The Bankruptcy Law in Brazil
- Brazil
- 06/13/2005
- Azevedo Sette Advogados
I. INTRODUCTION 2
II. MECHANISMS TO GRANT THE CREDIT IN THE BRAZILIAN LAW 3
III. THE COMMERCIAL INSOLVENCY 4
IV. BRIEF COMMENTS ON THE HISTORIC EVOLUTION OF THE BANKRUPTCY INSTITUTE IN BRAZIL 5
V. THE NEW BANKRUPTCY LAW 6
5.1 GENERAL DISPOSITIONS OF THE NEW BRAZILIAN BANKRUPTCY LAW 7
5.2 DISPOSITIONS APPLICABLE TO BOTH BANKRUPTCY AND JUDICIAL REORGANIZATION 7
5.3 THE JUDICIAL REORGANIZATION 8
5.4 THE BANKRUPTCY 10
5.5 EXTRAJUDICIAL REORGANIZATION 13
VI. TREATIES AND INTERNATIONAL CONVENTIONS 13
VII. RELEVANT PRATICAL ASPECTS OF THE BANKRUPTCY LAW FOR THE FOREIGN CREDITOR 14
VIII. CONCLUSION 16
I. INTRODUCTION
This memorandum outlines the Brazilian legislation that governs the bankruptcy institute, comprising the insolvency, the reorganization and the bankruptcy stricto sensu. It is worthy mentioning that a new Bankruptcy Law was recently enacted, giving rise to profound changes in the corresponding framework. Moreover, this report seeks to provide an overview of the historical development of the bankruptcy in Brazil as well the international treaties and conventions directly related to the subject matter, as a means of allowing for an extensive understanding of said framework.
The Brazilian new regulation on bankruptcy procedures and companies’ reorganization is the result of long lasting studies. It was a common and unanimous opinion that the former Bankruptcy Law - Decree Law. n. 7,661, dated as of June 21st, 1945, no longer met the needs of the country, hindering its economical development.
In this spirit of establishing a new statute suitable to the new economical situation and creation of legal mechanisms that would foster the national development, the Law n. 11,101, dated as of February 9th, 2005, was published. Differently than the Decree Law 7,661, which was extremely focused on collecting the unpaid credits, the Law 11,101 treats the potential reorganization and recovery of companies in financial distress in a more tolerant proactive way. During the effectiveness of the Decree-Law 7,661, a considerable number of bankruptcies were observed in the country, what reflects, beyond the poor financial situation that Brazilian in general experienced, the non-adequacy of said statute to the Brazilian status. As an illustration of such mismatch, the Board of Trade of São Paulo (largest economical center of Brazil, responsible for around 35% of the Gross Domestic Product - GDP) registered in 2004 the opening of 136.000 companies, the closing of 39.000 companies and 2.055 bankruptcies .
In addition to reducing the number of bankruptcies, the Law 11,101 intends to reduce the average duration time of a bankrupt process - which so far was around fifteen years - to approximately seven years from now on.
Furthermore, Law 11,101 openly contemplates the Preservation of the Company Principle, which has been influencing other legal systems for years. The new law does not condemn to liquidation the businessman with difficulties. Conversely, such law foresees alternative solutions to companies facing financial distress, such as the judicial reorganization. This institute, similar to the reorganization part of the American Bankruptcy Code (11 U.S.C., 1978), was conceived as a tool that the debtor may use to fulfill its obligations and avoid the liquidation path. Better still, even in the event that bankruptcy is inescapable, the Law 11,101 prefers, as per its article 140, that the establishment and the assets which integrate the bankrupt estate be transferred to third parties in blocks, in order to optimize the odds that the business lasts as well as to preserve the intangible value inherent to such assets being jointly explored (goodwill).
The Law 11,101 seeks therefore, through more efficient rules, the maintenance of the company, or in the worst case scenario, the establishment (understood as a set of assets organized to develop an economic activity). Moreover, such a statute also aims at preserving, in a reflexive way, the jobs and the tax revenue arising out of the exploration of the economical activity, which contributes to the economic stability and national development.
II. MECHANISMS TO GRANT THE CREDIT IN THE BRAZILIAN LAW
Before dealing specifically with the insolvency and the means of collective execution, such as bankruptcy and reorganization, it is crucial presenting a brief description of the main species of guarantees that the Brazilian law provides.
The means - for the defense of creditor’s right - can be classified according to the type of risk to be mitigated, as follows: (a) risk of debtor’s insolvency and (b) risk of intentional deviation of debtor’s assets that shall impair the probability that debt is paid.
