After years of debate, Brazil recently enacted legislation amending its bankruptcy statute and modernizing the Brazilian insolvency system. The new legislation provides new domestic tools to rescue distressed companies from disaster, including rules that enable DIP financing and allow creditors to propose a plan when the debtor’s proposal is unsatisfactory. In the cross-border insolvency area, the new law implements the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross–Border Insolvency.
The basic framework of the UNCITRAL Model Law familiar to insolvency practitioners has been road-tested in 48 countries prior to Brazil’s recent legislative change. The Model Law seeks to identify the jurisdiction where the debtor’s center of main interests (COMI) is located, and deems the insolvency proceeding filed in that jurisdiction the “foreign main proceeding.” Under Brazil’s version of the Model Law, an insolvency proceeding filed in a jurisdiction other than the debtor’s COMI and where the debtor engages in non-transitory economic activities or holds property is a “foreign non-main proceeding.” The Model Law’s vision is that a troubled multi-national business will be able to break through the disparate and sometimes contradictory insolvency regimes in different nations. The Model Law promotes cooperation across borders in order to accomplish laudable objectives, such as the rescue of financially troubled businesses.
Where Brazil is the debtor’s COMI, the new law is, in many ways, simply a codification of the existing practice. For many years, in cases where Brazil is the debtor’s COMI, Brazilian insolvencies have sought recognition and cooperation through ancillary proceedings abroad. A prominent example is the liquidation of the Brazilian bank Banco Santos, where the Brazilian trustee was able to recover and sell over 90 pieces of valuable artwork with the cooperation of foreign courts and use the repatriated proceeds to pay creditors.
However, until now, Brazilian courts could not give reciprocal treatment to foreign main proceedings when the debtor’s COMI was outside of Brazil. Indeed, prior requests to enforce foreign bankruptcy decisions in Brazil through exequatur proceedings were rebuffed. See, e.g., Gutmen Investiment Corp v. Manacá S A Armazens Gerais e Administração, Case No. SEC 11277 / VG, rapporteur Min. Maria Thereza de Assis Moura, Decision on request for granting exequatur to foreign judgment (Superior Tribunal of Justice Jul. 1, 2016). See also, Antônio Moraes Sarmento Patrício v. Vera Maria Brak Lamy P. Raposo Patkoczy Fonseca, Case No. SEC 1.734/PT, rapporteur Min. Fernando Gonçalves, Decision on request for granting exequatur to foreign judgment (Superior Tribunal of Justice Feb. 16, 2011).
Under the new law, Brazil embraces the Model Law’s modified universalism and provides its courts with the basis to recognize and provide assistance to both main and non-main foreign proceedings. In some respects, the new Brazilian legislation deviates from the suggested wording in the Model Law in order to emphasize the broad cooperation available.
Opening the Gate: The Request for Recognition
To access comity and cooperation from a Brazilian court, the representative of the foreign insolvency proceeding (foreign representative) must pass through the gateway referred to as “recognition” in the Model Law. The foreign representative must file a request for recognition with the court of the place where the debtor has its principal “establishment” in Brazil under the Model Law definition, meaning the place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services. If a voluntary or involuntary bankruptcy proceeding of the debtor was previously filed in Brazil, the foreign representative must file the request for recognition with the same court where that plenary proceeding had been filed.
The new law sets out the requirements for obtaining recognition of a foreign insolvency proceeding. The request is a straightforward document attaching evidence of the existence of the foreign proceeding, the appointment of the foreign representative, and, in practice, information sufficient to provide the context necessary to grant the relief sought. “One of the key objectives of the Model Law is to establish simplified procedures for recognition of qualifying foreign proceedings that would avoid time-consuming legalization or other processes and provide certainty with respect to the decision to recognize.” Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency, ¶29 (the Guide). In practice, this means that filing an application for recognition should not be an onerous process.
For a proceeding to qualify for recognition under the Model Law (and Brazil’s enactment thereof), it must be a collective proceeding. A collective proceeding is one in which “substantially all of the assets and liabilities of the debtor are dealt with in the proceeding, subject to local priorities and statutory exceptions, and to local exclusions relating to the rights of secured creditors.” See, Id. at ¶70. This requirement sheds light on the Model Law’s intent “to provide a tool for achieving a coordinated, global solution for all stakeholders of an insolvency proceeding,” and not merely to be used by a single creditor pursuing collection or by a debtor winding up its affairs in a proceeding that does not address claims of creditors. See, Id. at ¶69.
