Article preview
The Sweet Smell of Success: Brazilian Confectioner, Indústria de Produtos Alimentícios Cory, Obtains a Fresh Start under Brazil’s New Bankruptcy and Restructuring Law
Christopher Andrew Jarvinen, Associate, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, USAAfter more than seven months of often difficult negotiations
with its major creditors, one of Brazil’s largest family-owned manufacturers of confectionary products,Indústria de Produtos Alimentícios Cory (‘Cory’), has restructured debt totaling the equivalent of USD 57 million.
Cory, which markets such well-known Brazilian brands of candies and cookies as Icekiss and Show Gol, is one of the first companies to undergo a successful judicial reorganisation (recuperação judicial), a court-supervised proceeding similar to the chapter 11 process under the United States Bankruptcy Code, pursuant to Brazil’s year-old New Bankruptcy and Restructuring Law (Nova Lei de Falências e Recuperação de Empresas) (‘NBRL’).
Cory is not alone. Since the NBRL went into effect on 9 June 2005, more than 1,000 Brazilian companies have commenced one of its three, court-supervised proceedings.
About 130 have been judicial reorganisations with bankruptcy liquidations (fâlencias) comprising the rest. And although a number of Brazilian companies are currently rumoured to be preparing to initiate court cases under the NBRL’s third option, the out-of-court reorganisation (recuperação extrajudicial), none has done so. The out-of-court reorganisation, a flexible restructuring proceeding somewhat analogous to a ‘pre-packaged’ reorganisation in the United States, will permit financially distressed companies to seek court approval for one or more pre-packaged plans negotiated with individual, or groups of, creditors.
‘A major challenge during Cory’s reorganisation has been sustaining constructive negotiations among the debtor’s sole shareholder, the state Development Bank of Minas Gerais [‘BDMG’] which holds 80% of Cory’s secured debt, 13 other secured lenders, 250 employees and hundreds of unsecured trade creditors,’ stated Antonio Carlos Mazzuco, reorganisation counsel to Cory and a partner with São Paulo-based Madrona, Hong, Mazzuco, Kawamura Sociedade de Advogados.
Cory was no stranger to the bankruptcy process when it commenced a judicial reorganisation in 2005. The combination of a disastrous decision to expand Cory’s business in 1999 by purchasing a chain of money-losing home appliance stores, combined with soaring prices for raw materials, principally sugar, used in the manufacture of Cory’s confections resulted in the company incurring a significant amount of unanticipated debt that resulted in the company being declared bankrupt in May 2004 under Brazil’s six-decade-old, prior bankruptcy law (the outdated Decree-Law No. 7661 of 21 June 1945).
The prior bankruptcy law offered very few legal and financial tools to help debtors like Cory shed enough debt to repair their balance sheets, because the old law provided debtors with a very limited debt discharge, restricted to a statutorily prescribed percentage of unsecured
claims. The prior bankruptcy law also prohibited debtors from negotiating individualised rehabilitation plans directly with creditors.
‘Approximately one-third of Cory’s USD 57 million debt represented secured claims. As such, Cory needed to restructure both its secured and unsecured obligations, something that the NBRL now authorises debtors to do,’ explained Mazzuco.
During August 2005, the court overseeing Cory’s existing case under the prior bankruptcy law agreed to convert it to a judicial reorganisation, thereby paving the way for Cory to enter into restructuring negotiations with its major creditors.
Copyright 2006 Chase Cambria Company (Publishing) Limited. All rights reserved.