united states vs. brazilian bankruptcy codes

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

January 18th, 2011

SUMM

Summary

MARYThe 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 crossborder 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

l h b f f l l b d llBrazilian economy, the number of filings involving cross‐border situations will continue to 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.

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TOPIC

Topics: Differences in the United States Bankruptcy Code (USBC) and the The current Brazilian Bankruptcy Law (BBL), with regards to:

CS: DIFFER

Regulation Debtor in Possession (DIP) Financing

RENCES

Types of Proceedings

Firms Excluded from Proceedings

Pre‐petition Transactions

Powers of the Trustee

Order of Claims

Chapter 7 (Bankruptcy) Process

Executory Contracts

Asset Sales: Free and Clear of Liens

Chapter 11 (Judicial Recovery) Process

Chapter 11 (Judicial Recovery) Time Periods

Conversion of Proceedings

Cross‐Border InsolvenciesChapter 11 (Judicial Recovery) Time Periods

Chapter 11 (Judicial Recovery) Plan Acceptance

Ad t P t ti

Cross Border Insolvencies

Out‐of‐Court Restructurings

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Adequate Protection

REGU

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

LATIO

N

United States Bankruptcy Code (USBC)

Brazilian Bankruptcy Law (BBL)

• Federal district courts have jurisdiction over all • Despite being enacted as a federal law in Brazil, proceedings and federal bankruptcy laws come before those of the state in which the proceeding is heard.• Federal bankruptcy judges have the power to rule in all “core proceedings”, which include: all matters relating to the estate preferences dischargability of

judicial recovery and liquidations are enforced by the 26 separate Brazilian states, each with the power to organize its own court system.• Specialized courts for insolvency proceedings have not been created throughout the country though two dorelating to the estate, preferences, dischargability of

particular debts, determination of property liens, asset sales, and confirmation of plans.• If the issue is considered “non‐core”, the final decision should be determined by the district court.

been created throughout the country, though two do exist in the state of São Paulo.

Main Difference Between the USBC and BBL

• Though BBL is a federal law meaning that the same procedural rules are to be applied• Though 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.

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TYPES

What are the different types of insolvency proceedings under both the USBC and the BBL?

SOFPRO

C



• Chapter 7: Voluntary or involentary liquidation of • Falência: Voluntary or involuntary bankruptcy CEEDINGS

either an individual or an organization;• Chapter 9: Voluntary reorganization of municipalities;• Chapter 11: Voluntary or involentary reorganization of either an individual or an organization;• Chapter 12: Voluntary reorganization of the family

liquidation;• Recuperação Judicial: Voluntary judicial recovery;• Recuperação Extra‐Judicial: Volentary out‐of‐court recovery.

• Chapter 12: Voluntary reorganization of the family farmer;• Chapter 13: Volentary reorganization for individual with regular income and low levels of debt; and• Chapter 15: Recognition of foreign insolvency

The Nova Lei de Falência e Recuperação does not have provisions for :• Falência Privada: Private bankruptcy liquidation• 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;

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• have provisions for the reorganization of municipalities;• have provisions for cross‐border insolvencies proceedings.

FIRM

SWhat types of firms are excluded from liquidation or judicial reorganization proceedings under both the USBC and the BBL?

SEXCLU

DE



Chapter 7 Liquidation: Liquidation and Reorganization: EDFRO

M

• Railroad;• Domestic insurance company, bank, savings bank, cooperative bank, savings and loan association, building and loan association, New Market Venture Capital Company Small Business Investment Company credit

• Government owned entities;• Quasi Public/Private firms;• Cooperatives or consortias;• Public or private financial institutions; • Credit unions; PRO

CEEDI

Company, Small Business Investment Company, credit union, or industrial bank.• Foreign insurance company’s and banking firms (as referenced above)Chapter 11 Reorganization:

• Credit unions;• Supplementary pension companies; • Health care companies; • Insurance companies; • Special savings companies; IN

GS

• 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

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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.

ORD

EWhat are the order of claims, as relate to the absolute priority rule, under both the USBC and BBL?