As part of the recognition process, the court must determine the debtor’s COMI, and that will directly affect what relief is available to the foreign representative. The court will recognize the foreign proceeding as a “foreign main proceeding” if it was filed in the jurisdiction where the debtor’s COMI is located or alternatively as a “foreign non-main proceeding” if it was filed in any other jurisdiction. Although the concept of COMI is new to Brazilian law and neither the new law nor the Model Law defines it, that concept has been long present in cross-border insolvency practice and discussed by the international insolvency community for many years. (The Model Law’s concept of COMI must not be confused with the concept of the debtor’s “principal establishment,” which is used in the Brazilian bankruptcy statute to determine the appropriate venue for a domestic bankruptcy case. The Brazilian bankruptcy statute does not define “principal establishment,” and at least three different approaches have emerged in the case law. The approach that seems to be gaining favor is the so-called economic approach — that is, the “vital center of the debtor’s main activities” and “where the debtor has the highest business volume” — as the majoritarian theory. However, to identify a debtor’s COMI, Brazilian practitioners should look not to domestic decisions about the debtor’s “principal establishment” but to the text of the new law, to the Guide and to other jurisdictions where the Model Law has been implemented.) As the Guide explains, the concept of COMI originates from the European Union Convention on Insolvency Proceedings, and it should be interpreted homogeneously in furtherance of harmonization of the notion of a “main proceeding.” See, Id. at ¶¶81-82. Determining the debtor’s COMI is one of the most important steps in cross-border insolvency proceedings, and a consistent interpretation of such concept throughout all jurisdictions that adopted the Model Law is key to promote the uniformity prescribed by Article 8 of the Model Law.
In short, the definition of debtor’s center of main interests is “the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.” See, Id. at ¶83. Both the new law and the Model law provide for a rebuttable presumption that the debtor’s COMI is the debtor’s registered office or habitual residence. That legal presumption may be set aside if objective circumstances recognized by third parties indicate that the debtor has its administrative seat in another jurisdiction. The analysis of the objective circumstances may consider different facts, from the location of the debtor’s headquarters or factory where the debtor manufactures its products to the country code of the debtor’s website or phone number.
Such interpretation of the COMI enables parties to better calculate legal risks when entering into transactions. When considering potential insolvency as a risk factor, the party may assume that international jurisdiction will be based on a place known to the debtor’s potential creditors. See, Id. at ¶84.
Interestingly, the new Brazilian law includes a provision to avoid forum shopping that has no equivalent in the Model Law. In Brazil, the foreign proceeding will be recognized as a “foreign non-main proceeding” if the debtor’s COMI was transferred or manipulated with the intent to transfer the debtor’s “foreign main” jurisdiction to another country. While such a provision is intended to increase legal certainty and reduce forum shopping, it could trigger additional litigation about the debtor’s intent and about the appropriate lookback period, which is not specified in the new law.
Types of Relief Available
While recognition turns on the strict application of objective criteria, the consequences of recognition (referred to as the “relief” in the Model Law or as “medidas” in the new Brazilian law) are largely discretionary. This arrangement reflects a need for efficiency and predictability in obtaining recognition, but equips the courts with the flexibility to fashion the relief that should result from recognition.
The new law makes available to the foreign representative broad discretionary relief both before and after recognition of the foreign proceeding. From the filing of the application for recognition to the court’s ruling on such request, the foreign representative may request any injunctive relief necessary to protect the estate, the efficiency of the administration, or the enforcement of Brazilian bankruptcy law.
Upon recognition of the foreign proceeding, either as a “main” or “non-main” proceeding, the foreign representative may request any relief necessary for the protection of the assets of the estate and in the creditor’s interest. The drafter’s intent to provide Brazilian courts with the flexibility to fashion meaningful relief is evident in two provisions in the Brazilian law that differ slightly from those in the Model Law. First, in the list of discretionary relief available after recognition, the Model Law includes a catchall provision allowing the court to grant “additional relief that may be available to [the trustee] under the laws of this State.” See, Model Law, Art. 21 (g). The Brazilian law would allow the court to “grant any additional relief that may be necessary” and is not limited by reference to the powers of a Brazilian trustee. See, Art. 167-N, V – Law 11.101/2005.