Among the guarantees that can be granted, in order to minimize the risk that debtor’s insolvency harms the creditor, there are real guarantees and personal guarantees. The real guarantees include mortgage, real pledge, and the antichresis, respectively governed by articles 1473, 1431 and 1506 of the Brazilian Civil Code - Law n. 10.406, as of January 10th, 2002, and also the trust receipt regulated by Decree-Law n. 911, dated as of October 3rd, 1960. The personal guarantees comprise the bond (foreseen in article 1491 of the Civil Code) and the suretyship (as per Decree 57.633, as of April 4th, 1966).
Moreover, the Brazilian Law of Public Register (Law n. 6015, as of October 11th, 1973) provides in its article 167 the rule that the first creditor to register the guarantee, with the competent notary office, holds the preference for seizing the asset given as guarantee and for receiving the funds arising out of such asset’s sale – to be held in a public auction. However, such preference can be voided in the event that it involves fraud against other creditors or in case the debtor is declared bankrupt, as explained hereinbelow.
Concerning the defense against intentional acts seeking deviation of creditor’s assets that cause the fraudulent reduction of the creditor’s ability to pay its debts, the Brazilian law establishes procedural mechanisms such as the seizure and distress of the assets . The former can be required, according to article 822 of the Civil Process Code (Law 5.869, as of January11th, 1973), whenever there is risk of diversion, destruction or fraudulent transfer of an asset by the debtor. In said event, the creditor must appoint a specific asset to be arrested. The distress is foreseen in article 813 of the same statute for the cases where the debtor, with or without a permanent address, tries to absence itself, deceitfully absences, or transfers its assets without keeping assets of value sufficient to pay its debts. Such a situation generally takes place when the creditor, unaware of the assets that the debtor holds, requires the seizure of as many assets as necessary to guarantee the payment of the pending debt.
Even though there are many mechanisms to guarantee the credit, situations where debtors deceitfully try to deliberately withdraw assets from the company in order to avoid paying debts are usual. With the objective of deterring such practices and discouraging the fraudulent - albeit seldom creative - imagination of some bad debtors, Law 11,101, in its article 168, sets forth that the above-mentioned behavior constitutes crime, imposing a penalty of three to six years of imprisonment. Likewise, article 591 of the Brazilian Civil Procedure Code and article 161 of the Brazilian Civil Code assign the creditor a procedural instrument called “ação pauliana” - similar to the defeasance action - or revocatory action, the objective of which is, in general terms speaking, voiding any acts that aims at releasing the debtor from its obligation to fulfill obligation assumed before creditors .
III. THE COMMERCIAL INSOLVENCY
In Brazil, two distinct legal statutes rule the insolvency: the Brazilian Civil Procedure Code, which deals with the civil insolvency and Law 11,101, which governs the commercial insolvency.
The Brazilian Civil Procedure Code, article 748, defines civil insolvency as the situation of negative equity or, in other words, situation where the company’s liabilities are higher than its assets and rights. Such a definition applies to natural persons, limited partnerships (“sociedades simples”), and civil associations.
On the other hand, Law 11,101, which applies to commercial companies, such as limited liability companies and corporations, does not demand said disproportion between assets and liabilities as a requirement for the insolvency status. Such statute provides a method according to which the insolvency situation is presumed if there is unpunctuality in the fulfillment of obligations or if debtor acknowledges its insolvency. Specifically speaking, Law 11,101 sets forth that there is commercial insolvency if the debtor acts as follows: (i) without relevant reason, debtor does not pay the debt on the due date (art. 94, I); (ii) sued to pay any determined amount, debtor does not pay, does not deposit nor appoint enough assets to be pledged as guarantees to the debt payment (art. 94, II); (iii) proceeds to the early liquidation of its asset or engages fraudulent means to pay the debt (art. 94, III, “a”); (iv) accomplishes or tries to accomplish simulated business or alienation (art. 94, III, “b”); (v) transfers its establishment to third parties without the creditors’ prior approval and remains without enough assets to pay its liabilities (art. 94, III, “c”); (vi) simulates the transference of its main establishment (art. 94, III, “d”); or (vii) gives or increases guarantee to creditors by debt previously settled without having free and clear assets to liquidate debtor’s liabilities (art. 94, III, “e”). So, if any of the above-mentioned situations occurs, the debtor will be presumed insolvent and against it a bankruptcy claim may be filed.
IV. BRIEF COMMENTS ON THE HISTORIC EVOLUTION OF THE BANKRUPTCY INSTITUTE IN BRAZIL
In order to understand the spirit of Law 11,101, it is necessary to make a brief incursion in historical development of the bankruptcy institute in Brazil, which starts with the Brazil colony years.