EROFCLA



• Administrative expense claims; • Labor claims up to 150 minimum wages; IMS• Priority claims;

• Priority expense (for certain wages and benefits) claims;• Secured claims* ;• Unsecured claims;

• Secured claims• Tax‐related claims (not including penalties)• Claims with special privileges• Claims with general privileges• Unsecured claims• Unsecured claims;

• Ownership interests• Unsecured claims• Contractual fines for breaches of law• Subordinated claims

Main Difference Between the USBC and BBL• The changes made to the BBL in 2005 increased the protection offered to secured

ditcreditors. • Priority claims under the BBL, because of DIP financing for example, have not been proven successful to date (see section on DIP).

* l l f h ll l b f h ll l

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* Secured claimants are entitled to payment from their collateral before the collateral is used to satisfy any other claims.

CHAP

What is the process for filing a Chapter 7 and a Bankruptcy liquidation proceeding under both the USBC and BBL, respectively?

PTER7 (B

A



• If an “Individual” debtor files for Chapter 7, he must • Both the debtor and creditor can file for Falência ANKRU

PTC

meet cetain financial guidlines, including passing the “means test”, which determines eligibility for extinguishment of debts in leiu of repayment under Chapter 13.• Any company can file for Chapter 7 protection they do

(Bankruptcy).• Bankruptcy shall be decreed for any debtor that: Does not pay a sum which exceeds 40 minimum salaries (+/‐ USD $13,000) Does not pay monies owed within a set contract CY) PRO

CE

• Any company can file for Chapter 7 protection, they do not need to show financial difficulties.• In order for a creditor file for an involentary Chapter 7, the following conditions must be met: If the debtor has 12 or more creditors, the

Does not pay monies owed within a set contract term. Intentionally performs any irresponsibe action (many are listed in the code), which devalue the assets of the estate. ESSinvolentary 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.

Main Difference Between the USBC and BBL• 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

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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 alsoliquidate the assets of the estate by filing a Chapter 11 petition. In this case, the liquidation is performed by the debtor and givesthem more control with regards to timing and strategy of sales.

CHAP

What is the process for filing a Chapter 11 and a Judicial Recovery proceeding under both the USBC and BBL, respectively?

PTER11 (J



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

LR

• In order for the debtor file for Chapter 11, he must have a place of business and residence in the United States.• Neither insolvency nor the inability to pay debts is a requirement for filing Chapter 11

has been doing business regularly over two years and meets the following requirements: He shall not be bankrupt, or if he has been, the bankruptcy must be cleared. He shall not have obtained concession of JR within

RECOVERY

requirement for filing Chapter 11.• In order for a creditor file for an involentary Chapter 11, the following conditions must be met: If the debtor has 12 or more creditors, the involentary petition needs at least 3 creditors who are

He shall not have obtained concession of JR within the last 5 years. He, nor the controlling partners of the firm, shall not have been convicted of a crime.

) PROCESS

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

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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.

CHAP

Describe key time periods as relate to the administration of a Chapter 11 and a Judicial Recovery plan under both the USBC and BBL, respectively.

PTER11 (J



• The debtor has 120 days to submit a plan of • The debtor has 60 days, from the time of filing, to JUDICIA

LR

reorganization, which can be extended up to 18 months by the judge presiding over the case. • If no plan is submitted within 180 days, creditors can submit a plan of their own.• The the automatic stay is in effect for the duration of

submit a plan of reorganization and this term cannot be extended. (Only the debtor can submit a plan.)• The general meeting of creditors, when the voting to accept the plan take place, must occur within 150 days of the filing of the judicial recovery petition

RECOVERY

• The the automatic stay is in effect for the duration of the case until it is closed, there is no set period.•The debtor has an additional 60 days from the time the plan is submitted to have the creditors accept the plan.

of the filing of the judicial recovery petition.• The duration of the automatic stay is 180 days from the filing, therefore, the debtor must have a plan approved in this timeframe.• If plan is not accepted within this timeframe, the case ) TIMEPE

shall be converted to a liquidation.


RIODS

• 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

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• 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.

CHAP

What qualifications need to be met in order for a Chapter 11 and a Judicial Recovery plan to be accepted under the USBC and BBL, respectively?

PTER11 (J



• Plan is voted on at the General Meeting of Creditors. • Plan is voted on at the General Meeting of Creditors. JUDICIA

LR

• A class of claims has accepted the plan when more than one‐half in number and at least 2/3 in amount of the allowed claims have accepted the plan.• If a class is to recieve nothing in the plan, it is perceived as rejecting the plan

• Plan is approved if:a. 50% of all credits held by each class and a majority

vote in number of all creditors present at the meeting.

