese, there was no need to obtain approval from the creditors for the judicial system to offer the standardized two-year term for payment of unsecured liabilities.  The old law was barely a formality by which the party seeking Concordata just needed to comply with some legal requirements (i.e., having been incorporated as a business entity for more than two years, having assets not subjected to any liens corresponding to at least 50 percent of total liabilities, among a few others) for the judge to give way to the corresponding process.   The judge, at least in principle, was uninterested as to how the party seeking Concordata had reached such a situation or how it intended to emerge out of it. In fact, waiting for the installments to be deposited during the legal process became just a formality that included some customary proceedings as well as imposing some sort of conditions on how the business should be run in the meantime.

 

Creditors, on the other hand, were not allowed to intervene more directly in the process and just had to wait the allotted time to receive the install payments.  The new Business Restructuring Law, however, requires any business reorganization plan presented by the debtor to be approved by its creditors.  This new requirement resembles to some extent the spirit of the legal procedures under Chapter 11 of the American Bankruptcy Code.  Creditors are even allowed to present alternative plans if conditions or terms proposed by the debtor are unsatisfactory.  In the end, however, if the debtor fails to gain approval from the creditor(s) for its reorganization plan, the judge must ultimately declare the company’s bankruptcy.

 

As could be seen, the system is supposed to work provided creditor’s approval for the company’s business reorganization is granted.  For the purposes of summarizing, creditors may be considered in the following three broad categories: (a) company workers; (b) those holding collaterized assets; and, (c) all other creditors.

 

The business reorganization plan needs to be approved by all three broad categories of creditors.  Each one of them (i.e., category of creditors) needs to be approved by the individual creditors that in turn would need to represent more than half of the total credit amounts (turned liabilities in this case) at their respective creditors’ meetings and also by a simple majority of the creditors present.

 

Thus, the criteria that have to be observed to obtain creditors’ approval are two: the amount of the credits (liabilities) and the number of creditors present at the representative meetings.  If these conditions are not met, however, the judge could actually approve the business reorganization plan provided that:

 

a.         There is a favorable vote from the creditors representing more than half the total amount of the credits present at the representative meeting, independently of the type of creditor;

b.         The approval by two types of creditors, or in case only two types of creditors with voting creditors are present, the approval of at least one of them; and,

c.         If rejected by any type of creditor, a favorable vote by more than 1/3 of the voters in the specific group of creditors.

 

Thus, it could also be concluded that the business reorganization plan should be sufficiently consistent in that it should not only promote the business reorganization itself, but also that it should not impose on the creditors an excessive and perhaps unjustified burden to collect their payments.

 

4.        Equality among Creditors

 

Another important difference brought forward by the new law is not to turn mandatory the equality among creditors, a principle that was also part of the old Concordata.  Creditors that were subjected to this old process had to receive the same and equal treatment from the party seeking Concordata.  Creditors were careful not to receive any payments in terms and conditions different from others (i.e., creditors), by fear of risking the judge’s sentencing the immediate bankruptcy of the debtor company.  The new system is different in that the proposed reorganization plan could present different payment forms and schedules for the same type of liabilities, except when the judge adheres to the proposal presented by the debtor provided the aforementioned three conditions are met.  In this case, creditors from one same group could not receive differential treatment.

 

How does it Compare?

 

The new American Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 went into effect a few months after Brazil’s own Bankruptcy Protection Law.  The highly complex, technical, and comprehensive American code, contained in over 500 pages, was aimed at making corporate restructuring a more efficient process and financially undisciplined individual consumers more accountable as well.  The Brazilian code, on the other hand, has primarily targeted larger companies in an attempt to preserve jobs, provide tax revenues for the government, and keep an active economy running.  Imperfections in both legislations are likely to be found in due course and their corrections are likewise expected by the system at-large. To summarize, both Brazilian and American bankruptcy laws have something in common at this juncture.  They are full of expectations and are clearly no less controversial as to their capacity to produce tangible results.

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¹Concordata Preventiva.  The term was posted in its native language throughout the text for the sake of clarity.  It was a process designed to prevent a company from having its bankruptcy declared. 

 

² Business Restructuring.  Or “Recuperação Judicial” in Portuguese.  A legal process by which the Brazilian court system attempts to rescue a company from declaring bankruptcy.  The term has been used in a largely broad sense and it does not necessarily mean the same as in the American legal system, whose Bankruptcy Code has many different Chapters and is more comprehensive than the Brazilian one.

 

 

Nelson Marcondes Machado – Marcondes Machado, Britto e Pimentel Advogados in association with Nehring e Associados Advocacia – São Paulo, Brazil.

Gonzalo Antonio Zurita – Strategic Management Professor at BSP – Business School São Paulo’s MBA Program.