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The New Brazilian Bankruptcy Law

Arnaldo Laudisio, Local Partner, Linklaters São Paulo, Brazil

Introduction

The current Brazilian bankruptcy law was enacted in 1945 providing for the liquidation of insolvent companies instead of giving them the means to overcome their financial difficulties. As a result, the rules in this law establish a procedure that does not allow for the business recovery even if there is one activity which is technically feasible. Assets must be sold separately through auctions that take place many years after the beginning of such a procedure.
As a consequence, many Brazilian Companies in the 80s and 90s had to cease their activities, with prejudice to creditors, employees and the Government itself because there were no legal means which allowed creditors and debtors to renegotiate debts in order to keep a viable business going.

Thus, since 1993, the Brazilian Congress had been discussing the enactment of a Law relating to corporate recovery and bankruptcy proceedings (the ‘Law’). After many amendments to its original version, in December 2004, the Brazilian Congress approved the Law. After being sanctioned by the President and published in the Official Daily Gazette, the Law will be effective after a period of 120 days.

It will be applicable from-mid June 2005 to all new requests for recovery or bankruptcy. It can also be applied to ongoing concordata proceedings if the company under concordata fulfils some specific requirements.
In contrast with from the current legislation, the Law contemplates the recovery of economically viable companies facing temporary financial constraints. In the short term, it protects Brazilian companies from creditors by giving them time for debt restructuring and encouraging creditors and suppliers to assist companies while they are facing such difficulties.

The Law is a major milestone in Brazil’s improving economy and it is very important for the economic growth of the country. As soon as this Law is enforced, Brazilian companies will be able to seek temporary protection from creditors in order to reorganize their debts and operations (‘Corporate Recovery’).

This Law is also intended to increase the recovery of debt rates. The Brazilian legal system does not provide creditors with an efficient and immediate way to enforce their credits in court. Therefore, the average recovery of debt rates is very small.

According to economic studies, the interest rates paid by Brazilian companies could drop with the approval of this Law since it significantly changes the order of preference of credits in bankruptcy proceedings, granting secured credits (mostly banks) preference over tax and social security creditors (‘Bankruptcy Proceedings’).

Therefore, even if the company goes bankrupt, there is a greater possibility that secured credits will be paid. These are significant changes which may cause Brazilian banks to charge lower financing interest rates because the respective credit risks would be reduced with the enactment of the new Law, which will make Brazilian companies even more competitive at the international level.

Corporate Recovery

There are important changes in recovery proceedings, in order to speed up the solution allowing a company with financial constraints to present a restructuring plan to its creditors.

Corporate recoveries will be conducted through judicial or extrajudicial recovery proceedings.

The Law introduces judicial recovery proceedings which will replace the current corporate recovery process (‘concordata’). In essence, debtors will be able to negotiate with creditors on the repayment of debts, including corporate restructuring, under the protection of the law.

All existing creditors prior to the judicial recovery request filing are subject to the proceeding, even though they are not due at the date.
The Law stipulates a stay period of 180 days for all claims and enforcement proceedings against the company in judicial recovery after the judicial reorganization is granted. Within this period, the company has to present a restructuring plan.

The court will approve negotiations between debtor and creditors on any type of liability, including, in particular, tax and labour liabilities. This is a major improvement in relation to the current legislation.


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