OR

RECOVERY

perceived as rejecting the plan.• If a class is to be unimpaired, it is percieved to have accepted the plan.

ORb. By a majority vote of the creditors present at the

general meeting and a majority of two classes of creditors and 1/3 of the third class.

) PLANAC


• See above

CCEPTANC

• See above.

E

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ADEQ

How is the concept of adequate protection*, as relates to the automatic stay, dealt with under both the USBC and BBL?

QUATE

PRO



• A secured claim holder may be granted relief from the • No formal provisions are given in the BBL to address OTECTIO

N

automatic stay if the creditor’s interest in the collateral 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

the issue of adequate protection.

periodic cash payments in order to be able to use the asset as collateral for cash advances.


• The NBRL does not address adequate protection.

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•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.

DEBT

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

TORIN

POS



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

administrative expense priority, as followed by the absolute priority rule.• A super‐priority claim may also be given to a post‐petition financier, which provides administrative priority over all other administrative expenses and liens

but only in the case of liquidation and makes no mention of what happens to these claims (ex. DIP Loan) during judicial recovery proceedings.• BBL does not have provisions for the debtor to follow with regards to obtaining secured or unsecured debt FIN

ANCIN

priority over all other administrative expenses and liens against any unencumbered assets.• The court can also give a financier a super‐priority lien over all encumbered assets if the value of those assets is adequately protected.

with regards to obtaining secured or unsecured debt (ex. DIP Loan) during the judicial recovery process.

G(DIP)Main Difference Between the USBC and BBL

• 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

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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.

PRE‐P

What types of pre‐petition transactions can be voided under both the USBC and BBL?

PETITIONT



• Transfers to insiders, from 1 year before the filing, if • Payment of non‐overdue debts made by the debtor, TRANSA

CT

proven the firm was insolvent;• Preferential transfers to non‐insiders, from 90 days before the filing, that gives the creditor a greater value on their claim then Chapter 7 liquidation would have given them;

for a period not longer than 90 days from the filing;• Creation of a mortgage pledge within the legal term;• Transactions entered into for no consideration in the two years before the declaration of the bankruptcy;• Sale of an asset which resulted in the debtor not

TIONS

given them;• Direct preferences: when two creditors of equal position are treated differently 90 days prior to filing;• Transfer to a third party in order to benefit the debtor, known as the Deprizio Preference.

• Sale of an asset, which resulted in the debtor not having sufficient funds to pay back creditors, without consent from all creditors.

Main Difference Between the USBC and BBL• See above.

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POW

What are the duties/powers of the Trustee in a Chapter 11 and a Judicial Recovery proceeding under both the USBC and BBL, respectively?

ERSOFTH



HETRU

STE

• If appointed in a Chapter 11 case *, a trustee is given the same powers as a Debtor In Possession (DIP) would be with regards to operating the business and reporting to the courts.• The trustee is also given the same power(Strong Arm)

• Under the BBL, the roles of the trustee are: to monitor the debtor and plan performance; to file bankruptcy in the event of non‐performance of any obligation under the reorganization plan; to submit a monthly report on the debtor’s activities

EEThe trustee is also given the same power(Strong Arm) as: A hypothetical judicial lien creditor; A hypothetical executing creditor.• Both of these hypothetical parties would in effect, i lid t it i t t th t t l

to submit a monthly report on the debtor s activities to the judge; to submit a report on the performance of the judicial reorganization plan.• The trustee will never act as the debtor in possession (DIP) i j di i linvalidate security interests that were not properly

perfected, in order to increase the value of estate. (DIP) in a judicial recovery.

Main Difference Between the USBC and BBL• 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

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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.

EXECU

How are executory contracts* handled in a Chapter 11 and a Judicial Recovery proceeding under both the USBC and BBL, respectively?

UTO

RYCO



ONTRA

CTS

• The Debtor in Possession or the Trustee have the option to: Reject ; Accept ; or Assume and assign an unexpired lease or contract

• Under BBL, leases and contracts are excluded from proceedings and handled outside of the estate, but:• In Falência (Bankruptcy), the DIP does have this ability, and can accept or reject contracts to increase asset value or decrease the value of liabilities of the estate.Assume and assign an unexpired lease or contract

• 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 j d t l ” hi h t t th t ti t b t k

value or decrease the value of liabilities of the estate.

judgement rule”, which states that action must be taken which would conform to that of a reasonably prudent business person.