During the centuries when Brazil was a colony of Portugal, meaning 16th, 17th and 18th centuries, the rules of the metropolis (Portugal) were applicable to the colony (Brazil). When the Portuguese came ashore in Brazil, the law in effect in Portugal was the “Ordenações Afonsinas”. In 1521, “Ordenações Manuelinas” were drawn up by the King D. Manoel, and replaced for the “Ordenações Afonsinas”. Both statutes imposed ruled that, in case of bankruptcy, the debtor should be arrested until the payment of the debt. To avoid prison, the debtor should deliver all its assets to the creditors.
In 1603, “Ordenações Filipinas”, which bore Spanish origin, were enacted. It provided, in a not very clear way, the insolvency cases. Such a statute, however, was of utmost importance at the time, marked by the birth of Brazil-Colony commerce.
In 1756, another important statute was enacted, the Public Bill (“Alvará”) as of November 13th, 1756, deemed as a “very original and authentic bankruptcy procedure, clear and emphatically commercial, in commercial judgment, exclusively for the trader, merchant or businessmen” . According to such statute, the bankrupt should present itself before the board of trade to swear the “real reason for the bankruptcy”. Then the bankrupt should deliver the keys and the books of the establishment as well as declare all its assets. An inventory of these assets should be prepared and a public notice should be published convoking all the creditors. Ten percent (10%) of the balance were assigned to the bankrupt and to its family, the rest shall being distributed among the creditors. If any sort of fraud were detected, the bankrupt should be arrested .
After the independency of Brazil, it adopted, for a short period of time, the French Commercial Code, which marked the deep French influence in the Brazilian bankruptcy law.
Following the proclamation of the Republic of Brazil, Decree n. 917, as of October 24th, 1890, was enacted. Although it had controversial points, it was responsible for the evolution of the bankruptcy law in Brazil, providing means of preventing the bankruptcy declaration, such as the moratorium, assets assignment, and preventive deal.
In order to create a more rigid dynamic and, at the same time, halt the frauds that were becoming frequent at the time, Law n. 859, as of July 16th, 1902, was enacted. However, it did not have the expected results, purportedly because such statute failed to detail proceeding aspects of the bankruptcy. The creditors hence remained without appropriate protection mechanisms .
On June 21st, 1945, Decree-Law 7,661 was enacted. It remained in force for over sixty (60) years and, although revoked, is considered a milestone of the evolution of the bankruptcy institute in Brazil. The main goal of said statute was curing negative aspects of former statutes based upon the main mistakes that the law community pinpointed, such as procedural rigidity and the short term granted to the debtors’ reorganization.
In this line, Decree-Law 7,661 was commonly known as the “creditor revenge”, because the most relevant interest that seemed to guide said statute was ceasing debtor’s activities, even if it meant the non-payment of the debts. The odds that a company recovered from a bankruptcy process and, hence, that the creditors were paid their credits were overly remote. There was not the actual conscience that the company’s preservation was important to the creditors and the society as a whole.
Decree-Law 7,661 also provided an order for the payment of creditors, privileging labor and tax creditors, what, therefore, harmed the other creditors with real and special guarantees and the unsecured creditors. Generally, an unsecured creditor would hardly receive any portion of its credit from the bankrupt debtor. It is also important to mention that Law 11,101 aimed to correct such distortion (see comparison between the former and the new preference orders in item 5.4 below).
Decree-Law 7,661 also set forth the composition institute (“concordata”), not contemplated by Law 11,101 anymore. There were two species of composition. The first one – preventive composition (“concordata preventiva”) aimed to allow the continuation of the business of companies facing financial distress and the recovery of its economical condition by preventing the bankruptcy declaration. Such composition could be requested by the debtor before the bankruptcy declaration. The suspensive composition (“concordata suspensiva”), in turn, could be requested after the adjudication of the bankruptcy and before liquidation, so that the bankrupt could resume the business administration and try to improve its financial condition.
V. THE NEW BANKRUPTCY LAW
With the enactment of Law 11,101, Brazil finally recognized the importance of the business continuity and, therefore, of the bankruptcy institute. It is relevant to highlight that it represents a major shift from the so far applicable mentality – present at Decree-Law 7,661 -, which was focused on a revengeful spirit rather than on a positive and rational ideology.
The new bankruptcy law evidences that the Government is not only concerned about optimizing the chances that the debtors receive the corresponding amounts. Further still, the Government also seeks preserving and stimulating the business, the jobs, and the consequent tax revenue arising out of the development of businesses. The linchpin of the new statute’s dynamic is the dissociation between the business and the businessman, what allows for replacing the businessman without liquidating the business.
