UNCITRAL Model Law on Cross-Border Insolvency in Force in Brazil

Written by | Corporate, Dispute Resolution

By Fabiano Deffenti and Luciana Queiroz

On 23 January 2021, Law 14,112/2020 came into force. This Law substantially amended the Brazilian Judicial Recovery and Bankruptcy Law (the “Insolvency Law”), with the key amendment being Brazil’s adoption of the UNCITRAL Model Law on Cross-Border Insolvency.

Adoption of the Model Law

An entirely new chapter (Chapter VI-A) is dedicated to the Model Law.

Chapter VI-A adopts the objectives set out in the preamble of the Model Law with some additions. Chapter VI-A’s objectives are:

  • the cooperation between courts and competent bankruptcy authorities in Brazil and other countries in cases of cross-border insolvency;
  • greater certainty for economic activity and investment;
  • the fair and efficient administration of cross-border insolvencies to protect the interests of all creditors and other interested parties, including the debtor;
  • the protection and maximisation of the value of the debtor’s assets;
  • the recovery of companies in financial trouble, with the protection of investments and the preservation of jobs; and
  • the liquidation of the company’s assets in financial trouble, with the preservation and optimisation the company’s financial, productive and other assets, including intangibles, for their “productive use”.

The objects relating to the protection of jobs and the liquidation of the companies’ assets are in addition to those set out in the Model Law.

In line with the Model Law, Law 14,112/2020 provides that Brazilian courts must interpret Chapter VI-A considering “its international origin and the need to promote uniformity in its application and the observance of good faith”.

The rules relating to cross-border insolvency will apply when:

  • a foreign authority or a foreign representative requests assistance in Brazil for a foreign proceeding;
  • assistance related to a proceeding governed by the Insolvency Law is sought from abroad;
  • foreign proceedings and proceedings under the Insolvency Law relating to the same debtor are ongoing concurrently; or
  • foreign creditors or other interested parties have an interest in requesting the commencement of, or participating in, a proceeding under the Insolvency Law.

The court with jurisdiction where the debtor’s main establishment is located in Brazil will be the appropriate forum for the recognition of the foreign proceedings and for cooperating with foreign authorities. Based on our experience, this is likely to be problematic for cases where the main establishments are located in small towns, as judges tend to have no experience with international matters (let alone to deal with the complexity of cross-broder insolvencies).

The following parties to Brazilian proceedings are allowed participate in foreign proceedings, without prior approval from the Brazilian court:

  • the debtor, both in judicial and non-judicial (out of court) recovery proceedings; and
  • the judicial administrator, in bankruptcies.

By the same token,  foreign legal representatives will have standing to appear before the Brazilian court, with foreign creditors having the same rights as Brazilian creditors.

After recognition of a foreign main proceeding, no proceedings may be commenced in Brazil unless the debtor has assets in Brazil.

Other Key Changes to the Insolvency Law

Stay of Enforcement Period: There is now the possibility of extending the stay of enforcement period applicable to judicial recoveries for another 180 days if the general meeting of creditors approve an alternative plan.

Arbitration agreements: An arbitration agreement cannot be rejected by the judicial administrator once the judicial recovery or declaration of bankruptcy is received by the judge.

Distribution of profits or dividends: No distribution of profits or dividends to shareholders will be allowed until the judicial recovery plan is approved.

Credit assignments: The recovery court must be immediately notified about any assignment of credit or even the promise of an assignment. In bankruptcies, debts assigned by creditors to other parties will keep their priority rank.

Role of the judicial administrator: The role of the judicial administrators has been expanded to include obligations to:

  • encourage mediation, conciliation and other alternative dispute resolution methods;
  • maintain a website with updated information about the bankruptcy and judicial recovery processes, and making available the main documents relating to the case;
  • have a specific email address to receive administrative proofs of debt and complaints, unless otherwise decided by the court;
  • prepare a monthly report to the court, inspecting the veracity and conformity of the information provided by the debtor;
  • supervise negotiations between the debtor and its creditors, ensuring that the parties do not cause unnecessary delays;
  • proceed with the sale of all assets held by the bankrupt estate within a maximum period of 180 days.

In Bankruptcies, the judicial administrator can communicate directly with the relevant authorities and cooperate with them in foreign legal proceedings related to the Brazilian bankruptcy. This does away with the need to comply with the formalities of letters rogatory, which is a slow and expensive exercise due to the various formalities involved.

General Meetings of Shareholders: Creditors’ decisions that require a general meeting of shareholders can now be replaced by:

  • a proforma deed signed by all creditors that satisfy the specific quorum for approval;
  • electronic voting that allows for the same voting conditions as in a general meeting of creditors;
  • any other mechanism considered sufficiently secure by the court.

Conciliation and mediation: An entire new section regarding conciliation and mediation was added to the Insolvency Law to encourage these dispute resolution methods be adopted, before or during judicial recovery process (even if the matter is under appeal ).

Urgent relief for the stay of enforcement against the debtor will be available for up to 60 days before filing for judicial recovery as a means to attempt to settle the debts with creditors in a mediation or conciliation procedure before the Judicial Centres for Conflict Resolution and Citizenship (bodies within the State court structure). Matters relating to the legal nature and classification of credits and voting criteria at the General Meeting of Creditors cannot be resolved through conciliation and mediation. Agreements reached through conciliation or mediation must be approved by the court.

Fresh start: The fresh start principle was added to the Insolvency Law. The legislators’ intention is to create a swifter bankruptcy process, allowing the quick liquidation of non-viable companies and to foster entrepreneurship.

Extent of bankruptcy effects: A new provision expressly limits the extension of the effects of bankruptcy to the legal entity. Shareholders, controlling companies and directors are expressly excluded from any effects of the bankruptcy, unless the court is satisfied that the elements required for lifting the corporate veil are proved.

Abusive voting:  Votes may be declared void when the creditor is trying to obtain an unlawful advantage for himself or for others. This was being accepted by courts but the Insolvency Law removes any uncertainty.

Creditors’ alternative plans: Creditors may submit an alternative plan when:

  • after the stay of enforcement, the plan proposed by the debtor is not approved; or
  • the plan presented during the general meeting of shareholders is rejected.

Creditors can vote to present an alternative plan. This plan must be presented within 30 days and be approved within 90 days from the general meeting of shareholders which voted for the presentation of the alternative plan.

Other changes: In addition to the key changes described above, Law 14,112/2020 has extensively amended the Insolvency Law in other areas, including:

  • judicial recovery of rural producers;
  • means of judicial recovery;
  • non-judicial recovery;
  • sales of assets via separate business units (cells);
  • payment of debts;
  • different treatment to creditors whose supplies are essential for the continuation of the debtor’s activities; and
  • debtor in possession (DIP) financing.

Final Remarks

The changes brought about by Law 14,112/2020 substantially improve the Insolvency Law. Importantly, the adoption of the Model Law is another positive step taken by Brazil in its efforts towards becoming an OECD member. We expect that these changes will continue.

Questions?

Contact me if you would like further information. My firm is ready to assist you.

Last modified: February 4, 2021