February 22, 2021
On Jan. 23, Brazil adopted the Model Law on Cross-Border Insolvency, which was created by the United Nations Commission on International Trade Law (UNCITRAL) in 1997. This will now allow U.S. insolvencies. debt restructurings and liquidations (so-called "foreign proceedings") to be formally recognized by Brazilian courts.
By Allen D. Moreland and Andr F. R. Rocha February 19, 2021 at 09:15 AM
AJlen D. Moreland, left, and Andre F. R. Roch a, right. Courtesy photos
On Jan. 23, Brazil adopted the Model Law on Cross-Border Insolvency, which was created by the United Nations Commission on International Trade Law (UNCITRAL) in 1997. This will now allow U.S. insolvencies, debt restructurings and liquidations (so-called "foreign proceedings'1 to be formally recognized by Brazilian courts and permit U.S. debtors and their representatives- acting as "foreign representatives"-to bring cases in Brazil to, among other things, enjoin litigation against the U.S. debtor, preserve the U.S. debtor's assets, and pursue other claims in Brazil consistent with a restructuring or liquidation plan approved by a U.S. bankruptcy judge.
Brazilian debtors and their representatives have enjoyed this right in the U.S. bankruptcy courts since 2005, when the U.S. adopted the Model Law by adding it as Chapter 15 to the Bankruptcy Code. Most Chapter 15 cases in the United States are filed in the Southern District of New York and the Southern District of Florida and a significant number of those Chapter 15 proceedings have been initiated by Brazilian debtors.
Other Amendments
The adoption of the Model Law is only one of the amendments to the Brazilian Bankruptcy Law that shou ld interest U.S. i n vestors. Others include a lim itat i on on the value of labor claims that are superior to secured creditors, mandatory disclosure of all debtor liabilities (including the so-called extraconcursal obligations that are exempt from bankruptcy proceedings), wider discretion in selecting the group of assets that can make up an "isolated production unit" (UPI} that may be sold off without successor liability, greater flexibility in negotiating the amount and repayment terms of federal tax debt, the promotion of pre packaged, "extrajudicial" arrangements instead of judi cia l restructur i ngs, the availab ility of DIP financing, and the possibility that creditors may propose their own restructuring plan.
Asset Sales
Although PresidentJair Bolsona ro vetoed a pro vision that would have eliminated successor environmental and ant i-corrupt ion liab ilit ies in debtor asset sales, Article 60 of the new law preserves the policy of allow ing any "isolated production unit" (unidade pr odu tiva isolada UPI} to be sold without successor liability- including tax and labor liabil ity. Only now there is significantly more flexibility in spec i fying the assets that will compose the UPI-which can include rights or assets of any kind, whether tangible or intang ible, isolated or grouped together, and even equity held by the debtor.
Disclosure of Exempt (Extraconcursal) Obligations
Certain obligations remain exempt (extraconcursal) from Brazilian bankruptcy law. These include obligations secured by a fiduciary lien (aliena ao fiduci ria} (a type of secur i ty interest widely used in Brazil ian financings) and tax obligations. Under the new law, however, debtors are required to disclose all their exempt liabilities, which gives potential investors a much better picture of the financial cond i ti on of the distressed company.
Federal Tax Obligations
Outstanding federal tax debt is now allowed to be repaid in 120 monthly installments.
These prov isions of the amended law are comp lem ented the recently enacted Tax Transaction Law (Law n° 13.988/20} which allows a taxpay ing entity to negotiate a federal tax deal with the Office of the Attorney General of Internal Revenue (Procuradoria Geralda Fazenda aciona l}. For taxpayers facing judicial restructurings, it may include a 70% haircut and a 120-month repayment period. Additionally, the bankruptcy judge is empowered to stay any tax foreclosure actions on any assets of a restructuring debtor that are deemed essential to its operations (though they must be replaced with nonessential ones).
However, if the debtor defaults under the tax repayment plan, or if the federal tax author ities determine that the debtor is engaged in asset depleting transfers, the tax author ities have the right to demand the liquidation of the debtor.
Extrajudicial Restructurings
The new law contains provisions that promote the use of pre-packa ged, pre-negotiated debt restructurings (Recupera ao Extra jud icial), which can be carried out with greater speed, fewer legal technicalities and lower costs than their judicial counterparts. These provisions include the app licati on of the stay period to extrajudicial restructurings, which begins with the filing of the petition and the abi lity to negotiate labor claims extrajudicia lly- provided negotiation must be carried out through the relevant union and not directly with workers.
ew "cram-d own" provisions allow the debtor to petition for the homologation of the extrajud icial restructuring plan with only a simple majority (of value, not heads) of each class of creditors affected by the restructu ring (previously it had been three fifths). The debtor can even initiate extrajud icial restructuring proceedings with the approval of only one third of the affected creditors if it undertakes to get the remaining creditors necessary for a simple majority on board within 90 days.