Law 11,101 has also seeks to foster collaboration and direct participation of governmental authorities in the business reorganization. In this regard, such statutes provides mechanisms such as financing to be granted by the Social and Economic Development National Bank (“Banco Nacional de Desenvolvimento Econômico e Social – BNDES”) and the possibility of suspension of enforceable tax debts. The justification for a direct participation of the Executive Branch in the bankruptcy would be that such branch, by keeping already existing jobs, promoting new jobs and increasing tax revenue, would be achieving the Government’s social goals.
Moreover, Law 11,101, although published on February 9th, 2005, will be in force on June 9th, 2005, only, by virtue of the vacatio legis provided therewith (so that the society has a four-month term to familiarize with the new concepts that such statutes contemplates).
5.1 GENERAL DISPOSITIONS OF THE NEW BRAZILIAN BANKRUPTCY LAW
The first three articles of Law 11,101 deal with the institutions that are not submitted to such statute and to the determination of the court competent to run the bankruptcy and the judicial and non-judicial reorganization. Public companies, private and public joint stock companies, financial institutions (either public or private), credit unions, consortiums, pension funds, health companies, insurance companies and capitalization companies are not under the reach of the Law 11,101, remaining governed by specific rules.
5.2 DISPOSITIONS APPLICABLE TO BOTH BANKRUPTCY AND JUDICIAL REORGANIZATION
Law 11,101 firstly addresses the subjects that are equally applicable to the bankruptcy process and the judicial reorganization. Afterwards, such statute provides the specific rules to be applied to said institutes separately.
In both bankruptcy and judicial reorganization, creditors cannot recover from debtor gratuitous obligations and the attorneys’ fees and judicial expenses that the creditors incurred to enroll in the proceeding (art. 5, I and II).
After the bankruptcy adjudication or the granting of the judicial reorganization petition, the counting of the statute of limitations is suspended as well as collection suits against the debtor (art. 6 of Law 11,101). Therefore, the bankruptcy and the judicial reorganization protect the debtor from the terms and collection suits during all the length of such procedures. Nevertheless, Law 11,101 provides certain exceptions, namely: the actions that demand undetermined amounts are not suspended and the actions requesting that the judicial administrator accept, exclude, or modify labor credits may be filed. Said law also imposes that the labor claims against the debtor are judged at the specialized court (Labor Court) and, after the verification of the respective credit, it shall be inserted in the general chart of debtor’s creditors (art. 6, §2).
The judicial administrator represents an innovation to the Brazilian bankruptcy’s scenario, its corresponding obligations enumerated in article 22 of Law 11,101. Such obligations include information and clarifications supply, assistant’s hiring, and the preparation of the creditors’ general chart. In both bankruptcy and judicial organization, the judicial administrator is entitled to a consideration for its services, the value of which the judge will decide. Nonetheless, this amount cannot exceed five percent (5%) of the total amount due to the creditors.
In a judicial reorganization case, the judicial administrator has the important task of inspecting the debtor’s activities to certify that the rehabilitation plan presented to the judge and creditors is complied with. If debtor breaches any obligations assumed therein, the administrator shall request to the competent court that the debtor’s bankruptcy be declared (art. 22, II, “b”).
In a bankruptcy case, the judicial administrator shall, among other obligations pertinent to the good administration of the bankruptcy estate liquidation, inform the creditors of the real situation of the bankrupt, represent the bankruptcy estate in court, present a report about the causes that led the debtor into bankruptcy, gather assets and documents, practice acts that make possible the creditors’ payment, request to the court the anticipated sale of perishable assets or of assets that may depreciate very quickly and render the applicable accounts at the end of the bankruptcy process. Moreover, the judicial administrator shall not compromise or waive any rights (i.e., concede discount on debts) without previous and express authorization of the competent judge (art. 22, §3).
Law 11,101 also innovates by creating a new body, the Committee of Creditors. This body shall be composed of a representative of the labor creditors, a representative of the creditors with real rights of guarantee or special privileges and a representative of the unsecured creditors and with general privileges. The main competencies of such body are to inspect and monitor the fulfillment of the law, to inform the judge of any violation of legal provisions and to issue opinion on interested parties’ complaints (art. 27).
5.3 THE JUDICIAL REORGANIZATION
The judicial reorganization is an institute that was created by Law n. 11,101 to replace the composition that Decree Law 7,661 provided. The article 47 of Law 11,101 provides that: “The judicial reorganization aims to allow that the debtor overcomes a financial-economic crisis situation, furthering the preservation of the business activity, of jobs and of creditors’ interest and, hence, promoting the preservation of the company, of its social function and of the stimulation to the economic activity.”
