Vol 2 (2005) - Issue 5

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Out-of-Court Reorganizations - The Brazilian Model

Introduction

Earlier this year, the government of Brazil enacted the Nova Lei de Falências e Recuperĉào de Empresas, Law No 11.101 of 9 February 2005 (the ‘New Bankruptcy and Reorganization Law’ or ‘NBRL’). The new law came into force on 9 June 2005, and it applies to most types of business entities. The NBRL represents the first major overhaul of Brazil’s corporate insolvency laws in more than half a century and replaces the prior bankruptcy law, Decree-Law No. 7661 of 21 June 1945 (the ‘Prior Bankruptcy Law’).

One of the principal goals of the NBRL is to provide financially distressed, but economically viable, business entities an opportunity to restructure their operations through market-based rehabilitation strategies negotiated directly with creditors. The public policy underlying the reforms is expressed in article 47 of the NBRL which states that the new law seeks to make it possible for debtors to overcome their economic and financial crises while maintaining the production source, the employment of workers and the interests of creditors, thus enabling debtors to continue the operation of their businesses, preserve the social function of their companies and foster economic activity. Accordingly, the NBRL is guided by the basic principle that debtors generally possess greater social value as going-concerns than they would from the piecemeal sale of their assets through forced liquidations.
A key component of the NBRL is the creation of two new legal proceedings, Recuperĉào Judicial (‘Judicial Reorganization’) and Recuperĉào Extrajudicial (‘Out of- Court Reorganization’), both of which authorize debtors to obtain court confirmation of reorganization plans negotiated directly with creditors. A Judicial Reorganization embodies features similar to a traditional chapter 11 proceeding under the United States Bankruptcy Code (the ‘U.S. Code’). Similarly, an Out of-Court Reorganization is somewhat analogous to a ‘pre-packaged’ reorganization. Many Brazilian insolvency professionals regard the option to pursue an Out-of-Court Reorganization as the NBRL’s most important innovation for companies experiencing economic or financial crises. In this article, we briefly describe key features of the Out-of-Court Reorganization proceeding.

The Prior Bankruptcy Law

A fundamental weakness of the Prior Bankruptcy Law was the limited debt discharge provided to debtors undergoing reorganization proceedings. As stated above, the Prior Bankruptcy Law prohibited debtors from negotiating rehabilitation schemes directly with their creditors. Moreover, the debt discharge available to debtors was restricted to a statutorily prescribed percentage of unsecured claims.