Second, the new Brazilian law includes a provision with no parallel in the Model Law by clarifying that the relief available under the cross-border insolvency chapter of the new law are “merely exemplary” and that relief available under “other laws” may be sought. See, Art. 167-A §2 – Law 11.101/2005. It is unclear whether this phrase would allow lawsuits, such as claw backs, under non-Brazilian laws, or whether it is limited to “other [Brazilian] laws.”
In addition to the permissive relief, the new law provides for automatic relief if the foreign proceeding is recognized as a “foreign main proceeding”: i) the stay of specific lawsuits against the debtor; ii) the toll of the statute of limitations for the enforcement actions against the debtor; and iii) the avoidance of transfers and encumbrances of the debtor’s non-current assets without previous court authorization.
It is important to note that under Brazil’s bankruptcy laws the stay of proceedings against the debtor is narrower compared to some other jurisdictions. Brazilian insolvency law provides numerous legal exceptions to the stay or suspension of lawsuits. In broad terms, Brazil’s insolvency laws impose a stay only to non-tax judgment enforcement proceedings and other actions directly related to the debtor’s assets. Ordinary lawsuits and arbitration proceedings at a pre-judgment phase are not stayed either by operation of Brazil’s general insolvency law. Accordingly, obtaining automatic or discretionary stays under Brazil’s adoption of the Model Law imposes a less robust set of prohibitions.
Granting Recognition to Foreign Insolvency Proceedings vs. Granting Exequatur to Foreign Judgments
Brazilian commentators have expressed some concern that the new law’s recognition of foreign proceedings could be confused with the previously existing mechanisms for international judicial assistance in Brazil, namely exequatur of foreign judgments and letters rogatory. In fact, granting recognition of foreign insolvency proceedings has little or nothing to do with granting exequatur. The Model Law was created as a necessary alternative to the legal systems’ traditional approach to judicial cooperation under the comity doctrine and exequatur. See, Guide, ¶8.
While the new law sets forth a streamlined process by which the bankruptcy courts (courts of first instance) shall recognize foreign proceedings, the Brazilian constitution grants to the Superior Tribunal of Justice (STJ) — a centralized court superior to the state and federal courts of appeals — jurisdiction over exequatur of foreign judgments and letters rogatory. Those who understand the purpose and effect of the recognition of foreign insolvency proceedings, including those who drafted Brazil’s new law, do not see a conflict with the STJ’s exequatur jurisdiction. Acknowledging that recognition under the new law does not encroach upon the STJ’s exequatur jurisdiction, the new law expressly submits to the STJ’s constitutional jurisdiction over exequatur “whenever applicable.” See, Art. 167-A§6 – Law 11.101/2005.
While this reference to the STJ’s exequatur proceedings has been the source of some debate leading up to the law’s implementation, most Brazilian commentators take the position that such provision does not impede the local bankruptcy courts from recognizing foreign insolvency proceedings. Indeed, recognizing a foreign insolvency proceeding is not tantamount to enforcing an order issued by the judicial authority of a sovereign state. For example, a foreign administrative proceeding in which no court orders whatsoever have been made is eligible for recognition under Brazil’s new law. In addition, the Brazilian legislature implemented a system to recognize foreign insolvency proceedings and expressly granted jurisdiction to the trial court of the place where the debtor has its principal “establishment” to hear such cases. It would be illogical to interpret that, in writing rules with specific provisions on the jurisdiction to process requests for recognition, the legislature, in fact, intended the Superior Tribunal of Justice to have jurisdiction to rule on such petitions.
Another context in which the STJ’s exequatur jurisdiction may become relevant is where the Brazilian bankruptcy court is asked to cooperate with a court order entered in the foreign proceeding. The new law requires the bankruptcy court to cooperate “to the maximum possible extent with the foreign authority or with the foreign representative[.]” See, Art. 167-P – Law 11.101/2005. This provision implies that certain deference may be given to orders made in the foreign main proceeding, such as orders confirming a plan of reorganization, orders made in a claim dispute between debtor and creditor, and discovery orders. The cooperation called for in the new law does not require that such orders be enforced directly in Brazil. Cooperation can be achieved by giving deferential treatment to such orders in light of the law’s international origin and objectives. Giving deferential treatment means recognizing the foreign court’s better position to rule on the matter as the court with the main interest and most information on the issue, and to refrain from reviewing the matter de novo. It also means recognizing that when acting as the ancillary court, the Brazilian court cannot impose its own domestic priority scheme or claims process on the debtor. The ancillary court must remain focused on the goals expressly noted in the new law: promotion of international cooperation with foreign courts and representatives, greater legal certainty, and fair and efficient administration of cross-border insolvencies. By giving deferential treatment to an order in the foreign main proceeding, the ancillary court may avoid a conflict and a duplication of efforts that could weigh down efforts to rescue a struggling enterprise.