Thus, the new statute conceives the judicial reorganization as a device that enables the businessman - in financial distress - to restructure so that it can pay its debts, instead of forcing it to liquidate the business, what would lead to unpleasant consequences such as loss of jobs and of tax revenues.
According to article 48 of Law 11,101, debtor’s judicial reorganization may be requested by the debtor itself, its survivor spouse, debtor’s inheritors, debtor probation’s administrator or debtor’s remaining shareholder. Judicial reorganization is restricted to the debtor who: (i) has developed its activities regularly for a term longer than two (2) years; (ii) is not declared insolvent or, in case debtor has been subject to a bankruptcy process, such process has been duly completed; (iii) has not benefited by judicial reorganization in the five (5) preceding years; (iv) has not been awarded special judicial reorganization for small companies in the eight (8) preceding years; and (v) has not been convicted of or has not been the manager or the controlling shareholder convicted of any crimes that Law 11,101 set forth.
All the credits existing on the petition date are subject to the judicial reorganization, even if such credits are not overdue (art. 49). In such process, creditors keep their rights and privileges against co-obligors and guarantors (article 49, I). Article 50 determines the possible measures that may be taken in connection with the reorganization, such as extension of payment terms, total or partial replacement of administrators, increase of capital stock, and partial sale of assets.
Within the non-extendable term of sixty (60) days, counting from the date of the decision as to the bankruptcy processing petition, debtor shall present to the court the judicial reorganization plan. If debtor does not comply with this obligation, debtor shall be declared bankrupt and the applicable proceeding shall ensue (art. 53).
The reorganization plan shall contain a thorough description of the measures to be taken, a demonstration of the economic feasibility of the plan and an economic-financial expert assessment and debtor’s goods and assets assessment. Moreover, said plan shall not establish a period shorter than one (1) year for the total payment of the labor credits and those credits resulting from labor accidents (art. 54).
During the month following the presentation of the plan by the debtor, any creditor can object to the plan before the judge. If it happens so, the judge shall convoke a General Meeting of Creditors to deliberate on the acceptance, refusal or modification of the judicial reorganization plan, within one hundred and fifty (150) days from the date of the decision approving the reorganization (art. 56, §1). The deliberations to be held in the General Meeting of the Creditors require approval from all the creditors’ classes present at such meeting . The General Meeting of Creditors may decide to recommend that changes are made to the reorganization plan, the approval of all creditors being a condition to the effectiveness of such changes. If all creditors reject the plan, the judge shall outright declare debtor’s bankruptcy (art. 56).
Law 11,101 provides, in its article 59, that the plan of judicial reorganization the judge grants represents novation of the credits that precede the bankruptcy petition, and binds the debtor and all the creditors submitted to it. The sentence that grants the reorganization constitutes an enforceable judicial instrument. Besides, all acts, contracts and documents signed by the debtor shall include the expression “in judicial reorganization” after the company’s name.
If the approved reorganization plan determines the judicial sale of branches or productive units, the judge shall order so. Furthermore, the person or entity that acquires assets from the debtor under reorganization shall not succeed debtor’s liabilities, regardless of such liabilities’ nature - labor, tax, product liability, etc (art. 141, II). This rule represents one of the greatest improvements that Law 11,101 as, according to the former statute, successor liability – especially when relating to tax, labor and product liability obligations - usually applied to such cases, hindering most negotiations aimed at reorganizing debtor.
Still in accordance with Law 11,101, should debtor breach any obligation assumed under the reorganization plan within two (2) years counting from the plan’s approval, debtor shall be declared bankrupt. Likewise, if such breach occurs after this 2-year period, any creditor shall be entitled to require either the specific enforceability of the outstanding obligation or that the debtor be declared bankrupt (art. 62).
Once all obligations that the plan provides are fulfilled, the judge shall declare the corresponding termination. Afterwards, debtor shall pay the judicial administrator fees and settle the court costs. In this case, judge will decree the dissolution of the Committee of Creditors and will notify the Board of Trade for the appropriate measures (art. 63).
5.4 THE BANKRUPTCY
The article 75 of the Law 11,101 foresees that “the bankruptcy proceeding, upon removing debtor from its activities, aims to preserve and to optimize the productive use of goods, assets and productive resources of the company, as well as its intangible ones”.
The declaration of debtor’s bankruptcy leads to the anticipation of the maturity date of all obligations of debtor as well as of its shareholders severely and jointly liable for debtor’s obligations (art. 77). The bankruptcy also reaches jointly liable shareholders that withdrew the company in less than two years before the bankruptcy declaration, irrespective of the reason for such a withdraw (art. 81).
