Doing Business in Brazil

28. Company Recovery and Bankruptcy



Law No. 11,101/2005 regulates the Court-Supervised Reorganization (formerly Arrangement with Creditors), Out-of-Court Reorganization and Bankruptcy of the businessperson and the company in Brazil (“LFR”).

Its purpose is to make it possible to overcome the debtor’s economic and financial crisis, allowing the maintenance of the source of production, the employees’ jobs and the creditors’ interests, thus preserving the company, its corporate purpose and fostering the economic activities.

However, care must be taken not to trivialize the Court-Supervised Reorganization Institute, which was not created to reward the inefficiency of the entrepreneur or his irregular performance. If the law, on the one hand, aims to overcome the economic and financial crisis of the company and its preservation, on the other hand, it also protects the rights and guarantees of creditors, by preserving them, including considering the hypothesis of convolution of the Court-Supervised Reorganization in bankruptcy.

The LFR does not apply to public companies, government controlled (private) companies and companies subject to extrajudicial liquidation (financial institutions, banks, insurance companies, capitalization companies), nor to companies that have already been granted the benefit less than five (5) years and/or are managed by businesspersons convicted of bankruptcy. In addition, for the request to be granted, it is necessary that the company prove the regular exercise of its activities for more than two (2) years.

The court competent to assess the request is the one where the main establishment of the debtor or the subsidiary of a company that is headquartered outside Brazil is located, the main establishment understood to be the one with the highest turnover, which may be at the headquarters of the debtor company or any of its subsidiaries.

The initial petition of the request for processing the Court-Supervised Reorganization, pursuant to art. 51 of the LFR shall contain:

I – the explanation of the concrete causes of the debtor’s equity situation and the reasons for the economic and financial crisis.

II – financial statements of the company referring to the last three (3) fiscal years that are especially prepared to accompany the petition, drawn up in strict compliance with applicable corporate legislation and compulsorily including:

a) The balance sheet.
b) Statement of retained earnings.
c) Statement of income since the last fiscal year.
d) Cash flow management and projection report.

III – the full nominal list of creditors, including those by obligation to do or obligation to give, including their address, the nature, classification and present value of the credit, specifying its origin, the regime of the respective maturities and the indication of accounting records for each pending transaction.

IV – the full list of employees, including their duties, salaries, indemnities and other installments to which they are entitled, with the corresponding month of accrual, and the breakdown of amounts pending payment.

V – debtor’s certificate of regularity in the Public Register of Companies, the updated organizational documents and the minutes of appointment of the current directors.

VI – the list of the private assets of the controlling shareholders and the debtor’s directors.

VII – the updated statements of the debtor’s bank accounts and any financial investments of any kind, including investment funds or stock exchanges, issued by the respective financial institutions.

VIII – certificates of protest offices located in the judicial district of the debtor’s domicile or headquarters and in those where it has its subsidiaries.

IX – the list, subscribed by the debtor, of all lawsuits in which the debtor is a party, including those of a labor nature, with the estimate of the respective amounts in controversy.

Currently, in some specific cases – and by way of exception – the judges have determined to carry out an expert examination prior to granting the request, in order ascertain whether the documents presented by the debtor comply with the LFR requirement. In general, this expert examination aims to prevent the Court-Supervised Reorganization institute from being misused.

Once the requirements are met and the presentation of the required documentation is regular, a decision will be issued granting the processing of the Court-Supervised Reorganization and determining, in the same act: i) appointment of the bankruptcy trustee; ii) exemption from tax clearance certificates for private hiring; iii) suspension of all actions or executions against the debtor, for a period of one hundred and eighty (180) calendar days, as the case law of the Superior Court of Justice (stay period); iv) monthly rendering of accounts by the debtor while the Court-Supervised Reorganization lasts, under penalty of dismissal of its directors; v) Service of notice from the Public Prosecution and communication by letter to the Tax Authorities in which the debtor has an establishment; vi) Issuance of a notice containing the summary of the request, the decision that grants its processing and the nominal list of creditors, with updated value of each credit until the date of filing of the request and its classification, to be published with the official agency.

Some types of lawsuits are not affected by the stay period, especially lawsuits related to labor, accidents, which require illiquid amount, tax foreclosures (regarding these, the Superior Court of Justice has established that although not staying, acts are prohibited that reduce the assets of the company under reorganization, so that the compliance with the approved Court-Supervised Reorganization plan is not impeded, which, in practice, implies suspension thereof), as well as those referring to credits not submitted to the reorganization procedure, which are those derived from: i) ACC – Advance to Exchange Contract; ii) fiduciary ownership of immovable or movable property, including fiduciary assignment of receivables and/or negotiable instruments; iii) lease-purchase agreement; iv) real estate or promise to sell real estate whose respective agreements contain an irrevocability or irreversibility clause, and v) real estate in sale contract with domain reservation. In such cases, during the suspension period, the sale or withdrawal of the debtor’s establishment from the capital assets essential to its business activity will not be allowed.

The purpose of the stay period is to allow the debtor, after being granted the processing of the Court-Supervised Reorganization request, to be able to reorganize its activities and negotiate with the creditors to create a plan that allows the company to recover, trying to accommodate everyone’s interest without the risk of any attachment, for example. LFR provided that that this period of one hundred and eighty (180) days is not extendable. [l], However, in practice, the Superior Court of Justice has already consolidated the view that this period can be exceptionally extended, provided that the debtor’s delay cannot be attributed to the debtor, who should have its Court-Supervised Reorganization plan approved within that period.

After the publication of the notice containing the summary of the debtor’s request and the decision granting the processing of the Court-Supervised Reorganization, as well as the nominal list of creditors presented by the debtor, they will have a period of fifteen (15) days to present to the bankruptcy trustee their qualifications or divergences with respect to the related credits, either regarding their values, class or even requiring the exclusion of credit not subject to the reorganization procedure. After analysis, within forty-five (45) days – which, in most cases, is not met – the bankruptcy trustee shall publish the second notice, with the credits and values it understands that are due. Within ten (10) days, any creditor (including questioning third party credit), the debtor or its partners or the Public Prosecution Office may file an objection to a claim before the Court, which will be processed separately, depending on the Court-Supervised Reorganization.

Please note that the objection cannot be used as a substitute for the creditor who did not qualify/diverge within the deadline for the first published notice. Such creditor may avail, however, himself of the Late Qualification, with the limitations imposed by law due to the strict non-compliance with the deadline. Late creditors, except for labor creditors, shall not have the right to vote in the resolutions of the general creditors’ meeting. In bankruptcy, these creditors lose not only the cash that would fit them that may have already been prorated, as well as the possibility of demanding the accessories between the deadline and the date of the application for qualification. After the judgment of objection to claims and any Late Qualifications, the judge will approve the general list of creditors

LFR also provided that all credits constituted until the filing of the request are subject to the Court-Supervised Reorganization, even if not overdue. It also provides that obligations by gratuitous title, such as a donation and even a suretyship provided without direct economic interest of the company, surety, assignment, lending, among others, might be required of the debtor, including in bankruptcy.

The creditors of the debtor under |Court-Supervised Reorganization maintain their rights and privileges against the co-debtors, sureties and debtors of recourse. Obligations prior to Court-Supervised Reorganization shall comply with the conditions originally contracted or defined by law, including the charges, unless otherwise stated in the Court-Supervised Reorganization plan.

The credits derived from obligations assumed by the debtor during the Court-Supervised Reorganization, including those involving expenses with suppliers of goods or services, and loan agreements, will be considered post-petition credits should the bankruptcy be adjudicated.

Once the Court-Supervised Reorganization has been deferred, the company must present its Court-Supervised Reorganization plan within sixty (60) days, under penalty of bankruptcy convolution, and the plan cannot provide for early payment of debts, nor to give different treatment to creditors of the same class and/or unfavorable treatment to creditors that are not subject to such plan. There is, however, the possibility for first priority claim creditors to adhere to the terms and clauses of payment provided for in the plan. According to art. 50 of the LFR, means of reorganization include, among other hypotheses:

I – concession of special terms and conditions for the payment of the matured or maturing obligations.

II – spin-off, incorporation, merger or transformation of a company, incorporation of a wholly-owned subsidiary, or assignment of membership interests or shares, subject to the rights of the members or shareholders, pursuant to applicable law.

III – change of controlling interest.

IV – total or partial replacement of the debtor’s directors or change of their administrative bodies.

V – granting creditors the right to separate election of directors and veto power with respect to the matters specified in the plan.

VI – capital increase.

VII – Sale or lease of establishment, including to a company organized by the employees themselves.

VIII – reduction of salary, compensation of hours and reduction of working hours, by collective labor agreement or collective bargaining agreement.

IX – giving in payment or novation of debts of the liability, with or without constitution of own or third party guarantee.

X – constitution of a creditors company.

XI – partial sale of assets.

XII – equalization of financial charges regarding debts of any kind, having as the start date the date of distribution of the request for Court-Supervised Reorganization, which is also applicable to the rural credit agreements, without prejudice to the provisions set forth in specific legislation.

XIII – company enjoyment.

XIV – shared management.

XV – issuance of securities.

XVI – organization of a special purpose company to adjudicate the assets of debtor in payment of the credits.

It is understood that the labor claims or those arising from occupational accidents, already overdue by the date of the filing of the Court-Supervised Reorganization request, must be paid within one (1) year, from the date of the request. Credits of a strictly salary nature, due in the three (3) months prior to the application for Court-Supervised Reorganization, up to the limit of five (5) minimum wages per worker, must be paid within thirty (30) days of the presentation of the plan, in view of the food nature of such money. There may be no provision to the contrary in the plan regarding such credits.

Once the plan is received, a notice will be published to creditors. Should any creditor object to the plan presented, the general creditors’ meeting shall be designated for deliberation, which shall be convened within 150 days of the decision granting the processing of the Court-Supervised Reorganization, a period not infrequently, observed by the Judiciary.

The meeting will be chaired by the bankruptcy trustee and will be installed on the first call, with the presence of creditors holding more than half of the credits of each class, calculated by their amount, and on the second call, with any number. For exclusive purposes of voting, the credit in a foreign currency shall be translated into Brazilian currency at the exchange rate on the date prior to the date of the meeting.

At the time, the four (4) classes of creditors – labor, collateral holders (pledge or mortgage up to the value of the collateral), unsecured and very-small companies (ME) or small businesses (EPP) – meet to resolve on the Court-Supervised Reorganization plan submitted by the debtor, and may approve or reject the plan. Other matters of common interest to creditors may also be resolved.

In the resolution on the Court-Supervised Reorganization plan, all classes of creditors shall approve the proposal presented by the debtor. However, in the collateral and unsecured classes, the plan should have the cumulative approval of creditors representing more than half of the total value of present credits and the simple majority of present creditors. With regard to the labor and very-small companies (ME) or small companies (EPP), it is sufficient that the simple majority of creditors present to approve the proposal, regardless of the credit amount.

If the plan is not approved as indicated in the previous paragraph, the Judge may grant the Court-Supervised Reorganization provided that it has cumulatively obtained: i) the favorable vote of creditors representing more than half the value of all credits; ii) the approval by two classes of creditors, if there are three or four classes or, if there are only two classes, the agreement of at least one of them; and iii) the favorable vote, in the class that has rejected the plan, of more than one third of the creditors. This institute is called “cram down,” which was imported from US law and which means, in free translation, “to push down the throat”.

However, the prevailing understanding in the Superior Court of Justice is that the Court Supervised Reorganization plan may be approved through cram down, even if all the requirements for approval of the plan contained in the LRF are not met, under the grounds that the maintenance of the still recoverable company must override the interests of one or a few divergent creditors.

The plan may be changed at the general creditors’ meeting, provided that the debtor expressly agrees with such changes. The decision of the meeting is sovereign, and the Judiciary is only able to exercise legality control over the provisions contained in the proposal.

Once the plan is approved, the Judge will grant the Court-Supervised Reorganization, and the debtor will remain in this condition for a period of two (2) years. If debtor fail to comply with any of the obligations under the plan that mature within this period, its bankrupt will be declared, a hypothesis that will also occur if the plan has been rejected by the creditors’ meeting.

The jurisprudence has understood that, if there is a grace period for the payment of the first installment provided for in the plan after the biennium or provision for derisory payments in the first two years, the inspection period that the law assigned to the reorganization court will start after the end of the grace period (which may even be considered while insignificant payments are occurring).

The decision granting the Court-Supervised Reorganization is a judicially enforceable instrument, and the creditors who have their obligations overdue after this biennium, in case of default, may enforce the debt novated by the plan or file for bankruptcy of the debtor.


If filed for bankruptcy, the creditors will have their rights and guarantees reconstituted under the conditions originally contracted, discounting the amounts already settled under the Court-Supervised Reorganization.

Filing for bankruptcy implies the early payment of debts of the debtor and the unlimited liability members or shareholders.

The bankruptcy court is universal, that is, it is indivisible and competent to take cognizance of all actions on the bankrupt’s assets and interests, except labor and tax lawsuits, which will be dealt with before the specialized courts, being certain that after the final decision is issued by such specialized courts, the respective credits will be qualified in the bankruptcy.

Bankruptcy can also be ordered if a company under Court-Supervised Reorganization fails to fulfill an obligation that is not subject to this procedure. The debtor can also be filed for bankruptcy for not paying its obligations, at maturity, without a relevant legal reason, any net obligation or protested instruments that exceed the equivalent of forty (40) minimum wages at the date of filing for bankruptcy. The request may also be made if, by enforcement action, the debtor does not pay, deposit or nominate to the attachment, within the legal term, sufficient assets to honor the obligation.

With the filing for bankruptcy, the debtor businessperson is removed from the company’s command, and will be replaced by a bankruptcy trustee appointed by the Judge. The bankruptcy trustee will manage the company’s resources and the bankrupt estate, which is the bankrupt’s assets (assets and credit) and the liabilities (debts).

The bankruptcy trustee will verify the bankrupt’s debts and assets, proceeding with their collection for settlement and payment of creditors. There will be four (4) payment steps, which must comply with the following order:

1. Labor claims.
2. Credits from refund claims.
3. First priority claim.
4. Regular credits, subject to the order provided for in art. 83 of the LFR.

Once the asset is realized and the product is distributed among the creditors, the bankruptcy trustee shall render its accounts to the court (if rejected, the bankruptcy trustee’s assets may be frozen and/or its property may be seized) and, after being judged, a final report will be presented, so that the Judge may render a judgment terminating the bankruptcy, against which an appeal may be filed.

The judgment declaring the extinction of the bankruptcy resets to the beginning of the count of the bankruptcy’s statute of limitations, which had been suspended with the declaration of bankruptcy. Likewise, it allows the bankrupt to resume its activities, provided that its obligations have been declared extinct, without the occurrence of bankruptcy crime.


The Out-of-Court Reorganization is, in practice, nothing more than a restructuring of debts, an extrajudicial agreement between the debtor and certain classes of creditors, which is subject to approval by the Judiciary, provided that the same requirements required for filing the Court-Supervised Reorganization are met.

Labor claims, tax liabilities and those not subject to Court-Supervised Reorganization are not subject to Out-of-Court Reorganization.

In order for the Out-of-Court Reorganization plan to be submitted for court approval, it must be signed by at least three-fifths (3/5) of all claims of each kind covered by it. In this case, there will be mandatory submission to the plan of other creditors of the same kind.

Creditors not submitted may not be included in the plan to be presented for court approval, and any stipulation that implies their mandatory inclusion is invalid. However, as credit is an available right, any creditor may voluntarily adhere to it. Credits not included in the plan will not be considered in the approval quorum calculation, and such credits cannot have their original conditions or value changed.

Creditors may not withdraw from the plan after the approval application has been distributed, except with the express consent of the other signatories.

The request for approval of the Out-of-Court Reorganization plan will not imply the suspension of rights, actions or executions, nor does it prevent the filing of bankruptcy by the creditors not subject to it, either due to unjustified unpunctuality, practice of bankruptcy acts or frustrated enforcement. Therefore, there is no interference of the Out-of-Court Reorganization on creditors not subject to the plan (whether those legally excluded or those not included by the debtor), except with respect to those dissenters that correspond to the same kind of three-fifths (3/5) who signed the agreement.

Although the LFR has not expressly provided for the need for a stay period in the Out-of-Court Reorganization, the doctrine and jurisprudence have understood that the creditors subject to it will have their actions and executions suspended from the filing of the request until the final approval of the plan, at which moment the debts will be novated.

Once the request for approval of the Out-of-Court Reorganization Plan has been distributed and received, the Judge shall order the publication of a notice in the official agency and in a widely circulated national newspaper or in the localities of the debtor’s headquarters and subsidiaries, calling upon the creditors to present, within the period of thirty (30) days, an objection to the plan. The debtor must provide proof of sending a letter to each of the creditors subject to the plan that are domiciled in Brazil, which shall contain the conditions of the plan and information on the deadline for any objection.

The only matters that may be objected are those provided for in art. 164, paragraph 3 of the LFR, namely: i) non-fulfillment of the minimum percentage of three fifths (3/5) of the credits; ii) the practice of bankruptcy acts provided for in art. 94, III, of the LFR or the practice of fraud against creditors; or iii) non-compliance with any of the LFR requirements or other legal requirements.

The Out-of-Court Reorganization plan may remain in the extrajudicial sphere only, without being taken to the Judiciary. However, if the debtor opts for judicial proceedings, the judgment approving it shall constitute a judicially enforceable instrument. The plan will take effect after its approval, even if an appeal is brought against it. It should be noted that there might be compliance with clauses even before the court approval, whose compliance will be subject to confirmation. If this does not occur, the creditors will have the original conditions of their credits reconstituted, less any amounts already settled before the court decision is rendered.

If the plan is not approved, the proceeding is terminated without prejudice. If the legal requirements are met, the debtor may submit a new Out-of-Court Reorganization plan.

The measure against the decision that approves or rejects the plan will be the appeal.

Author: Mirella Guedes, Partner at Chiarottino e Nicoletti Advogados

Chiarottino e Nicoletti Advogados
Av. Juscelino Kubtischek, 1700 – Vila OlĂ­mpia
04543-000 SĂŁo Paulo – SP
Tel (11) 2163 8989
[email protected]
Full service office specializing in business law