Vol 6 (2009) - Issue 6

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The 'Principal Establishment' Concept under the New Brazilian Insolvency Law

1. Introduction

Due to the many global economic crises over the last two decades (e.g. the Mexican peso crisis in 1995, the Asian crisis of 1997, the Russian crisis of 1998, Argentina’s external debt default in 2001), several international organisations such as the World Bank, the International Monetary Fund, and the United Nation’s Commission on International Trade Law (UNCITRAL) have made important contributions towards the establishment of more efficient legal frameworks to address insolvency around the world. With the globalisation of capital markets, the lack of predictability in the face of insolvency in one country could foster instability in the global market and restrict the access of that country to funding sources. The above-mentioned international organisations have therefore published guidelines to help countries build effective insolvency systems and have strongly encouraged the adoption of best practice in these areas. This is the case with the Word Bank’s Principles and Guidelines for Effective Insolvency and Creditor Rights Systems (2001) and the UNCITRAL Legislative Guide on Insolvency Law (2004).

The reform of the Brazilian Insolvency Law is part of this wider effort to modernise the bankruptcy system around the world. The recent reform that occurred in Brazil is a process that began in 1993 and was concluded in February 2005. The former law that had been enacted in 1945 was outdated. In practice, the insolvency process had been ineffective at saving viable businesses and protecting creditor rights. Such inefficiencies resulted in higher interest rates, which in turn restricted the growth of Brazilian credit markets. The new law improved the existing legislation by creating a Chapter 11 type of restructuring, a pre-packaged restructuring and streamlining the liquidation rules in order to rescue the going concern value for the benefit of the stakeholders.

However, many questions were not properly dealt with in the new legislation. One of the issues causing controversy is the criteria for determining a court’s jurisdiction over an insolvency case. The new Insolvency Law has maintained the criteria of the old law, by defining jurisdiction as the court of the location ‘where the [debtor] company has its principal establishment’, without however defining the term ‘principal establishment’.

In Brazil, as defined by the Federal Constitution, insolvency proceedings are under the scope of each State’s Judiciary. There are 27 States in Brazil and each State is responsible for enacting its own rules in respect to the organisation of its court system. The federal courts have no jurisdiction over insolvency matters in Brazil.