The bankruptcy declaration also causes the proportional discount of interests and the conversion of the values in foreign currency to the national currency, the exchange rate of the day of the judicial decision shall being used (art. 77).
The classification of the credits in the bankruptcy, according to Law 11,101, obeys the following terms (comparing to the systematic adopted in the Decree Law 7,661):
Preference Order Decree-law 7,661 - Revoked Bankrupt Law(article 102) Law 11,101 – New Bankruptcy Law(article 83)
1 Labor credits – Labor Accidents Credits derived from (i) labor statutes, limited to 150 (one hundred fifty) minimum wages by creditor, and (ii) labor accidents.
Labor Credits – salaries and labor indemnifications
2 Tax credits Credits with real guarantee rights, until the limit of the collateral.
3 Creditors by bankruptcy estate charges Tax credits
4 Creditors by bankruptcy estate debts Credits with special privileges
5 Credits with real guarantee rights Credits with general privileges
6 Credits with special privilege over certain assets Unsecured credits
7 Credits with general privileges Subordinated credits
8 Unsecured credits ————————————
The credits with special privileges are those provided in article 964 of the Brazilian Civil Code and other civil or commercial statutes. The credits with general privilege are listed in article 965 of the Brazilian Civil Code .
Credits arising out of labor statutes that exceeds the 150 minimum wages threshold are considered unsecured credits, according to article 83, VI, “a”, of Law 11,101. Credits owed to shareholders or relating to managers (without employment bond) are considered as subordinated credits (art. 83, VIII, “b”). Shareholders can not enforced the bankrupt estate to pay their residual interests (art. 83, §2).
Law 11,101, article 84, determines that some credits have payment preference over the above-mentioned credits. Such extra category of credits is commonly known as extra-bankruptcy credits and comprise values due to the judicial administrator and to its assistants, values given to the bankrupt estate by the creditors, amounts spent in the administration of the bankruptcy, judicial costs, obligations resulting from legal acts practiced during the judicial reorganization and tax debts whose taxable event occurred after the bankruptcy declaration.
According to article 124 of Law 11,101, if debtor’s assets are insufficient to pay subordinated creditors, interests that mature after bankruptcy declaration shall not be collected from the bankrupt estate, even if such interests are expressly contemplated in law or contract.
Debtor’s bankruptcy shall be declared, if debtor, without relevant lawful justification, does not pay until the due date protested enforceable instrument or net obligations materialized in instruments whose total sum exceeds forty (40) minimum wages (art. 94). Besides, the debtor’s bankruptcy shall be declared if debtor, when enforced to pay any outstanding amount, does not pay it and neither deposit nor indicate enough assets to be pledged to liquidate the debit (art. 94, II).
The debtor itself, the survivor spouse, any inheritor or inventory administrator, the shareholder or any creditor is entitled to require the bankruptcy of debtor (art. 97). If bankruptcy is deceitfully requested, the respective petitioner shall be condemned, in the decision that denies the petition, to indemnify the debtor (art. 101). According to article 48, I, debtor may request its judicial reorganization, provided that debtor’s bankruptcy has not been declared.
The bankrupt shall not develop any business activities during the period elapsed between the bankruptcy declaration and the completion of the corresponding process (art. 102). Thus, in such case, debtor looses the right to manage or dispose of its assets. Nonetheless, the bankrupt may monitor the administration of the bankrupt estate and intervene in the lawsuits which the bankrupt estate is involved in (art. 103, sole paragraph).
The bilateral and unilateral contracts that the debtor executed do not immediately terminate upon the bankruptcy declaration. Those contracts may be performed by the judicial administrator if their fulfillment diminishes the bankrupt estate’s liabilities, prevent their increase or is necessary for the preservation of the bankrupt’s assets (art. 117). However, the consent from Committee of Creditors is a condition to the fulfillment of these contracts. Likewise, the bankruptcy declaration results in the revocation of the mandates the debtor granted (art. 120).
Once the assets are liquidated and the extrabankruptcy credits are paid, the payment of the creditors inserted in the creditors’ general chart commences. Should there remain any moneys after the payment of all creditors, such balance shall accrue to the bankrupt (art. 153). The judicial administrator shall present a report of final accounts to the judge within 30 (thirty) days from the completion of creditor’s payment. The competent judge will analyze such report. In case the judge approves it, the administrator shall present a final report covering the entire process and the corresponding transactions. As soon as the judge approves this final report, the bankruptcy process is completed (art. 156).
