Differences in US and Brazilian bankruptcy laws

Differences between the United States Bankruptcy Code and the current
Brazilian Bankruptcy Law of 2005

January 18th, 2011

SUMM
Summary

MARY
The current Brazilian Bankruptcy Law (BBL), No. 11.101/05, came into effect in June of 2005
with the purpose of increasing the effectiveness and efficiency of bankruptcy liquidations
and judicial reorganizations. Many of the mechanisms within the Brazilian law were
structured to resemble those of Chapter 7 and Chapter 11 proceedings, which fall under the
Title 11 of the United States Bankruptcy Code (USBC).

One of the most noticeable differences between the two systems is of recognition of cross
One of the most noticeable differences between the two systems is of recognition of cross‐
border insolvencies, as Brazilian courts do not recognize concurrent proceedings in other
countries and require that a separate filing is made in Brazilian courts, while the USBC
recognizes core proceedings under Chapter 15. With the increase of capital inflows into the
Brazilian economy, the number of filings involving cross‐border situations will continue to
l h b ffl l b d ll
grow exponentially in the coming years. As a result, it is important that practioners in the
United States understand the process by which insolvency cases are presided over in Brazil.

This presentation highlights the major differences between both codes, as well as displays
the manner by which each is governed.

1

Topics: Differences in the United States Bankruptcy Code (USBC) and the

TOPIC : DIFFER
The current Brazilian Bankruptcy Law (BBL), with regards to:

CS
 Regulation  Debtor in Possession (DIP) Financing

RENCES
 Types of Proceedings  Pre‐petition Transactions

 Firms Excluded from Proceedings  Powers of the Trustee

 Order of Claims  Executory Contracts

 Chapter 7 (Bankruptcy) Process  Asset Sales: Free and Clear of Liens

 Chapter 11 (Judicial Recovery) Process  Conversion of Proceedings

 Chapter 11 (Judicial Recovery) Time Periods
Chapter 11 (Judicial Recovery) Time Periods  Cross‐Border Insolvencies
Cross Border Insolvencies

 Chapter 11 (Judicial Recovery) Plan Acceptance  Out‐of‐Court Restructurings

 Ad
Adequate Protection
t P t ti

2

REGULATION
How are insolvency proceedings regulated under the USBC and the BBL?

United States Bankruptcy Code Brazilian Bankruptcy Law
(USBC) (BBL)
• Federal district courts have jurisdiction over all • Despite being enacted as a federal law in Brazil,
proceedings and federal bankruptcy laws come before judicial recovery and liquidations are enforced by the 26
those of the state in which the proceeding is heard. separate Brazilian states, each with the power to
• Federal bankruptcy judges have the power to rule in organize its own court system.
all “core proceedings”, which include: all matters • Specialized courts for insolvency proceedings have not
relating to the estate, preferences, dischargability of
relating to the estate preferences dischargability of been created throughout the country, though two do
been created throughout the country though two do
particular debts, determination of property liens, asset exist in the state of São Paulo.
sales, and confirmation of plans.
• If the issue is considered “non‐core”, the final decision
should be determined by the district court.

Main Difference Between the USBC and BBL

• Though BBL is a federal law meaning that the same procedural rules are to be applied
BBL is a federal law, meaning that the same procedural rules are to be applied
by all judges, debtors, creditors, and judicial personnel in insolvency cases, cases are
overseen by the local judge in the state that the company is located.
• As a result, local jurisdictions preside over insolvency cases even though they might
not have prior experience in these types of matters.

3

What are the different types of insolvency proceedings under both the

TYPES OF PROC
USBC and the BBL?

S
(USBC) (BBL)
• Chapter 7: Voluntary or involentary liquidation of • Falência: Voluntary or involuntary bankruptcy

CEEDINGS
either an individual or an organization; liquidation;
• Chapter 9: Voluntary reorganization of municipalities; • Recuperação Judicial: Voluntary judicial recovery;
• Chapter 11: Voluntary or involentary reorganization of • Recuperação Extra‐Judicial: Volentary out‐of‐court
either an individual or an organization; recovery.
• Chapter 12: Voluntary reorganization of the family
Chapter 12: Voluntary reorganization of the family
farmer; The Nova Lei de Falência e Recuperação does not have
• Chapter 13: Volentary reorganization for individual provisions for :
with regular income and low levels of debt; and • Falência Privada: Private bankruptcy liquidation
• Chapter 15: Recognition of foreign insolvency • Recuperação Privada: Private judicial restructuring
proceedings during cross‐border insolvencies.