Main Difference Between the USBC and BBLMain Difference Between the USBC and BBL• 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

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j y , g p pestate.

* 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.

ASSET

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

TSA

LES: F



FREE

AND

Terms of selling assets free and clear of liens:• Non‐bankruptcy law must permit sale;• Lienholders must consent to the sale; • Price that property is sold for must be greater than the aggreagate value of all liens;

Terms of selling assets free and clear of liens:• After following the advice of the Creditors, the judge will order the assets to be sold by: Auction, Sealed bids, or Public proclamation• Sale of assets should take place in following CLEA

ROF

aggreagate value of all liens;• Creditor can be compelled to accept monetary value;• Creditor can “credit bid” for the value up to claim;• Debtor must expose deal to the market.Bidders are given protection devices, including: B k f (St lki H )

Sale of assets should take place in following preference: Disposal of the company, sale in block Disposal of the company, sale of branches and plants Disposal of block of assets constituting each asset Di l f t id d i di id ll

FLIEN

S

Break‐up fees (Stalking Horse); Overbid Protections; andWindow Shopping Provisions

Disposal of assets considered individually• The winning bidder shall engage the existing labor force with new contracts, yet will not be liable for past liabilities.

Main Difference Between the USBC and BBL• 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

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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.

CONV

What is the procedure for converting a case from a Chapter 11 (Judicial Recovery) into a Chapter 7 (Bankruptcy) under the USBC and BBL?

VERSIONO



A Chapter 11 shall be con erted to a Chapter 7 pon The j dge shall decree Bankr ptc d ring a J dicial

OFPRO

CEE

A Chapter 11 shall be converted to a Chapter 7 upon:• the debtor requesting such a conversion;• the failure of the debtor to execute the JR plan;• any acts of fraud or misappropriation of assets of the estate.

The judge shall decree Bankruptcy during a Judicial Recovery procedure:• by the resolution of the general meeting of creditors;• due to the failure of the debtor to submit the plan of reorganization in the allowable time frame; ED

INGS

• 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 liquidationRecovery into a bankruptcy liquidation.

Main Difference Between the USBC and BBLMain Difference Between the USBC and BBL• 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

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, g ptimeframe, 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.

CRO

SHow are cross‐border insolvency proceedings handled under both the USBC and the BBL?

SS‐BORD

ER



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

LVE

insolvency cases if they afford the same due process as given in the United States, even if foreign laws differ.• Chapter 15 of the USBC has provisions for: Commencement of a US case ancillary to a foreign proceeding;

insolvency.• For cross‐border cases, a concurrent proceeding will need to be filed in the Brazilian Courts under the BBL. • Brazilian courts have cooperated with courts of other nations when there are concurrent proceedings N

CIES

proceeding; Recognition by US bankruptcy courts of foreign insolvency proceedings; Cooperation with foreign courts; and Protection of property located within the United

nations when there are concurrent proceedings.•Brazil does not have any international treaties as relate to international insolvencies.

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.

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OUT‐

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

‐OF‐CO

URT



• Out‐of‐court restructurings are possible. • A debtor who meets the requirements of a judicial TRESTRU

C

• Creditors whom are in favor of the out‐of‐court restructuring plan can provide non‐consenting creditors with incentives to go along with the plan, but there is no cramdown feature available.

recovery, can petition for an out‐of‐court restructuring.• The provisions of the out‐of‐court restructuring do not apply to the following types of claims: Labor credits, tax credits, forward foreign exchange contracts trustee ownership agreements and leasing CTU

RINGS

contracts, trustee ownership agreements, and leasing 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

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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.

CONT

Contact Information

TACT

INFO

Íntegra Associados Reestruturação Empresarial Ltda. (“Íntegra”)

Address:

Av. Dr. Cardoso de Melo, 1460 ‐ 8º andar ‐ cj. 84 ‐ Vila Olímpia ORM

ATIO

N

São Paulo – SP – Brasil

[email protected]

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 6600Mobile: +55 11 9677 6600

USA #: 917‐470‐9449

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

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