Brazil: Brazilian Courts Awake To Multijurisdictional Insolvency - The OGX Case And Other Cases

In the last months, we have been following the crisis experienced by OGX Group that filed for court-supervised reorganization on October 30, 2013. OGX Group is formed by the following companies: OGX Petróleo e Gás S.A., OGX Petróleo e Gás Participações S.A. (both established in Brazil) and OGX International GMBH and OGX Austria GMBH (Austrian subsidiaries of the Group).

OGX Group used its subsidiaries in Austria to issue bonds and receive revenues abroad that were intended to finance the group's activities in Brazil.

In OGX's case, the Prosecutor's Office presented Opinion contrary to the admission of the processing of the petition for court-supervised reorganization of the Austrian subsidiaries together with the Brazilian companies.

Based on the Principle of Territoriality, the 2nd Bankruptcy Prosecutor's Office of Rio de Janeiro argued that the bankruptcy (liquidation) or court-supervised reorganization, whichever the case, should be processed in the country where the debtor company is based. It further argues that according to Law 11.101/05 (Brazilian Bankruptcy And Reorganization Law - BBRL) only the Court of the place of the debtor's principal place of business would be competent to ratify reorganization plans.

That was also the understanding of Judge Gilberto Matos, of the Fourth Corporate Court of Rio de Janeiro, who accepted the request for court supervised reorganization only for the companies based in Brazil and excluded from the proceedings OGX's subsidiaries in Austria.

Although the Rio Bankruptcy Courts had previous experience regarding bankruptcy procedures with international repercussions, and used the principle of comity to obtain the cooperation of the New Your courts as to the seizure of certain airplanes involved in the notorious Varig Bankruptcy procedures, the filing and the decision did not seek international cooperation, simply excluding the Austrian debtors from the jurisdiction of the Brazilian bankruptcy court.

This also notorious case led us to prepare this Article, trying to give an overview of how the Brazilian rules of conflict of laws deal with multi-jurisdictional insolvencies.

Any company, be it a sole proprietorship or a business corporation, as defined in Article 892 of the Brazilian Civil Code, facing liquidity or financial problems may seek recovery by operationally and financially restructuring itself and the legal benefit under Art. 47 of BBRL or, if the recovery is unfeasible, file for voluntary bankruptcy (self bankruptcy - liquidation) or defend itself in an involuntary bankruptcy-liquidation case under the same law

However, where the main place of business is abroad, where the debtor is abroad and the principal place of business is in Brazil, where there are assets and rights located abroad and, finally, where there are other countries than Brazil involved, conflicts of law and jurisdiction arise.

Although the international insolvency is a matter relatively new and little discussed in Brazilian courts, examples of provisions for cooperation and harmonization, either unilateral or in the form of treaties, can be found in Europe since the Middle Age.

Most of the Middle Age treaties were intended to allow the extradition of negligent debtors. The treaty between Verona and Trento, quite likely one of the oldest insolvency treaties in the world (XIV Century), aimed at subjecting assets located abroad to only one jurisdiction.

In the United States of America, the discussion on the international insolvency and its effects is not new. From an initial position of extreme resistance to the enforcement, in the US, of decisions by foreign insolvency courts (XIX Century), the US courts gradually constructed forms of legal cooperation in cases of insolvency, culminating in the US Bankruptcy Code (1979) ("USBC") that was preceded by US Bankruptcy Act of 1962 and that, more recently, had the inclusion of Chapter 15, exactly to better regulate multijurisdictional bankruptcy procedures issues.

In Latin America, especially in Brazil, the concept of domicile ( International Commercial Law Treaty of 1889 and the Bustamante Code) or the concept of main place of business in Brazil, is used to establish the competent court, as stipulated, in Brazil, in Article 3 of BRRL. Therefore, in Brazil, it is the jurisdiction of the principal place of business that determines not only the internal, national competence of the insolvency court, but also the international competence.

Indeed, in establishing the competence of the Brazilian branch location to govern its insolvency, the Article 3 of the BRRL precludes the possibility of extension of the effects of the principal place of business1 insolvency, such as, for instance, the effects of the insolvency of the seat located abroad on its branch in Brazil. In other words, the BRRL requires that a separate Brazilian bankruptcy procedure governed by the law and applied by the jurisdiction of Brazil be held to address the insolvency of the Brazilian branch of a foreign company. Even if the main place of business (for instance, the head-office) is located outside Brazil.

From a practical perspective, considering that the establishment of branches of foreign companies' is very rare in Brazil today, the procedures of insolvency of foreign capital companies incorporated in Brazil as, for instance, the so-called whole-owned subsidiaries, even if they make part of a major multinational or global group, would in all cases be principal bankruptcy proceedings.