Brazil s BBL does not:
Brazil’s BBL does not:
• allow for an involuntary filing of a judicial recovery, as the USBC courts do with Chapter
11;
• have provisions for the bankruptcy or judicial recovery of an individual, as the USBC
does with Chapter 7, 11, and 13;
• have provisions for the reorganization of municipalities;
• have provisions for cross‐border insolvencies proceedings.

4

What types of firms are excluded from liquidation or judicial

FIRMS EXCLUDE FROM PROCEEDI
reorganization proceedings under both the USBC and the BBL?

S
(USBC) (BBL)
Chapter 7 Liquidation: Liquidation and Reorganization:

ED
• Railroad; • Government owned entities;
• Domestic insurance company, bank, savings bank, • Quasi Public/Private firms;
cooperative bank, savings and loan association, building • Cooperatives or consortias;
and loan association, New Market Venture Capital • Public or private financial institutions;
Company, Small Business Investment Company, credit
Company Small Business Investment Company credit • Credit unions;
Credit unions;
union, or industrial bank. • Supplementary pension companies;
• Foreign insurance company’s and banking firms (as • Health care companies;
referenced above) • Insurance companies;
Chapter 11 Reorganization: • Special savings companies;

INGS
• Stockbroker and commodity broker • Other organizations equal to the above


• The USBC does not allow for the liquidation of firms through Chapter 7 that are viewed
as “essential” to the economy and its growth. In lieu of liquidation, these firms can be
reorganized under Chapter 11 of the USBC.
• The BBL’s list of companies exempt from liquidation and reorganization is more
extensive than that of the USBC. If any of these entities become financially insolvent,
out of court restructurings will need to occur.

Note‐ Under Chapter 9 of the USBC, municipalities can file for reorganization; which was not shown in the analysis above.
5

What are the order of claims, as relate to the absolute priority rule, under

ORDE OF CLAIMS
both the USBC and BBL?

ER
(USBC) (BBL)
• Administrative expense claims; • Labor claims up to 150 minimum wages;
• Priority claims; • Secured claims
• Priority expense (for certain wages and benefits) • Tax‐related claims (not including penalties)
claims; • Claims with special privileges
• Secured claims* ; • Claims with general privileges
• Unsecured claims;
Unsecured claims; • Unsecured claims
Unsecured claims
• Ownership interests • Contractual fines for breaches of law
• Subordinated claims

• The changes made to the BBL in 2005 increased the protection offered to secured
creditors.
dit
• Priority claims under the BBL, because of DIP financing for example, have not been
proven successful to date (see section on DIP).

* Secured claimants are entitled to payment from their collateral before the collateral is
* l l f h ll lb f h ll l
used to satisfy any other claims.

6

What is the process for filing a Chapter 7 and a Bankruptcy liquidation

CHAP 7 (BA
proceeding under both the USBC and BBL, respectively?

PTER
(USBC) (BBL)
• If an “Individual” debtor files for Chapter 7, he must • Both the debtor and creditor can file for Falência

ANKRUPTC ) PROCE
meet cetain financial guidlines, including passing the (Bankruptcy).
“means test”, which determines eligibility for • Bankruptcy shall be decreed for any debtor that:
extinguishment of debts in leiu of repayment under  Does not pay a sum which exceeds 40 minimum
Chapter 13. salaries (+/‐ USD $13,000)
• Any company can file for Chapter 7 protection they do
Any company can file for Chapter 7 protection, they do  Does not pay monies owed within a set contract
Does not pay monies owed within a set contract

CY
not need to show financial difficulties. term.
• In order for a creditor file for an involentary Chapter 7,  Intentionally performs any irresponsibe action (many
the following conditions must be met: are listed in the code), which devalue the assets of the
 If the debtor has 12 or more creditors, the estate.

ESS
involentary petion needs at least 3 creditors who are
owed $10,000 in total.
 If there are fewer than 12 creditors, only 1 creditor
with at least $10,000 in claims is needed.

• Individuals are not entitled to file for bankruptcy liquidation under the BBL.
• Under the USBC, a company does not need to show financial difficulties to file for
Chapter 7, as a firm does to file bankruptcy under the BBL.
Chapter 7 as a firm does to file bankruptcy under the BBL

Note‐ Under the USBC, if a Chapter 7 petition is filed, a trustee is appointed to the case to liquidate the assets. A debtor can also
liquidate the assets of the estate by filing a Chapter 11 petition. In this case, the liquidation is performed by the debtor and gives
them more control with regards to timing and strategy of sales.
7

What is the process for filing a Chapter 11 and a Judicial Recovery

CHAP 11 (J
proceeding under both the USBC and BBL, respectively?

PTER
(USBC) (BBL)
• A debtor or creditor may petition for Chapter 11. • Judicial Recovery (JR) may be filed by any debtor that

JUDICIAL R
• In order for the debtor file for Chapter 11, he must has been doing business regularly over two years and
have a place of business and residence in the United meets the following requirements:
States.  He shall not be bankrupt, or if he has been, the
• Neither insolvency nor the inability to pay debts is a bankruptcy must be cleared.
requirement for filing Chapter 11.
requirement for filing Chapter 11  He shall not have obtained concession of JR within
He shall not have obtained concession of JR within

RECOVERY) PROCESS
• In order for a creditor file for an involentary Chapter the last 5 years.
11, the following conditions must be met:  He, nor the controlling partners of the firm, shall not
 If the debtor has 12 or more creditors, the have been convicted of a crime.
involentary petition needs at least 3 creditors who are
owed $10,000 in total.
 If there are fewer than 12 creditors, only 1 creditor
with at least $10,000 in claims is needed.

S
• Chapter 11 under the USBC allows for both debtors and creditors to file for
reorganization, while BBL only allows for the debtor to file.
• A debtor under the USBC and the BBL does not need to show financial difficulties or
A debtor under the USBC and the BBL does not need to show financial difficulties or
insolvency in order to file for Chapter 11 or Judicial Recovery, respectively.

8

Describe key time periods as relate to the administration of a Chapter 11

CHAP 11 (J
and a Judicial Recovery plan under both the USBC and BBL, respectively.

PTER
(USBC) (BBL)
• The debtor has 120 days to submit a plan of • The debtor has 60 days, from the time of filing, to

JUDICIAL R
reorganization, which can be extended up to 18 months submit a plan of reorganization and this term cannot be
by the judge presiding over the case. extended. (Only the debtor can submit a plan.)
• If no plan is submitted within 180 days, creditors can • The general meeting of creditors, when the voting to
submit a plan of their own. accept the plan take place, must occur within 150 days
• The the automatic stay is in effect for the duration of
The the automatic stay is in effect for the duration of of the filing of the judicial recovery petition.
of the filing of the judicial recovery petition

RECOVERY) TIME PERIODS
the case until it is closed, there is no set period. • The duration of the automatic stay is 180 days from
•The debtor has an additional 60 days from the time the the filing, therefore, the debtor must have a plan
plan is submitted to have the creditors accept the plan. approved in this timeframe.
• If plan is not accepted within this timeframe, the case
shall be converted to a liquidation.

• Under Chapter 11 of the USBC, the ability for creditors to file competing plans gives the
debtor an incentive to:
 file a plan in a timely fashion; and
 create provisions in the plan which are “equitable” to creditors
• The provisions under the NBRL do not allow for a creditor to file a plan of
The provisions under the NBRL do not allow for a creditor to file a plan of
reorganization, therefore, the threat of liquidation can be used by the debtor as
negotiating power.

9

What qualifications need to be met in order for a Chapter 11 and a Judicial

CHAP 11 (J
Recovery plan to be accepted under the USBC and BBL, respectively?

PTER
(USBC) (BBL)
• Plan is voted on at the General Meeting of Creditors. • Plan is voted on at the General Meeting of Creditors.

JUDICIAL R
• A class of claims has accepted the plan when more • Plan is approved if:
than one‐half in number and at least 2/3 in amount of a. 50% of all credits held by each class and a majority
the allowed claims have accepted the plan. vote in number of all creditors present at the
• If a class is to recieve nothing in the plan, it is meeting.
perceived as rejecting the plan.
perceived as rejecting the plan OR

RECOVERY) PLAN AC
• If a class is to be unimpaired, it is percieved to have b. By a majority vote of the creditors present at the
accepted the plan. general meeting and a majority of two classes of
creditors and 1/3 of the third class.


• See above
above.

CCEPTANCE
10

How is the concept of adequate protection*, as relates to the automatic

ADEQ
stay, dealt with under both the USBC and BBL?

QUATE PRO
(USBC) (BBL)
• A secured claim holder may be granted relief from the • No formal provisions are given in the BBL to address

OTECTION
automatic stay if the creditor’s interest in the collateral the issue of adequate protection.
lacks adequate protection.
• If granted adequate protection, the debtor could be
required to provide the creditor additional collateral or
periodic cash payments in order to be able to use the
periodic cash payments in order to be able to use the
asset as collateral for cash advances.


• The NBRL does not address adequate protection.

•Adequate protection is the concept that says if the value of the asset is less than the value of the lien or obligation on
the asset, the court can force the debtor to make protective concessions to the creditor in order to use the asset as
cash collateral.
11

DEBT IN POS
How is post‐petition financing (DIP) viewed under both the USBC and BBL?

TOR
(USBC) (BBL)
• Unsecured credit extended post‐filing is entitled to an • BBL treats all post‐petition financing as super‐priority,

SSESSION FINANCING (DIP)
administrative expense priority, as followed by the but only in the case of liquidation and makes no
absolute priority rule. mention of what happens to these claims (ex. DIP Loan)
• A super‐priority claim may also be given to a post‐ during judicial recovery proceedings.
petition financier, which provides administrative • BBL does not have provisions for the debtor to follow
priority over all other administrative expenses and liens
priority over all other administrative expenses and liens with regards to obtaining secured or unsecured debt
with regards to obtaining secured or unsecured debt
against any unencumbered assets. (ex. DIP Loan) during the judicial recovery process.
• The court can also give a financier a super‐priority lien
over all encumbered assets if the value of those assets
is adequately protected.


• Post‐petition financing under the BBL has not been proven to work with judicial
recovery proceedings, as creditors rights are only protected under the law through
liquidation.
• Post‐petition financing under the USBC protects financiers security interests in Chapter
Post petition financing under the USBC protects financiers security interests in Chapter
11, as well as if the case is converted to a Chapter 7 proceeding.

12

What types of pre‐petition transactions can be voided under both the

PRE‐P
USBC and BBL?

PETITION T
(USBC) (BBL)
• Transfers to insiders, from 1 year before the filing, if • Payment of non‐overdue debts made by the debtor,

TRANSACT
proven the firm was insolvent; for a period not longer than 90 days from the filing;
• Preferential transfers to non‐insiders, from 90 days • Creation of a mortgage pledge within the legal term;
before the filing, that gives the creditor a greater value • Transactions entered into for no consideration in the
on their claim then Chapter 7 liquidation would have two years before the declaration of the bankruptcy;
given them;
given them; • Sale of an asset which resulted in the debtor not
Sale of an asset, which resulted in the debtor not

TIONS
• Direct preferences: when two creditors of equal having sufficient funds to pay back creditors, without
position are treated differently 90 days prior to filing; consent from all creditors.
• Transfer to a third party in order to benefit the debtor,
known as the Deprizio Preference.

• See above.

13

What are the duties/powers of the Trustee in a Chapter 11 and a Judicial

POWERS OF TH TRUSTE
Recovery proceeding under both the USBC and BBL, respectively?

(USBC) (BBL)

HE
• If appointed in a Chapter 11 case *, a trustee is given • Under the BBL, the roles of the trustee are:
the same powers as a Debtor In Possession (DIP) would  to monitor the debtor and plan performance;
be with regards to operating the business and reporting  to file bankruptcy in the event of non‐performance of
to the courts. any obligation under the reorganization plan;
• The trustee is also given the same power(Strong Arm)
The trustee is also given the same power(Strong Arm)  to submit a monthly report on the debtor’s activities
to submit a monthly report on the debtor s activities

EE
as: to the judge;
 A hypothetical judicial lien creditor;  to submit a report on the performance of the judicial
 A hypothetical executing creditor. reorganization plan.
• Both of these hypothetical parties would in effect, • The trustee will never act as the debtor in possession
invalidate security interests that were not properly
i lid t it i t t th t t l (DIP) in a judicial recovery.
(DIP) i j di i l
perfected, in order to increase the value of estate.