DIP Finan cing
In contrast to the previous law, the new law specifically contemplates the use of DIP
financ ing in Brazilian restru cturings. During the 15 years that the prior law remained in effect, only eight DIP financings figured in the roughly 4,500 restructuring plans that were approved during the period, of which only six were ultimately effectuated.
It remains to be seen if the new law will resul t in DIP financing becoming more widely availab le in Brazi l. On the one hand, the presid ing j udge can now approve a DIP fi nanc ing proposal without creditor approval and DIP financing does gain second repayment priority (in the waterfall that kicks in after payment of the exempt cred itors) in the event of a
liqu ida tion and no subsequent judicial decision may alter this repayment prior ity- or diminish the collateral that secures it- once the DIP financing has been approved.
On the other hand, nothing in the new law affects the abso lute exemption of fiduciary liens, either in a restructuring or a liquidation-and many of the assets of a distressed debtor will more likely be subject to fiduciary liens and therefore may not serve as collateral for DIP
financ ing.
Creditor Proposal of Restructuring Plan
The prior law had no provisions that would allow for creditors to formulate a restructuring plan.
Under the new law, if the debtor does not present a restructuring plan to the Creditors' Meeting within the 180-day stay period (which may be extended only once if the delay in presenting the plan is not the fault of the debtor), or if the voted plan is not approved by the required number of votes at the Creditors' Meeting, the creditors will have the right to present an alternative plan. The alternate plan may provide for debt-to-equity conversions-even if the conversions result in a change of control of the debtor. Furthermore, the new shareholder/former creditor is not subject to successor liability after the conversion.
Allen Moreland is a partner at AXS Law Group, a boutique Miami-based firm focused on complex litigation and finance. He is also admitted to the Brazilian Bar Association-Sao Paulo Section (OAB-SP) as a Foreign Legal Consultant.
Andre Ferreira da Rosa Rocha is a managing partner at EXM Partners, a leading Brazilian insolvency, restructuring and forensics firm. He is also vice president of /BRA (Brazilian Institute of Asset Recovery) and the International Academic Coordinator at IBAJUD (Brazilian Insolvency Institute).
By Allen D. Moreland and Andr F. R. Rocha February 19, 2021 at 09:15 AM
AJlen D. Moreland, left, and Andre F. R. Roch a, right. Courtesy photos
On Jan. 23, Brazil adopted the Model Law on Cross-Border Insolvency, which was created by the United Nations Commission on International Trade Law (UNCITRAL) in 1997. This will now allow U.S. insolvencies, debt restructurings and liquidations (so-called "foreign proceedings'1 to be formally recognized by Brazilian courts and permit U.S. debtors and their representatives- acting as "foreign representatives"-to bring cases in Brazil to, among other things, enjoin litigation against the U.S. debtor, preserve the U.S. debtor's assets, and pursue other claims in Brazil consistent with a restructuring or liquidation plan approved by a U.S. bankruptcy judge.
Brazilian debtors and their representatives have enjoyed this right in the U.S. bankruptcy courts since 2005, when the U.S. adopted the Model Law by adding it as Chapter 15 to the Bankruptcy Code. Most Chapter 15 cases in the United States are filed in the Southern District of New York and the Southern District of Florida and a significant number of those Chapter 15 proceedings have been initiated by Brazilian debtors.
Other Amendments
The adoption of the Model Law is only one of the amendments to the Brazilian Bankruptcy Law that shou ld interest U.S. i n vestors. Others include a lim itat i on on the value of labor claims that are superior to secured creditors, mandatory disclosure of all debtor liabilities (including the so-called extraconcursal obligations that are exempt from bankruptcy proceedings), wider discretion in selecting the group of assets that can make up an "isolated production unit" (UPI} that may be sold off without successor liability, greater flexibility in negotiating the amount and repayment terms of federal tax debt, the promotion of pre packaged, "extrajudicial" arrangements instead of judi cia l restructur i ngs, the availab ility of DIP financing, and the possibility that creditors may propose their own restructuring plan.