As from the bankruptcy completion, the statute of limitations periods restart to count as to the ex-debtor (bankrupt). Nevertheless, the obligations of the bankrupt will be extinct if either all credits were paid or fifty percent (50%) of such credits were paid using the proceeds of the sale of all assets. If said percentage is not reached, the bankrupt may deposit the necessary amount so that the 50% percentage is reached. In the same line, the bankrupt’s obligations will extinguish in ten (10) years - if the bankrupt is convicted of bankruptcy crime, or in five (5) years, if the bankrupt is not convicted of such crimes (art. 158).
5.5 EXTRAJUDICIAL REORGANIZATION
The debtor qualified to request the judicial reorganization is also allowed to request the extrajudicial reorganization according to article 161 (and ensuing) of Law 11,101.
The extrajudicial reorganization results from an agreement between debtors and creditors, except for fiscal, tax, labor and labor accidents creditors. These creditors cannot compromise as they hold public rights that are deemed non-negotiable. The submission of an extrajudicial reorganization plan to the Court requires approval from creditors representing three-fifths (3/5) (art. 163). Should the judge approve the reorganization, the corresponding decision constitutes an enforceable judicial instrument (art. 59, §1).
After the extra-judicial reorganization petition is received, the creditors call notice will be published. Interested parties shall challenge the reorganization request within thirty (30) days from such publication (art. 164, §2). The extrajudicial reorganization plan only produces effects after the judge approves it. The reorganization shall not cause suspension of rights, of actions or of executions, nor shall it prevent that other creditors file for said debtor’s bankruptcy (arts. 165 and 161, §4).
VI. TREATIES AND INTERNATIONAL CONVENTIONS
There are few international treaties that affect the bankruptcy framework in Brazil, including the Montevideo and Havana Treaties. These treaties were incorporated to the Brazilian law through Decree 66, as of November 16th, 1981 and Decree 18,874, as of December 24th, 1929.
The Montevideo Treaty, executed on February 1st, 1980, by and among Bolivia, Colombia, Chile, Equador, Mexico, Peru, Brazil, Uruguay, Argentina, Venezuela and Paraguay, provides the dynamic of the bankruptcy treatment, aiming to avoid controversies and the simultaneity of countries judging the same matter. In case of a businessman who has commercial places/business in lots of states, which depends on a main establishment, the unit principle shall apply; meaning that the bankruptcy petition shall be filed and judged in the state where the headquarters of the main establishment are located. Conversely, if the debtor holds establishments in different places, the principle of the plurality shall apply, meaning that the bankruptcy request can be filed in several countries. Furthermore, for the Havana Treaty, named “Bustamante Code”, in honor of its author - the Cuban jurist Antonio S. Bustamante -, determines certain guidelines for the solution of international conflicts, as follows: “Art. 315. No signatory State will organize or maintain in its territory special courts for members of the rest of the signatory States. Art. 316. The ratione loci competence is subordinated, in the international relationship sequence, to the law of the signatory State that establishes said competence. Art. 317. The ratione materiae and ratione personae competences, in the international relation sequence, shall not be based, on the part of the signatory States, upon the condition of national or foreigners of the interested people, as a means of harming the latter”.
Still regarding the competence matter, the Bustamante Code determines that the competent judge in the lower court shall be that one which the litigants expressly or tacitly submit themselves to, provided that at least one said litigants is born in the signatory state that the judge belongs to or is a resident of.
In the bankruptcy or compositions filed by the creditors, the Bustamante Code asserts that “Art. 329. In the compositions or bankruptcy filed by the creditors, the competent judge will be the one from any place that knows the claims that motivate them, preferably if among them is the judge of the legal residence of the debtor, if the latter or the majority of the creditors request so”.
One can infer from such statute that, if debtor holds only one establishment, there shall be one bankruptcy or composition court for dealing with all debtor’s assets and creditors. Furthermore, should there be different establishments in more than one state that are entirely separate and independent, there may be a plurality of bankruptcies processes (arts. 414 and 415).
The bankruptcy declaration pronounced in one of the signatory states shall be executed in other countries, the cases and forms established in said Code shall being observed.
Nevertheless, the unification of the bankruptcy proceedings among the signatories of the Montevideo Treaty is not reality from the pragmatic viewpoint. Deviations among local national statutes thwart the use of a single judicial bankruptcy proceeding. Hence, creditors prefer (i) following the territoriality principle, filing for the debtor’s bankruptcy in the respective creditor’s home country, what may result in many bankruptcy lawsuits run in different countries involving a single debtor though or (ii) using other dispute resolution mechanisms, such as mediation and arbitration, which allows such parties to reach a solution faster than if they have opted for international treaties mechanisms.
VII. RELEVANT PRATICAL ASPECTS OF THE BANKRUPTCY LAW FOR THE FOREIGN CREDITOR
Brazilian law presents no restriction as to the presentation by foreign creditors of claims in bankruptcy lawsuits processed in Brazil.