• In Chapter 11, if appointed, the Trustee would operate the business in the same
manner as would the DIP.
• Under the BBL, the trustee’s sole purpose is to monitor and administer the case, as
well as take action and liquidate the company if the DIP is failing on obligations.
* A trustee is only appointed to a Chapter 11 case if the Debtor in Possession (DIP) is replaced due to negligence.

14

How are executory contracts* handled in a Chapter 11 and a Judicial

EXECU
Recovery proceeding under both the USBC and BBL, respectively?

UTORY CO
(USBC) (BBL)

ONTRACTS
• The Debtor in Possession or the Trustee have the • Under BBL, leases and contracts are excluded from
option to: proceedings and handled outside of the estate, but:
 Reject ; • In Falência (Bankruptcy), the DIP does have this ability,
 Accept ; or and can accept or reject contracts to increase asset
 Assume and assign an unexpired lease or contract
Assume and assign an unexpired lease or contract value or decrease the value of liabilities of the estate.
value or decrease the value of liabilities of the estate.
• If the estate would be aided or hindered by continuing
performance under the contract, it would be one in
which would be assumed or rejected, respectively.
• The debtors decision must conform to the “business
judgement rule”, which states that action must be taken
j d t l ” hi h t t th t ti tb t k
which would conform to that of a reasonably prudent
business person.

• In Chapter 11 USBC allows for the DIP to maximize the value of the estate by accepting
or rejecting executory contracts, while the BBL only recognizes this in Falência
(Bankruptcy)
• In judicial recovery under the BBL, “leasing” contracts are kept outside of the bankrupt
j y , g p p
estate.
* Executory Contract‐ Contract under execution, or where one or more parties have not yet performed their duties as
stipulated in the contract document. An ongoing lease agreement is a good example of an executory contract.
15

What is the process for selling assets free and clear of liens under both the

ASSET SALES: FREE AND CLEAR OF LIENS
USBC and BBL?

T
(USBC) (BBL)

F
Terms of selling assets free and clear of liens: Terms of selling assets free and clear of liens:
• Non‐bankruptcy law must permit sale; • After following the advice of the Creditors, the judge
• Lienholders must consent to the sale; will order the assets to be sold by:
• Price that property is sold for must be greater than the  Auction, Sealed bids, or Public proclamation
aggreagate value of all liens;
aggreagate value of all liens; • Sale of assets should take place in following
Sale of assets should take place in following
• Creditor can be compelled to accept monetary value; preference:
• Creditor can “credit bid” for the value up to claim;  Disposal of the company, sale in block
• Debtor must expose deal to the market.  Disposal of the company, sale of branches and plants
Bidders are given protection devices, including:  Disposal of block of assets constituting each asset

F
B k
Break‐up fees (Stalking Horse);
f (St lki H )  Di
Disposal of assets considered individually
l f t id d i di id ll
 Overbid Protections; and • The winning bidder shall engage the existing labor
 Window Shopping Provisions force with new contracts, yet will not be liable for past
liabilities.

• The BBL lists no bidder protection devices to compensate initial suitors for expenses.
• The BBL does not mention the ability for creditors to “credit bid” on an asset up to the
amount of their claim, as possible under the USBC.
• The BBL states that the judge acts based on the advice of the committee of creditors,
not on that of the individual creditor holding the lien, as with the USBC.
16

What is the procedure for converting a case from a Chapter 11 (Judicial

CONV
Recovery) into a Chapter 7 (Bankruptcy) under the USBC and BBL?

