Brazil’s latest chapter
Thursday, 25th June 2015
Brazil’s insolvency rules were adapted during its boom years, but they are finding their full expression during the recent downturn. White & Case LLP partner Richard Salvatore Kebrdle and Felsberg Advogados partner Fabiana Solano discuss the growing number of Brazilian companies filing for Chapter 15 protections under the US Bankruptcy Code.
Credit: Minerva Studio
Brazil’s burdensome financial crisis has swept through some of the largest Brazilian corporations and brought new challenges to cross border insolvency cases. Following the enactment of Law 11.101/05 a decade ago, which provided for the first time a judicial framework under which debtors and credi- tors could negotiate restructuring plans, Brazilian companies in crisis now have access to an efficient legal solution that was practically non-existent before. In the US, the introduction of Chapter 15 of the Bankruptcy Code the same year provides a mechanism that brought a solution to cross-border insolvencies. Now, increasing numbers of bankrupt companies are filing for protections under Chapter 15 of the US Bankruptcy Code, which has proved to be an efficient tool for giving Brazilian reorganisations and bankruptcies full force and effect within the US. Both laws were ushered in on the good winds of a vibrant Brazilian economy that grew 7.5 per cent by 2010; a situation that is diametrically opposed to the country’s current economic malaise.
A new ingredient
Boosted by external funding and with the US leading the way among international investors and lenders, Brazilian companies were able to incur significantly more debt leverage during the good years. But the setbacks suffered in the country’s economy over the last few months compromised the ability of some of the largest Brazilian conglomerates to satisfy all of their new debt obligations. During this time, a new ingredient was added to the package of Brazilian insolvencies: the obligations to overseas lenders.
International banks and investors that had acquired notes issued abroad – the bondholders – have since been active in Brazilian insolvencies protecting and maximising their claims, taking advantage of the more encouraging environment created by the Brazilian law.
At the same time, Brazilian debtors with assets and creditors abroad needed a rapid response from the US courts to see their restructuring plans work out successfully. For example, in Brazil when a judicial reorganisation is filed, the court orders the suspension of the enforcement proceedings against the debtor for 180 days, putting an end to the race to the courthouse among creditors and the squandering of their assets, while the renegotiation of the debt progresses. However, the Brazilian court decision is not enough to stop the bleeding in the US. Rather, the commencement of a Chapter 15 case in support of the Brazilian proceeding is necessary to stay creditor enforcement actions in the US.
Richard Salvatore Kebrdle and Fabiana Solano
Chapter 15 essentially incorporates the trans- national insolvency provisions of the UNCITRAL into the Bankruptcy Code. It also permits the commencement of ancillary or auxiliary insolvency cases in the US, which act in support of the main proceeding filed by a foreign debtor in its home country. Among other stated goals, the purposes of Chapter 15 are to facilitate the recovery of businesses in financial crisis and promote fair and efficient administration of cross-border insolvencies.Within this context, the US court is not only able to suspend the enforcement proceedings against the debtor while decisions are rendered by the Brazilian court, but will also recognise and give full force and effect to the restructuring plans approved in countries like Brazil within the US.The idea is to cooperate with the foreign judiciary, enforcing its decisions in the US, provided that creditors are treated fairly and their interests are sufficiently protected and do not otherwise violate the fundamental public policies of the US.
A common problem faced by Brazilian debtors with international debt is how to efficiently and effectively restructure these obligations. In the case of US law-governed notes, the bondholders typically own beneficial interests in one global note held by an intermediary. Therefore, to affect an exchange of that global note and provide bondholders with their distributions under a plan, the intermediary holder normally requires entry of a US court order, which can be obtained in a Chapter 15 case, directing it to comply with the Brazilian plan. Without an order from a US court in a Chapter 15 giving full force and effect to a plan approved by a Brazilian court, bondholders may take the position that a Brazilian reorganisation does not apply to them and then attempt to enforce their rights by commencing legal actions to seize any assets the Brazilian company may have in the US, even years after a plan has been approved and consummated.
Within the context of the economic crisis that has hit Brazil; the US Chapter 15 has proved to be an extremely valuable compliment to the Brazilian reorganisation regime. Together, these proceedings represent an effective means for foreign investors and debtors to have their Brazilian restructurings enforced in the US, bringing greater legal certainty, agility, maximisation of value and the consolidation of transnational relations to the parties. It is hoped these cases will result in further consolidation of a solid jurisprudence in both countries, and be able to provide answers to controversial matters, creating greater certainty in the both distressed markets.
This article is based on an article first published in Brazilian business news daily Valor Econômico.
Fonte: Latin Lawyer on-line em 25.6.2015.