Thus, with regard to international insolvency, in Brazil, the domicile rule governs the judiciary competence. This is reflected in Article 88, item I and in the Sole Paragraph of the Brazilian Code of Civil Procedure ("CPC 73"), which, in turn, reproduces part of Article 12 of the Law of Introduction to the Brazilian Law Rules (Former Law of Introduction to the Civil Code of 1942).

Another important provision in the matter of international insolvency in Brazil is Article 89, item I of the CPC 732, which establishes the exclusive jurisdiction of the Brazilian judiciary to judge actions related to real estate. A consequence of such provision, in the case of the foreign insolvency of a debtor owning real estate in Brazil, is that it will be necessary to commence an insolvency proceeding in Brazil to include such real property in the bankruptcy estate. Even if the main center of interest or main place of business of the insolvent company is located outside Brazil. Said proceeding (necessarily an insolvency proceeding) will have to meet all conditions and requisites of the Brazilian law to be commenced, that is, for a bankruptcy proceeding to be commenced. In other words, if, according to the Brazilian law, the foreign owner cannot be declared bankrupt in Brazil, then it will not be possible to foreclose on the debtor's real estate in a bankruptcy proceeding in Brazil.

Besides such provisions, part of the jurists also understand that certain provisions relating to insolvency included in the old Brazilian Code of Civil Procedure (of 1939) are still in force (Articles 786 and Article 788), that exclude the application of foreign procedures to establishments, located in Brazil, owned by an insolvent debtor, located abroad.

As to moveable property (hardware, equipment, cash, receivables, etc...), part of the doctrine defends that the foreign court decision regarding the insolvency of a foreign debtor apply to moveable property owned in Brazil and should be homologated by our Superior Court of Justice ("STJ"), based on the Brazilian general rules of ratification of foreign court decisions.

Hence, if it were possible to summarize the international competence on insolvency matters in Brazil, we could describe it in the following manner:

Factual Situation

Competence of the Brazilian Judiciary

Principal establishment in Brazil

Absolute and exclusive, ratification of foreign insolvency decision impossible.

Secondary establishment (such as a branch)

Absolute and exclusive, ratification of foreign insolvency decision impossible.

Real property

Absolute and exclusive, ratification of foreign insolvency decision impossible.

Moveable property

Relative, non-exclusive, ratification of foreign decision possible.

Based on such a nationalist, closed conception of jurisdiction in international insolvency situation the STJ has recently pronounced on the matter in the proceeding on Contested Foreign Decision no. 1735 – PT (2007/0140920-4). The decision denied the enforcement of a natural person's bankruptcy adjudicated in Portugal on shares (moveable property) owned by said natural person in a company organized in Brazil, already under Law 11 101/05, on the argument that the bankrupt's principal place of business was located in Brazil and, therefore, the petition for bankruptcy should have been filed in Brazil. Inversely, the debt collection and the corollary thereof, the suspension of, and impediment to, foreclosure procedures would represent, according to the STJ's decision, a violation of "the national sovereignty."

In our opinion, the decision under this precedent is wrong, at the light of the existing Brazilian conflict rules, on the matter of international insolvencies as explained above, since the decision was not about the insolvency of the Brazilian company, but on the shares (moveable property) owned in Brazil by the Portuguese insolvent debtor. The foreign decision should have been ratified and enforced.

Internationally, there are currently two different theoretical models that have been discussed for decades. The first is the Territorial theory of jurisdiction, under which each State's courts would have exclusive jurisdiction over the debtor's assets located therein. The second is known as the Universality theory of jurisdiction, under which the State where the debtor has its centre of main interest has international jurisdiction over a debtor's insolvency.

The Universality theory may be implemented by two principal ways: (i) by auxiliary proceedings that are not typically bankruptcy proceedings and are limited, for instance, to the simple moratorium and assistance of a foreign bankruptcy trustee, and (ii) complete local insolvency proceedings may be adopted, but all of them acknowledging the principal proceeding and, in general terms, cooperating with such proceeding to a greater or lesser extent. The first, according to the terminology used in the US, would be the "ancillary proceedings", and the second, "parallel proceedings".

A mixed system is the Cooperative Territoriality, under which bankruptcy proceedings are independent and there is no acknowledgment of a principal proceeding. Nonetheless, there is cooperation and information is exchanged among them. The collection of the debtor's assets and the joint sale thereof may be a way of limiting the costs of separate proceedings. A negative aspect is the probable need of the creditors having to file proofs of claim in all jurisdictions.

The major concern of Treaties and the most recent internal legislation has been to render the principles above more flexible, with the purpose of intensifying and encouraging the the judiciary cooperation to reach a more equitable form of realization of the debtor's assets and their distribution among the creditors, without disregarding the social values and principles of public order and sovereignty of the States involved in the so-called "Multi-State Insolvencies".