VERSION O PROCEE
(USBC) (BBL)

OF
A Chapter 11 shall be converted to a Chapter 7 upon:
A Chapter 11 shall be con erted to a Chapter 7 pon The judge shall decree Bankruptcy during a Judicial
The j dge shall decree Bankr ptc d ring a J dicial
• the debtor requesting such a conversion; Recovery procedure:
• the failure of the debtor to execute the JR plan; • by the resolution of the general meeting of creditors;
• any acts of fraud or misappropriation of assets of the • due to the failure of the debtor to submit the plan of
estate. reorganization in the allowable time frame;

EDINGS
• when the reorganization has been denied;
• due to non‐performance of obligations under the
reorganization plan.
The debtor alone cannot choose to convert the Judicial
Recovery into a bankruptcy liquidation.
Recovery into a bankruptcy liquidation

• Under the USBC, the debtor can convert the case from a Chapter 11 to a Chapter 7
bankruptcy liquidation, but cannot convert a Chapter 7 case into a Chapter 11
reorganization.
• Under the USBC, if the debtor does not submit a reorganization plan in the set
, g p
timeframe, any creditor has the ability to submit one. Under the BBL, failure of the
debtor to submit a plan results in conversion to a Chapter 7 bankruptcy.

17

How are cross‐border insolvency proceedings handled under both the

CROS ‐BORDER INSOLVENCIES
USBC and the BBL?

SS
(USBC) (BBL)
• USBC courts generally provide comity to foreign • The BBL contains no rules relating to cross‐border

R
insolvency cases if they afford the same due process as insolvency.
given in the United States, even if foreign laws differ. • For cross‐border cases, a concurrent proceeding will
• Chapter 15 of the USBC has provisions for: need to be filed in the Brazilian Courts under the BBL.
 Commencement of a US case ancillary to a foreign • Brazilian courts have cooperated with courts of other
proceeding; nations when there are concurrent proceedings.
nations when there are concurrent proceedings
 Recognition by US bankruptcy courts of foreign •Brazil does not have any international treaties as relate
insolvency proceedings; to international insolvencies.
 Cooperation with foreign courts; and
 Protection of property located within the United
States.


• The lack of acceptance of an International standard for cross‐border insolvencies
The lack of acceptance of an International standard for cross‐border insolvencies
creates added costs to the estate and makes the bankruptcy process less efficient.
• The USBC recognizes this issue and therefore created Chapter 15 as a means to
increase the estate value, as well as the efficiency of the process.

18

What are guidelines for out‐of‐court restructurings under both the USBC

OUT‐OF‐COURT RESTRUC
and BBL?

‐
(USBC) (BBL)
• Out‐of‐court restructurings are possible. • A debtor who meets the requirements of a judicial

T
• Creditors whom are in favor of the out‐of‐court recovery, can petition for an out‐of‐court restructuring.
restructuring plan can provide non‐consenting creditors • The provisions of the out‐of‐court restructuring do not
with incentives to go along with the plan, but there is apply to the following types of claims:
no cramdown feature available.  Labor credits, tax credits, forward foreign exchange
contracts, trustee ownership agreements, and leasing
contracts trustee ownership agreements and leasing

CTURINGS
agreements (financial and operating)
• The debtor may file for the ratification of an out‐of‐
court reorganization plan that binds all creditors,
provided that it is approved by over 3/5th’s of all claims

S
of each kind encompassed.


• Under the BBL, an out‐of‐court restructuring would be recognized by the same court
that oversees liquidation and judicial recovery cases, while the USBC courts do not
recognize this type of proceeding.
• Under the BBL, the debtor can bind dissident creditors to the plan with a 3/5 of all
Under the BBL, the debtor can bind dissident creditors to the plan with a 3/5 of all
claims vote, while the USBC does not recognize a cram down feature.

19

CONT
Contact Information

TACT INFO
Íntegra Associados Reestruturação Empresarial Ltda. (“Íntegra”)
Address:
Av. Dr. Cardoso de Melo, 1460 ‐ 8º andar ‐ cj. 84 ‐ Vila Olímpia

ORMATION
São Paulo – SP – Brasil
integra@integraassociados.com.br
Phone: +55 11 3047 4570 / Fax: +55 11 3849 6803/ USA #: 917‐470‐9449

N
Tony Prada
Associate
tonyprada@br‐integra.com
Office: +55 11 3047 0459
Mobile: +55 11 9677 6600
Mobile: +55 11 9677 6600
USA #: 917‐470‐9449

Thank you for your time, please feel free to contact me with any questions!

20

Differences in US and Brazilian bankruptcy laws

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