Brazil's Superior Court of Justice has said it won't recognise the liquidation of British Virgin Islands company Gutmen Investment Corporation, citing risks to the judicial recovery of the company's Brazilian subsidiary.

In a judgment released on 4 July, a board of 14 ministers dismissed the application from Gutmen Investment Corporation for recognition of the appointment of Mark McDonald of professional services firm Grant Thornton as liquidator by the BVI's High Court of Justice.

Recognition would have given McDonald rights through a shareholder agreement over Brazilian company Manacá, a farming product wholesaler which is 99.5 per cent owned by Gutmen.

Manacá, which has been in judicial recovery proceedings in the Civil Court for the District of Ibaiti in Southern Brazil since June 2013, contested the recognition with counsel from De Luca, Derenusson, Schuttoff e Azevedo Advogados.

Gutmen was declared bankrupt by order of a BVI court in July 2012, following a default on payments to German bank Gesellschaft fuer Absatzfinanzierung (GEFA), from which it had attained a loan for the purchase of an aircraft in the US.

GEFA, described as Gutmen's only significant creditor, seized the aircraft but its value did not offset the entirety of the outstanding debt. Gutmen's other assets include its controlling stake in Manacá, which is valued at 750 million reais (US$76 million) and is currently undergoing a restructuring led by São Paulo firm Oliveira, Carvalho & Ranzini Sociedade de Advogados.

Gutmen, advised by Brazil's Krikor Kaysserlian Duarte e Forssell Advogados Associados, held that it met all requirements of universality under Brazil's civil code to have the liquidation, and McDonald's status as liquidator, recognised.

Manacá, whose other creditors include agricultural companies and labour groups, argued that recognising the BVI proceeding would give Gutmen priority creditor status, which is not intended by Brazilian legislation.

Manacá cited Brazil's civil code, under which orders of foreign courts should be recognised providing they are not contrary to national sovereignty, public order and morality.

Manacá's creditors are currently considering a payment plan, and the company's counsel argued that disrupting this to give priority to a non-operating holding company and the claims of one foreign creditor, GEFA, would be in violation of public order and sovereignty.

They further held that such priority would never be allowed if all proceedings were taking place in the Brazilian court system.

The court held that it had no grounds to challenge the decision of the foreign court but unanimously held that recognition of this decision, and therefore subordination of the Brazilian proceedings, would be an offence to national sovereignty.

Luis Augusto Roux Azevedo, of De Luca Derenusson, says the Brazilian court agreed that it was important to protect the creditors in the Brazilian proceeding, as it was unclear how McDonald would treat the judicial reorganisation if recognised as liquidator.

"We argued that this was in violation of the principle of public order, as we do not know what the BVI liquidator intends to do with the Brazilian company and what this means for the Brazilian creditors," says Azevedo.

He adds that "this decision is highly significant because the Brazilian court said it was its duty to protect the creditors who were subject to the Brazilian proceeding."

However, McDonald described the court's decision as concerning. "I believe the judgment is concerning for international investors because it demonstrates that the Brazilian courts will not readily protect their interests."

His lawyer, Henrique Forsell of Krikor Kaysserlian, adds that "there is nothing in the application that requests that the foreign creditors of Gutmen be paid by Manacá. Creditors of Gutmen have to be paid with assets available to Gutmen. Creditors of Manacá will be paid with assets available to Manacá."

McDonald intends to ask the court to clarify certain aspects of the judgment, including the payment of dividends from Manacá to Gutmen, the time period over which the court will refuse to recognise the Gutmen proceedings, and the approval process for the sale of the BVI company's assets. He also plans to appeal the decision.

Gutmen Investment Corporation v  Manacá SA Armazens Gerais EAdministração

Counsel to Gutmen Investment Corporation

Krikor Kaysserlian Duarte e Forssell Advogados Associados

Henrique Forsell and Octaviano Duarte Filho

Counsel to Manacá

De Luca, Derenusson, Schuttoff e Azevedo Advogados

Luis Augusto Roux Azevedo and Leandro Araripe Fragoso Bauch

For restructuring

Oliveira, Carvalho & Ranzini Sociedade de Advogados

Emmanoel Alexandre de Oliveira

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