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.


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.

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