Jessica Nowak – Just about 13 years ago, in early 2005, Brazil amended its long-standing bankruptcy code.[1] This is a relatively recent change in light of the fact that the previous code had not been amended since 1945. The new Brazilian Bankruptcy and Restructuring Law (“BBL”), also known as Federal Law No. 11.101, sought to revitalize the country’s corporate bankruptcy process.[2] Although Brazil made these amendments in an attempt to create a fairer restructuring process, corporate reorganizations continue to take a tremendous amount of time. With the recent recession that began in 2015, came more filings for Brazilian corporate bankruptcy than ever before.[3]
In June of 2016, Oi SA, a Brazilian telecommunications company, filed for the country’s largest ever corporate bankruptcy.[4] This bankruptcy, valued at about 20 million U.S. dollars, was an ongoing power struggle between the company’s creditors and its shareholders.[5] Oi’s discussions with creditors and bondholders about restructuring the debt ceased after shareholders realized that an agreement with creditors would result in a dramatic cut of their stake in the company.[6] From the beginning of the plan proposal process in mid-2016 until the end of the year in 2017, negotiations were at a standstill.[7]
After a year and a half of negotiations, the company and its creditors finally approved a plan for restructuring the corporation.[8] The real question is whether the time spent negotiating the plan while insolvent helped or hurt the company overall. Generally, the more time a corporation is stuck in the plan proposal phase the more money they lose in the process. It is more beneficial for a corporation to figure out a plan and begin reorganizing as quickly as possible, because insolvent companies are usually hemorrhaging money by the day. Only time will tell what this extended negotiation period meant for Oi, but what does it say about Brazil’s new bankruptcy code as a whole?
Brazil’s previous bankruptcy code allowed for corporate reorganization, but the courts were much quicker to liquidate than to allow reorganization.[9] The new code amended this process and allows the courts to focus more on the negotiation process, but, as demonstrated by the Oi case, this takes a significant amount of time. In the beginning of 2016, Brazilian officials recognized this problem and began discussions about further amending the BBL.[10] In light of the time spend on negotiation and plan proposal, the Brazilian government should attempt to find some middle ground between the 1945 code and the 2005 BBL. Brazil can learn from the use of the absolute priority rule in the United States Code, which puts strict rules on the fairness requirements of a proposed plan.[11] Adding some sort of fair and equitable requirement could create a shorter plan proposal period and put companies into reorganization much more quickly. It is uncertain as to when the Brazilian government will amend their code, but we will all have to keep an eye out for the changes that may be coming to the BBL in the near future.
[1] Restructuring & Insolvency (Nov. 2017), Getting The Deal Through, https://gettingthedealthrough.com/area/35/jurisdiction/6/restructuring-insolvency-2017-brazil/.
[2] Giuliano Colombo & Thiago Braga Junquiera, Ten Years of the Brazilian Bankruptcy Law: Some Lessons Learned and Some Wishes for Improvement, Cleary Gottlieb Emerging Mkts. Restructuring J., Issue 1 (Spring 2016), at 11, https://www.clearygottlieb.com/~/media/organize-archive/cgsh/files/emerging-markets-restructuring-journal/debut-issue-2016/3ten-years-of-the-brazilian-bankruptcy-code–lessons-challenges-and-prospects.pdf.
[3] Aluísio Alves, Bankruptcy filings for big Brazil firms seen hitting another record (January 30, 2017, 4:56 PM), Reuters, https://www.reuters.com/article/us-brazil-restructuring-bankruptcy/bankruptcy-filings-for-big-brazil-firms-seen-hitting-another-record-idUSKBN15E2NG.
[4] Guillermo Parra-Bernal & Ana Mano, Oi files for Brazil’s biggest ever bankruptcy protection (June 20, 2016, 9:30PM), Reuters, https://www.reuters.com/article/us-oi-sa-restructuring/oi-files-for-brazils-biggest-ever-bankruptcy-protection-idUSKCN0Z703V.
[5] Id.
[6] Id.
[7] Rodrigo Viga Gaier, Oi creditors approve largest-ever Latin American restructuring (Dec. 19, 2017, 5:54PM), Reuters, https://www.reuters.com/article/us-oi-sa-restructuring/oi-creditors-approve-largest-ever-latin-american-restructuring-idUSKBN1ED2VK.
[8] Id.
[9] See Supra Note 2.
[10] Brazil plans changes to bankruptcy law to bolster recovery, paper says (May 9 2017, 7:57 AM), Reuters, https://www.reuters.com/article/brazil-economy-bankruptcy/brazil-plans-changes-to-bankruptcy-law-to-bolster-recovery-paper-says-idUSL1N1IB0AR.
[11] 11 U.S.C. § 1129(b)(2) (2017).