Asset Sales
Although PresidentJair Bolsona ro vetoed a pro vision that would have eliminated successor environmental and ant i-corrupt ion liab ilit ies in debtor asset sales, Article 60 of the new law preserves the policy of allow ing any "isolated production unit" (unidade pr odu tiva isolada UPI} to be sold without successor liability- including tax and labor liabil ity. Only now there is significantly more flexibility in spec i fying the assets that will compose the UPI-which can include rights or assets of any kind, whether tangible or intang ible, isolated or grouped together, and even equity held by the debtor.
Disclosure of Exempt (Extraconcursal) Obligations
Certain obligations remain exempt (extraconcursal) from Brazilian bankruptcy law. These include obligations secured by a fiduciary lien (aliena ao fiduci ria} (a type of secur i ty interest widely used in Brazil ian financings) and tax obligations. Under the new law, however, debtors are required to disclose all their exempt liabilities, which gives potential investors a much better picture of the financial cond i ti on of the distressed company.
Federal Tax Obligations
Outstanding federal tax debt is now allowed to be repaid in 120 monthly installments.
These prov isions of the amended law are comp lem ented the recently enacted Tax Transaction Law (Law n° 13.988/20} which allows a taxpay ing entity to negotiate a federal tax deal with the Office of the Attorney General of Internal Revenue (Procuradoria Geralda Fazenda aciona l}. For taxpayers facing judicial restructurings, it may include a 70% haircut and a 120-month repayment period. Additionally, the bankruptcy judge is empowered to stay any tax foreclosure actions on any assets of a restructuring debtor that are deemed essential to its operations (though they must be replaced with nonessential ones).
However, if the debtor defaults under the tax repayment plan, or if the federal tax author ities determine that the debtor is engaged in asset depleting transfers, the tax author ities have the right to demand the liquidation of the debtor.
Extrajudicial Restructurings
The new law contains provisions that promote the use of pre-packa ged, pre-negotiated debt restructurings (Recupera ao Extra jud icial), which can be carried out with greater speed, fewer legal technicalities and lower costs than their judicial counterparts. These provisions include the app licati on of the stay period to extrajudicial restructurings, which begins with the filing of the petition and the abi lity to negotiate labor claims extrajudicia lly- provided negotiation must be carried out through the relevant union and not directly with workers.
ew "cram-d own" provisions allow the debtor to petition for the homologation of the extrajud icial restructuring plan with only a simple majority (of value, not heads) of each class of creditors affected by the restructu ring (previously it had been three fifths). The debtor can even initiate extrajud icial restructuring proceedings with the approval of only one third of the affected creditors if it undertakes to get the remaining creditors necessary for a simple majority on board within 90 days.
DIP Finan cing
In contrast to the previous law, the new law specifically contemplates the use of DIP
financ ing in Brazilian restru cturings. During the 15 years that the prior law remained in effect, only eight DIP financings figured in the roughly 4,500 restructuring plans that were approved during the period, of which only six were ultimately effectuated.
It remains to be seen if the new law will resul t in DIP financing becoming more widely availab le in Brazi l. On the one hand, the presid ing j udge can now approve a DIP fi nanc ing proposal without creditor approval and DIP financing does gain second repayment priority (in the waterfall that kicks in after payment of the exempt cred itors) in the event of a
liqu ida tion and no subsequent judicial decision may alter this repayment prior ity- or diminish the collateral that secures it- once the DIP financing has been approved.
On the other hand, nothing in the new law affects the abso lute exemption of fiduciary liens, either in a restructuring or a liquidation-and many of the assets of a distressed debtor will more likely be subject to fiduciary liens and therefore may not serve as collateral for DIP
financ ing.
Creditor Proposal of Restructuring Plan
The prior law had no provisions that would allow for creditors to formulate a restructuring plan.
Under the new law, if the debtor does not present a restructuring plan to the Creditors' Meeting within the 180-day stay period (which may be extended only once if the delay in presenting the plan is not the fault of the debtor), or if the voted plan is not approved by the required number of votes at the Creditors' Meeting, the creditors will have the right to present an alternative plan. The alternate plan may provide for debt-to-equity conversions-even if the conversions result in a change of control of the debtor. Furthermore, the new shareholder/former creditor is not subject to successor liability after the conversion.
Allen Moreland is a partner at AXS Law Group, a boutique Miami-based firm focused on complex litigation and finance. He is also admitted to the Brazilian Bar Association-Sao Paulo Section (OAB-SP) as a Foreign Legal Consultant.
Andre Ferreira da Rosa Rocha is a managing partner at EXM Partners, a leading Brazilian insolvency, restructuring and forensics firm. He is also vice president of /BRA (Brazilian Institute of Asset Recovery) and the International Academic Coordinator at IBAJUD (Brazilian Insolvency Institute).