A Plenary Bankruptcy Proceeding
A debtor whose foreign main or non-main proceedings have been recognized in Brazil may commence a full liquidation or reorganization case if the relief available in the ancillary case is insufficient to accomplish its purposes.
As a preliminary matter, it is important to understand the distinction between the ancillary proceedings contemplated under the Model Law and the plenary proceedings that may be commenced to reorganize or liquidate a company under Brazilian law. The gateway for ancillary proceedings is through the Model Law’s streamlined recognition process and simple eligibility criteria, embodied in Articles 167-H and 167-J of the new Brazilian law. The reward for entering through this gate is the relief described in Articles 167-L, 167-M, and 167-N of the new law. Ancillary proceedings are an act of comity between nations and thus they are simple proceedings that attempt to avoid duplication of effort. In this vein, the Model Law and Brazil’s enactment of it do not establish a separate claims process or reorganization plan in the ancillary proceeding. Indeed, the Model Law envisions that these should be handled in the foreign main proceeding.
A plenary proceeding, on the other hand, is a full liquidation or reorganization case, which in Brazil is governed by the other chapters of Law 11.101/2005. A debtor whose foreign main or non-main proceedings have been recognized in Brazil may commence a liquidation or reorganization case only if the debtor has assets or an establishment in Brazil, and that Brazilian plenary case will apply only to the Brazilian assets or establishment. The new law sets forth measures for cooperation and coordination between the Brazilian plenary case and the foreign main proceeding.
It should be noted that even in the absence of a petition for a plenary proceeding, Brazil’s new law allows the court to grant broad discretionary relief to the recognized foreign proceeding. Thus, there may be few instances in which foreign representatives might be interested in filing a plenary proceeding petition with the Brazilian court. This may change if Brazilian courts limit in practice the relief available to ancillary proceedings under their ample discretion. In any event, creditors also may initiate an involuntary plenary proceeding, especially if they are interested in establishing a claims process in Brazil, which is unavailable in the ancillary proceeding.
Generally, the party filing for a voluntary or involuntary plenary proceeding must show the petition meets the bankruptcy requirements under Brazilian law. Specifically, the foreign representative will have to show in the reorganization petition that the debtor is in regular business activity for more than two years and meets other requirements of the statute, such as not having been through reorganization in the last five years. See, Art. 48 – Law 11.101/2005. To initiate a liquidation proceeding in Brazil, the requesting party must show the so-called “legal insolvency” of the debtor by meeting one of the three statutory requirements: 1) unjustified default of an obligation over 40 minimum wages; 2) nonpayment of any amount under a judgment enforcement action; or 3) performance of any of the seven acts of bankruptcy listed in the statute (e.g., fraudulent transfer of property to avoid creditors or default on an obligation provided for in a reorganization plan). See, Art 94 – Law 11.101/2015.
Relevantly, the new law provides that the insolvency of the debtor is presumed if the foreign proceeding was recognized in Brazil as a “foreign main proceeding.” However, it is not clear if such presumption of the debtor’s insolvency is sufficient to show the “legal insolvency” requirement in liquidation petitions.
Outbound Cross-Border Insolvency and Communication With Foreign Representative and Courts
The new law does not limit its rules to inbound cross-border insolvency proceedings. It also includes rules related to outbound proceedings, which empower the representative of the Brazilian insolvency proceeding and the Brazilian court to seek recognition abroad and to act in that proceeding.
Under the new law, the trustee in the Brazilian liquidation and the debtor in the Brazilian reorganization are automatically authorized to act as representatives of the Brazilian proceeding in foreign jurisdictions. The Brazilian court may appoint a different representative for the Brazilian liquidation when necessary.
Moreover, the new law abrogates the long-established requirements of formal communication with foreign courts through letters rogatory. It expressly grants broad communication powers to the Brazilian bankruptcy court and trustee with foreign courts, representatives, and authorities.
Overall, the new law adheres closely to the Model Law and provides Brazilian bankruptcy courts with the tools to effectively cooperate in cross-border insolvencies. After many years of receiving international assistance for Brazilian insolvency proceedings, Brazilian courts are now ready to reciprocate. The tools for effective cooperation are in place and the Brazilian legal community is eager to usher in a new era.