Brazil: Acquisition Of Assets Under The Brazilian Bankruptcy Law

Labor Courts in Brazil are very reluctant to accept the universal jurisdiction of the Bankruptcy Court in the case of labor claims of companies undergoing a judicial recovery plan. The Brazilian Federal Supreme Court confirmed the application of the Brazilian Bankruptcy Law in a leading case related to the acquisition by Gol of Varig´assets, ruling that the Bankruptcy Court has the authority to judge such claims.

Brazilian Labor Courts are very protective of the employees´ rights and usually apply the law based on criteria that differ from those used in other courts to serve the best interests of employees when it comes to labor claims. However, there are certain limits to their jurisdiction. These limits have been recently discussed and defined in a leading case involving Gol Linhas Aéreas Inteligentes S.A. (Gol), a publicly-held corporation with shares listed in the New York Stock Exchange and in the Brazilian Stock Exchange (BM&FBOVESPA). Gol is the controlling shareholder of Gol Transportes Aéreos S.A., a Brazilian low-cost, low-fare airline.

On March 28, 2007, GTI S.A., a wholly-subsidiary of Gol, acquired the shares of VRG Linhas Aéreas S.A. (VRG), formed to operate the brand "Varig", a Brazilian airline company undergoing judicial recovery plan1 under the current Brazilian Bankruptcy Law (Law No. 11.101, of February 9, 2005).

VRG was a company based on the Isolated Productive Unit (UPI) of Varig (Viação Aérea Rio Grandense S.A.), created in the bankruptcy recovery plan of Varig and its subsidiaries Rio Sul and Nordeste (together, the Recovering Companies) and acquired by VarigLog in the Judicial Auction held on July 7, 2006.

Under the Brazilian Bankruptcy Law, the UPI was created and sold fully free of liabilities of any nature (civil, labor, tax, pension, etc.) and upon completion of the conditions established in the Judicial Auction Notice, so to assure payment to the creditors and the continued existence of the Recovering Companies.

However, a former employee of the "old Varig" claimed that Gol was the successor of Varig and that Gol was consequently liable for all Varig's labor debts and this claim was accepted by the Labor Court. In its defense, Gol claimed the validity of the existing arrangement to acquire the UPI of Varig without any liabilities and that this acquisition was duly ratified by the Bankruptcy Court2.

Under Brazilian law, the Bankruptcy Court has universal jurisdiction to resolve any matters or issues related to a bankrupt company or a company undergoing judicial recovery plan. In the case of Gol, the jurisdiction of the Bankruptcy Court was questioned by the Labor Court. This resulted in a conflict of jurisdiction that was submitted to the Brazilian Federal Supreme Court (Supremo Tribunal Federal – STF).

The Brazilian Bankruptcy Law3 governs the recoveries in and out of court and the bankruptcy of the individual businessperson and of the business company, including the companies performing in the aeronautic industry, whose certificate of formation provides for the exploration of air services of any kind and of aeronautic infrastructure.

This law prioritizes the recovery of companies rather than the bankruptcy, which may maintain job positions and safeguard the interests of creditors, by preserving the company, its social-interest role and encouraging economic activities, provided that the continuance of the debtor´s operations is viable.

Among the alternatives to permit the company´s judicial recovery provided for in the Brazilian Bankruptcy Law, it is possible to structure the deal as a partial sale of assets or the formation of a specific company to adjudicate, in payment of the claims, the debtor´s assets.

The realization of assets is also admitted in the case of a bankrupt company. The realization of assets means the disposal of bankrupt´s assets. Pursuant to the Brazilian Bankruptcy Law, assets will be realized in accordance with the preference order, that is: (i) disposal of the company, by selling pre-determined block of assets; (ii) disposal of the company, by selling branches or production units separately; (iii) disposal of pre-determined blocks of assets of the debtor´s establishments; and (iv) disposal of assets considered on a case-by-case basis.

The Brazilian Bankruptcy Law innovates in that the bankrupt´s assets, either entirely liquidated or not, will be discharged of labor, occupational accident related and tax obligations. This is because the acquisition is not of the bankrupt legal entity´s liabilities but of the set of certain assets required for the production operations, which may include the transfer of certain specific agreements. These benefits are inapplicable where the buyer is a partner of the bankrupt or company controlled by the bankrupt, direct or indirect family up to the fourth degree, whether consanguineous or the like, of the bankrupt or of partner of the bankrupt or identified as agent for the bankrupt with a view to defraud the succession.

An important consideration is that the labor laws and regulations deal specifically with the labor succession issues of the Brazilian Consolidation of Labor Laws (Consolidação das Leis do Trabalho – CLT), and therefore hold the successor (buyer of the whole or part of the bankrupt´s assets) liable for the labor debt assumed by the predecessor company. Under the CLT, any buyer: (i) acquiring the goodwill (customers) or the commercial or industrial installations and/or assets of a company; and (ii) in the same line of business as the seller and using the same employees, is considered a successor and therefore may be held liable for any credit of employees. The so-called company succession applies in the event of a merger, acquisition, conversion, amalgamation, or upon the sale of one of its establishments. The buyer undertakes to fulfill all the seller´s labor obligations, and the company itself is held directly liable for any labor obligations. The buyer´s right of recourse against the seller may be set forth in a private instrument, but this will not affect the buyer´s liability for past and future claims in any way. Based on these specific laws and regulations, the Labor Court tried to judge the matter in the case of Gol.

Furthermore, the Brazilian Bankruptcy Law contains specific provisions regarding labor claims4 which must be followed and applied by the Bankruptcy Court. Labor claims are granted priority in judicial recovery plans and must be paid within one year. In bankruptcy proceedings, priority of labor claims is limited only up to 150 minimum wages. The balances of labor claims that exceed this limit as well as labor-related claims assigned to third parties shall be considered unsecured claims. On the other hand, wages-related claims payable within the three-month period preceding the bankruptcy decree will be paid as soon as there is sufficient cash available up to the limit of five minimum wages per worker.

The STF5 expressly recognized the universal jurisdiction of the Bankruptcy Court and confirmed the application of the Brazilian Bankruptcy Law to this case, ruling that the Bankruptcy Court has authority (and not the Labor Court) to decide on labor claims of companies undergoing a judicial recovery plan or object of judicial alienation.

Footnotes

1. The judicial recovery plan in Brazil is a court-supervised proceeding aimed at enabling debtors to overcome an economic and financial crisis based on a reorganization plan negotiated with and approved by its creditors.

2. The competent Bankruptcy Court in this case is the 1st Commercial Court of Rio de Janeiro (1ª Vara Empresarial da Comarca do Rio de Janeiro).

3. The Brazilian Bankruptcy Law does not apply to: (i) government-owned entities and mixed-economy companies; and (ii) financial institutions, whether public or private; credit unions; consortia, supplementary pension companies; health care plan companies; insurance companies; special savings companies and other organizations held equivalent by law to those listed above.

4. The matter is governed by the provisions of article 54, article 83 I, VI (c) and Paragraph 4 of the Brazilian Bankruptcy Law. This legislation is available at http://www.planalto.gov.br/ccivil/_ato2004-2006/2005/lei/L11101.htm. The other provisions mentioned herein which support the STF court decision are articles 140 and 141.

5. Extraordinary Appeal (Recurso Extraordinário) No. 583.955-9 Rio de Janeiro, having Maria Tereza Richa Felga as Appelant (Recorrente) and VRG Linhas Aéreas S/A and other as Respondent (Recorrido), and as a Reporting Judge (Ministro Relator) Ricardo Lewandowski. The decision has been issued on June 8, 2009 and it is available at http://www.stf.jus.br/portal/geral/verImpressao.asp.

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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Authors
Walter Stuber
Adriana Maria Gödel Stuber
 
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