Lex Mundi Insolvency, Bankruptcy and Restructuring Practice Group: Latin America

Latin America:

It is no news that during the past recent years, Brazil has experienced a severe economic recession. Domestic and international macroeconomic factors and developments of several police investigations related to corruption scandals involving Petrobras, a state-controlled oil company, and several Brazilian companies have contributed to the downturn in the economy.

Consequently, the number of bankruptcy filings have substantially increased, particularly after 2013. A significant number of large corporate conglomerates have filed for protection under judicial reorganization proceedings (a proceeding similar to a US Chapter 11). These include, OGX, OSX, Sete Brasil, OAS, Abengoa Group, OOG, and, more recently, Oi Group.

The complexity of the capital structures of such sophisticated debtors, the variety of affected stakeholders and the high stakes involved in the cases brought a range of complex issues that have tested some of the concepts of the Brazilian Bankruptcy Law (Federal Law 11.101/2005), which has been in force for 13 years. The Brazilian Bankruptcy Law was the result of deep reform in the legal framework of bankruptcy in Brazil, which among other issues, incorporated in our system the so-called judicial reorganization proceeding intended to allow a distressed company to restructure its indebtedness through a reorganization plan approved by its creditors and emerge from the crisis as a going concern.

Since some of these debtors were part multinational economic groups, cross-border issues have arisen and generated heated debate, particularly in cases involving subsidiaries incorporated in foreign jurisdictions who have tapped international capital markets to finance the activities of the Brazilian operational companies.

The debate usually gravitates over (i) whether foreign entities could enjoy bankruptcy protection under a reorganization proceeding in Brazil; and (ii) the interaction between the Brazilian proceedings and proceedings initiated abroad.

The Brazilian Bankruptcy Law is silent on cross border issues and Brazil has not adopted the UNCITRAL Model Law on Cross-Border Insolvency. This lack of regulation of transnational insolvency has left to practitioners and courts the task of crafting solutions for the various situations where international creditors have acted as major stakeholders in restructuring cases.

Concerning the participation of debtors incorporated in foreign jurisdictions, Brazilian Courts have adopted a flexible approach to the rules of jurisdiction set forth in Brazilian Bankruptcy Law in order to allow such debtors to enjoy Brazilian proceedings, as long as the principal place of business of the economic group is located in Brazil. This was the primary reasoning of the decisions rendered in OGX, OAS, Sete Brasil, OOG and Oi Group cases.

The second issue, however, is more controversial. The lack of coordination rules between different jurisdictions and the absence of a definition of a main foreign proceeding may result in conflicting proceedings and holdups that could jeopardize the successful outcome of restructuring proceedings. The Oi case is the most recent example of how this lack of rules about transnational insolvency is detrimental to the insolvency system in Brazil.

In the Brazilian proceeding, Oi requested protection for both Portugal Telecom International Finance B.V. (PTIF) and Oi Brasil Holdings Cööperatief U.A. (Oi Coop), companies incorporated in the Netherlands that have issued notes guaranteed by Oi S.A. the ultimate parent company of the group. The Brazilian court, based on the rationale mentioned above, granted such protection and acknowledged both PTIF and Oi Coop as debtors in the Brazilian proceeding.

Oi Coop and PTIF, in parallel, commenced Suspension of Payments proceedings (“SoPs”) in the Netherlands. Similar to Brazil, the Netherlands has not adopted the UNCITRAL Model Law. The Dutch Court of Appeals, however, converted the SoPs into bankruptcy (liquidation) proceedings. As a consequence, the Dutch court appointed liquidators for both PTIF and Oi Coop bankruptcy cases.

The liquidators attempted to join the Brazilian proceeding and have their capacity as legal representatives of PTIF and Oi Coop acknowledged by the Brazilian court. Further to that, the liquidator of Oi Coop filed for a US Chapter 15 recognition of the Dutch proceeding as foreign main proceeding.

In the Brazilian proceeding, the Brazilian court refused to acknowledge the capacity of the Dutch liquidators and the enforceability of the Dutch decisions on the SoPs in Brazil.

According to the court (i) the center of main interest of Oi Group, including PTIF and OI Coop, was Brazil, as stated in the decision that had granted bankruptcy protection to PTIF and Oi Coop; (ii) other jurisdictions, including the US, Portugal and the UK, had acknowledged the Brazilian proceeding as the main insolvency proceeding of Oi Group; and (iii) under Brazilian Law, recognition of foreign decisions depends on a specific recognition proceeding to be filed before the Brazilian Superior Court of Justice.

Likewise, the US court refused to recognize the Dutch bankruptcy proceeding as the foreign main proceeding in view of its prior decision recognizing the Brazilian proceeding as the main foreign proceeding for the purposes of the US Chapter 15.

The controversy was ultimately settled after Oi Group and its creditors negotiated and approved a reorganization plan in the Brazilian proceeding. Based on the Brazilian reorganization plan, composition plans have been presented in the Dutch proceedings, which caused the bankruptcy to be lifted.

Despite the outcome of the disputes, the mere existence of fierce litigation over the issue has caused uncertainties in delays in the Brazilian reorganization proceeding. Further, the lack of clear rules about cross-border insolvency has the potential effect of fostering opportunistic behaviors towards lack of cooperation between different proceedings in order to improve the negotiation position of certain creditors, which could undermine the effectiveness of the restructuring resulting from the Brazilian judicial reorganization proceeding and the underlying goal of the preservation of the going concern provided for in the Brazilian Bankruptcy Law.

The Oi case highlighted the imminent need for changes in the Brazilian insolvency in order to create effective mechanisms to deal with cross-border issues. In this sense, adoption of the Model Law would represent Brazil’s adhesion to well-recognized best practices in terms of cross-border insolvency, which would naturally benefit all stakeholders involved in transnational cases.

Several Brazilian companies have accessed international capital markets in the past years. The significant amount of debt issuances abroad suggests that the trend of cross-border insolvency cases will continue or even grow in the near future. Thus, it also corroborates the need of statutory guidance on the matter. This holds particularly true in light of the usual major role played by international creditors in cross-border cases.

In this sense, pending before Brazilian Congress is a proposal for reform in the Brazilian Bankruptcy Law. The bill of law has faced several criticism from insolvency practitioners, particularly because of several legal provisions aimed at protecting and granting privileges to tax credits.

However, on the bright side, the bill provides for rules on cross-border insolvency. In a nutshell, the proposal incorporates the Model Law with few particularities. Despite the wording of the bill of law, the inclusion of provisions related to cross-border insolvency evidences Brazilian lawmakers’ recognition of the relevance of the issue and the need of put Brazil at the same level of other countries that have incorporated the best practices reflected in the Model Law into their domestic legislation.

It seems, therefore, that the first step has been taken despite the lack of visibility and predictability on the approval of the aforementioned bill of law. In the meantime, it is expected that Brazilian courts remain with the task of shaping the solutions for the various issues arising from the uncertainties of cross-border insolvency proceedings in Brazil.

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