The Federal Law 11.101/05, the so-called Brazilian Bankruptcy Act ("BBA"), had its 10th anniversary in 2015. After 10 years of effectiveness and massive use by Brazilian companies, it could be said that it has been revolutionary, particularly if compared to the former regime.
The BBA has provided the companies under financial crisis with genuine tools to turn around and restructure their indebtedness. The mechanism set forth by the BBA, despite some criticisms, has provided debtor and creditors with adequate venues to discuss their interests and look for a consensus on the best possible means to restructure.
However, since the enactment of the BBA Brazil had not undergone a crisis such as the one in place. Due to changes in the international market, mistakes made by the Government in macro and micro economy and, additionally, endless scandals of corruption, Brazil is currently facing a crisis whose end is not foreseen yet.
It is needless to say that laws concerning Bankruptcy are only genuinely tested when crisis come. As a consequence, it could be said that the BBA is currently passing through its tougher exam, and, like any student, its "approval" is dependent on its ability to cause companies to turn around and capability of making creditors slightly happier during crisis.
For the purpose of attenuating the crisis effects, the BBA's main sections have been construed and interpreted during the current scenario. Situations not foreseen when the BBA was enacted have been faced in the most important bankruptcy cases, which involve amounts higher than a few billion dollars.
Amongst such topics whose answers are not found in the BBA, the treatment to be rendered to a group of companies applying for a bankruptcy protection altogether is likely to be one of the hottest topics. In other words, the BBA does not say anything about the ability of a group of companies to jointly apply for any bankruptcy protection.
The issue becomes more relevant when it turns to the so-called judicial recovery ("Recuperação Judicial"), the Brazilian Chapter 11 equivalent, which is by far the most important and used remedy set forth in the BBA.
Since the BBA does not prevent companies for applying for a judicial recovery altogether, Courts have been accepting that, provided that some requisites are found. The joinder of a group of companies is accepted when most of the following requisites are found:
- the companies have the same parent companies or controlling entities;
- the companies share funds, management or other important resources;
- the companies have granted to creditors cross collaterals or have cross default mechanisms for acceleration of debts;
- the companies are seen by the market as belonging to the same group;
- the companies have acted with fraud and/or in collusion.
The question in Brazil, however, is whether the acceptance of the joint application for judicial recovery should give the applicants the immediate benefit of a substantial consolidation, that is, the ability to (a) submit one single plan of reorganization, which will be approved (b) by the creditors of all the companies altogether (not separating the creditors of each of the companies for quorum purposes and verification of majority in the approval or the plan of reorganization).
The answer to the aforementioned question has not been given by Brazilian Courts yet, at least not in a way that any interpreter could assess in one or other direction. Actually, there are decisions accepting the substantive consolidation and others denying its application.
As a matter of fact, the ability of companies to apply for a judicial recovery together should not indistinctively give rise to a substantial consolidation of the whole indebtedness of the companies into one single plan of reorganization, to be voted indistinctively by creditors of different companies of the same group.
The following reasons could support such conclusion, namely:
- The application for a judicial recovery commonly does not provide the Court with sufficient information/background to determine how linked the companies are. When deciding about granting the process of the judicial recovery, the Court assess in a prima facie analysis whether the formal requisites set forth by the BBA are met and if the allegations that the companies would have reasons to apply for such remedy together make sense in preliminary assessment.
- The submission of the plan of reorganization by the Debtors, however, takes place 60 days after the granting of the judicial recovery. The creditors, then, have 30 days to object/challenge the plan and the submission of one single plan of reorganization. At that opportunity creditors may raise issues concerning the impossibility of a substantive consolidation and the Court should have more elements to decide on this.
- The substantive consolidation may be the only solution for genuine group of companies, that is, such companies which are ordinarily seen by the market as a group. However, if the group of companies is not genuine, or at least is not seen by the market as such, creditors may have made the decisions to supply or give loans to a certain company without seeing the other group members. As a consequence, it would not be logical or fair that the creditors of a certain company ends up voting a plan along with creditors of a different company. In other words, the situation of each company of the group is different, as it is different the leverage creditors are going to have if the voting process is individualized or consolidated.
- According to the BBA, the Debtor which is found in default under the plan of reorganization should have its judicial recovery converted into liquidation. Bearing it in mind, if one single plan is approved for a few companies within a group, and if one of the companies is found in default under the common plan of reorganization, it could be said that the whole plan will be considered in default. Hence, the default of one company may cause the other group members to have their liquidations ruled by the Bankruptcy Court. This is clearly a risk the companies under judicial recovery run when they move for a substantive consolidation.
Obviously, the aforementioned list of issues is not exhaustive. We have just picked up some concerns Brazilian Courts usually have when accepting or not the substantive consolidation. However, it is still missing in Brazilian jurisprudence precedents that could be really helpful for the sake of setting requisites that should be taken into account by Bankruptcy Courts when deciding such matter.
In any event, from creditors' perspective, the silence of the BBA on substantive consolidation clearly does not mean that such a concept does not exist in Brazil. It has been a concept accepted by Brazilian Courts. Such aspect, as a consequence, should be an item to be taken into account on a daily basis when companies decide to sell their products and Banks execute their loans. The risk to be assessed in Brazil is not only those relating to the company purchasing the products or borrowing money, but also the surrounding situation of the companies which might be considered belonging to its same economic group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.