Correa, Gilberto Deon

Veirano, Ricardo C.

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Brazil Enacts New Federal Bankruptcy Law

Brigham Young University Law School

Brigham Young University International Law & ManagementReviewVolume 1 | Issue 1 Article 108-16-2005Brazil Enacts New Federal Bankruptcy LawGilberto Deon CorreaRicardo C. VeiranoFollow this and additional works at: https://digitalcommons.law.byu.edu/ilmrPart of the Bankruptcy Law Commons, and the Comparative and Foreign Law CommonsThis Other is brought to you for free and open access by BYU Law Digital Commons. It has been accepted for inclusion in Brigham Young UniversityInternational Law & Management Review by an authorized editor of BYU Law Digital Commons. For more information, please contacthunterlawlibrary@byu.edu.Recommended CitationGilberto Deon Correa and Ricardo C. Veirano, Brazil Enacts New Federal Bankruptcy Law, 1 BYU Int'l L. & Mgmt. R. 311 (2005).Available at: https://digitalcommons.law.byu.edu/ilmr/vol1/iss1/10BRAZIL ENACTS NEW FEDERAL BANKRUPTCY LAW Gilherlo Deem Correa .JII 11 ior* and Ricardo C. Veirallo** After more than a decade of debate in Congress, Brazil has recently enacted a new Bankruptcy Law (Law). The Law was published as Federal Law No. 11,101 on February 10,2005 and will become efTective 120 days after its publication. The Law not only updates the current legislation, Federal Decree-Law No. 7,661, enacted in 1945, but also replaces the cOllcordata, which was a procedure for deferring and/or reducing repayment of unsecured debts, with a new and more comprehensive reorganization procedure. Furthermore, the Law changes the credit preferences and expedites the liquidation procedure. The Law generally provides for two reorganization procedures: (i) judicial reorganization, in which the court supervises each stage of the process from preliminary negotiations to the post-approval period, and (ii) extrajudicial reorganization, in which the court only consents to plans previously negotiated among the debtor and creditors.' * Mr. Corrca is an attorney at Vcirano Advogados in Brazil. Mr. Correa graduated with honors. first in his class froi11 the Federal University of Rio Grande do Sui Law School where he received his LL.B. in 1985 and his LL.M. in 1993. Mr. Correa also received his M.C.I. in 1995 from New York University. Mr. Correa has also worked as a District Attorney and as a Professor of Business Law at the Magistrate University College of Rio Grande do SuI. ** Mr. Veirano is an attorney at Veirano Advogados in Brazil. Mr. Veirano rccieved his LL.B. Irol11 the Pontifical Catholic Univcrsity of Rio de Janeiro La\\ School in 1991 and his LL.M. fro!11 the University of Chicago Law School in 1995. Mr. Veirano also worked as a I()reign associate at ('mvath, Swaine & Moore in New York City Irml1 199)-1997 I An optional procedure will also he availahle 1(,,' small businesses (as defined in the Law). However, this optional procedure will only allow the debtor to defer repayments of unsecured creditors i(lr up to ISO days Irol11 the request fix relief and reschedule stich payments over a three-year period. 311 INTERNATIONAL LAW & MANAGEMENT REVIEW Spring 2005 Under judicial reorganization, the debtor will have up to 60 days following the acceptance of the procedure by the court to present a reorganization plan. Ifany creditor objects to the plan, it will need to be approved in a creditors' meeting by each of the following classes of creditors: a) holders of labor claims and claims arising out of on-the-job accidents; b) holders of secured claims; and c) other eligible creditors. The court may also grant the reorganization if one of the above classes of creditors rejects the plan, provided that it is approved by the holders of more than 50% of the aggregate amount of the claims and by the holders of at least one third of the aggregate amount of the claims of the class opposed to the plan. Some creditors arc excluded from the judicial reorganization. These include commercial lessors, owners or acquirers of real property (if they have entered into irrevocable agreements) and fiduciary owners of assets. In addition, the Law provides for the repayment of tax and social security debts on an installment basis. The terms and conditions for the repayment, however, will need to be determined by future legislation. The Law also allows the debtor to avail itself of any legal means to achieve reorganization, including mergers, sales or leases of assets or commercial establishments, changes of control, and the issuance of securities. As for extrajudicial reorganizations, in addition to the creditors that are excluded from judicial reorganizations, the Law also excludes creditors with labor, tax, social security and on-the-job accident claims. 312 Issue 1 International Updates The Law expedites the liquidation procedure, making it possible for the court to allow thc sale of asscts of the bankrupt cstate as assets are collected. The Law also provides that the court should give preference to selling the entire business rather than selling otT individual business assets. The Law also changes the preferences in a liquidation scenario. Among other changes, labor claims that currently rank first in paymcnt priority will be limited to the equivalent of 150 times the minimum wage." Under the Law, tax claims, which under the cun'ent system rank second in payment priority, will now take third priority, following secured claims) Overall, the Law will provide companies in financial distress with a better legal framework for reorganization, allowing the debtors to present a reorganization plan based on their economic and financial capabilities rather than applying for deferment and/or reduction in repayment of unsecured debts. Thus, the law should ultimatcly reduce crcditor risk and tighten interest ratc spreads to the extent that they relate to the probability of a creditor's claim being satisfied. 2 The minimum monthly wage is equivalent to R$260.00 (approximately US$96) and is expected to be increased in May 20()). 3 Note that the referenced claims shall be paid atler the payment of post-petition claims, as defined by the Ll\\i, which include the claims arising out of obligations contracted by thc debtor during the judicial rcorganization. including those rclating to contracts with goods or scrvice providcrs and loan agrccmcnts. 313 

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Brazil Enacts New Federal Bankruptcy Law

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