Nonetheless, according to the Brazilian Civil Procedure Code (arts. 584 and 585 ), only enforceable judicial instruments and enforceable extra-judicial instruments may be claimed in bankruptcy lawsuits.
Creditors holding foreign enforceable extra judicial instrument must comply with the formation requisites provided in the law of the place where such instrument was signed and indicate Brazil as the place where the obligation shall be executed, as per article 585, second paragraph, of the Brazilian Civil Process Code. Such conditions being observed, the title can be immediately presented to the bankruptcy court for collection purposes, provided that the preference order established in article 83 of the Law 11,101 shall apply.
If the enforceable extra judicial instrument does not fulfill the above-mentioned requirements or if the corresponding credit is not object of an enforceable instrument in the origin country, it must be submitted to the appreciation of the Judiciary of that country and afterwards be ratified by the Brazilian Superior Courts.
According to the Brazilian Civil Process Code (item IV of art. 584), the foreign court decision that the Brazilian Superior Court (“Superior Tribunal de Justiça”) ratifies constitutes a enforceable judicial instrument. The corresponding ratification process entails an analysis of formal aspects of the foreign court decision only, what excludes, therefore, the material content of such decision. The Brazilian Superior Court shall verify whether the parties were dully summoned in the origin country and if the decision is final and not subject to appeals only.
The enforceable instrument that documents the foreign creditor’s ratification claim in the bankruptcy lawsuit in Brazil will be received and analyzed by the bankruptcy administrator according to article 7 and subsequent articles of Law 11,101. Debtor, any of its shareholders or the District Attorney may object to such instrument. In case of conflict, the judge shall decide on the validity of the instrument ordering, if necessary, the evidence that the interested parties shall produce. The decision that denies or accepts the claim is subject to appeal. The administrator, any creditor or the Public Attorney can require, at any time, the analysis of the credits which approval was requested (art. 7).
It is important to highlight that the payment of the debt, even if it was settled in foreign currency, shall be paid in national currency. Besides, as mentioned above, the bankruptcy declaration also results in the proportional reduction of interests and the conversion of the foreign currency debt into national currency, using the rate of the bankruptcy declaration date (art. 77).
Finally, in the event that the foreign creditor is a party to the debtor reorganization process, and that such process involves the capitalization of the credit that the debtor owned the foreign creditor, the latter shall adjust its investment status before the Information System of the Brazilian Central Brazilian Bank – SISBACEN. Such an adjustment is a condition for the foreign investor to receive dividends and to repatriate the invested capital free of taxation.
VIII. CONCLUSION
The Brazilian law has been improved through the enactment of a bankruptcy statute that better fits the social-economic needs. As a matter of fact, the radical change of the rules that applies to companies in financial distress benefits the country as a whole. Rather than focusing on the collection of the outstanding debts solely, the new statute also seeks preserving the business and the corresponding intangible value, jobs and the tax revenue arising therefrom. Upon enacting such statute, Brazil follows the widespread trend and overcomes one of the greatest obstacles that have hindered the national economic development so far.
The Brazilians’ optimism as to the results that Law 11,101 may bring is so great, that businessmen and economists even forecast that the loan interest rates that Brazilian banks have been charging – one of the highest in the world – will drop. Such a forecast is based upon the fact that the new preference order provided in the new statute favors the banks, as they are usually unsecured creditors, what, in turn, would reduce the non-payment risk to the bank. If this happens so, Brazilian economy may benefit even more from the new statute and a larger step toward development may be taken indeed.
Law 11,101 is also suitable to the intention of contributing for the institution of a legal framework that plays a key role in the establishment of a social, politic, and economic environment favorable to the national and foreign investment. Notwithstanding the risk arising out of the fact that Law 11,101 is not in place yet (its legal effects commence on June 9th, 2005) and, therefore, there is no precedent involving such statute, the simple enactment of such statute - that contains clear rules regarding the processes of bankruptcy and reorganization – is of paramount importance. In this line, Law 11,101 allows new investors to acquire establishments that were mismanaged, since such statute determined that assets acquired under reorganization processes shall not give rise to successor liability. Simply put, the new bankruptcy statute further agreements among creditors and debtors, optimizing, therefore, the odds that the bankruptcy be a positive device instead of a revengeful one.
The foreign creditor has the right to claim its credit in bankruptcy lawsuits ran in Brazil, certain particularities that the Brazilian law set forth shall being observed.
Finally, the great receptiveness that the Brazilian society showed to the Law 11,101 represents an indication that such statute is suitable to Brazilian current needs and will be a device of utmost importance toward social-economic development.