Starting with bilateral treaties, the current trend is the approval of multilateral treaties, such as the EC Regulation on Insolvency (the "EC Regulation") and the United Nations Commission on International Trade Law - UNCITRAL ("the UNCITRAL Model Law"), as we will detail below.

The purpose of the UNCITRAL Model Law is to promote effective mechanisms to deal with international insolvency cases so as to promote the purposes of (i) cooperation among courts and other competent authorities of a State or other states involved in international insolvency cases; (ii) equitable and effective administration of international insolvencies that protect the interests of all creditors and other interested parties, including the debtor; (iii) protection and maximization of the value of the debtor's assets; and (v) facilitation of the recovery of enterprises facing financial difficulties, consequently, protection of investments and preservation of jobs.3

With a purpose different from that of the UNCITRAL Model Law, the EC Regulation on Insolvency has the power of law and it directly binds all State Members.

The EC Regulation faces issues such as (i) the international jurisdiction of the court authorized to start insolvency proceedings; (ii) the law applicable to insolvency proceedings; (iii) the material and procedural effects of those proceedings; (iv) the acknowledgment of proceedings started abroad; and (v) the powers of the bankruptcy trustee or receiver appointed abroad. It further regulates "secondary proceedings", dependent on the "main proceedings" to be filed in the "Centre Of Main Interests" (COMI).

In the US, as mentioned above, after an initial resistance to decisions rendered by foreign courts, which resulted in the adoption of the United States Bankruptcy Code ("USBC"), in 2005, it had its most recent development with the inclusion of Chapter 15 in the USBC. Basically, Chapter 15 incorporated the UNCITRAL Model Law into the USBC.

However, this is not the sole way of international harmonization and cooperation in regard to bankruptcy. As of 1991, as a result of Maxwell Communication Corporation's insolvency, the US and England courts entered into a protocol of cooperation for such international insolvency, after several conflicting court decisions from the countries involved.

Such protocol of cooperation represented the possibility that insolvency proceedings in different countries might be coordinated and organized to produce a new global system for corporate liquidation and recovery.4

Another case of great visibility was Yukos', one of the major oil and power groups in the Russian Federation, with over 200 subsidiaries that, in view of a billionaire tax claim (US$ 27.5 billion) presented by the Russian government in 2003 and the decision of selling Yukos' largest subsidiary in an auction. Yukos filed in US for bankruptcy under Chapter 11, which is used for corporate recoveries in that country. Such request was rejected by the US bankruptcy court.

Another important case to remind is Lehman Brothers' bankruptcy, which involved more than US$ 600 million distributed across over 75 insolvency proceedings in 16 different countries.5

These cases have been and are being solved thanks to modern treaties, internal legislation and protocol procedures, which lack in Brazil.

Brazilian companies have been holding subsidiaries and activities abroad for decades and, in some cases, a significant portion of their activities and assets is located abroad, in many countries, for either strategic, corporate planning or tax reasons.

It is clear that in a situation of economic and/or financial crisis involving one of those companies or economic groups, whether stemming from cyclical crises or not, in the case of insolvencies, local and foreign creditors and other stakeholders need measures to protect their rights and the assets of the company facing the crisis.

It is evident that the Brazilian insolvency juridical system is not prepared yet to face a situation that will need the cooperation among the judiciary branches of several countries and the harmonization of the different insolvency legal systems.

With the international recognition of the weight of the Brazilian economy in the global scenario, it is about time for Brazil to gain agility in the transformation of its business environment still pervaded by interventionism, bureaucracy and inefficiency, and open up to the world, knowing that, although it should not forget the power game among nations and the remains of protectionism and nationalistm that all of them carry, there are principles of justice, common sense and practicality that form the basis of treaties, statutes and protocols regulating international insolvencies and reorganizations. These principles should be the grounds for a revamping of the Brazilian conflict rules provisions in the matter of multi-jurisdictional insolvencies.

Footnote

1 Art. 88. The Brazilian judiciary authority is competent where: I – the defendant, regardless of the nationality thereof, is domiciled in Brazil; (excerpt omitted) Sole paragraph. For the purpose of the provision in item I above, any foreign legal entity having an agency, branch or office in Brazil is considered domiciled in Brazil."

2 "Art. 89. It is incumbent on the Brazilian judiciary authority, with the exclusion of any other:
I - to hear cases related to real properties located in Brazil; (excerpt omitted)"

3 (cf. Wessels, Markell e Kilborn, página 199.)

4 SATIRO, Francisco and CAMPANA FILHO, Paulo Fernando - A Insolvência Transnacional: para Além da Regulação Estatal e na Direção dos Acordos de Cooperação [Transnational Insolvency: Beyond the State Regulation and Towards Cooperation Agreements].

5 Ibid.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Rechtsanwalt Christian Moritz
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Rechtsanwalt Christian Moritz
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions