In January 2003, Luiz Ignacio Lula da Silva, the candidate of the populist Worker's Party, became president of Brazil, South America's largest nation. His election caused widespread speculation of what measures the da Silva government would adopt to protect Brazil's ailing economy, including the implementation of protectionist trade and investment legislation, and how his campaign rhetoric would affect the country's relations with the International Monetary Fund. Three months into his presidency, Mr. da Silva appears to have opted for a mainstream approach. However, the Brazilian economy still suffers from the adverse affects of the past several years and the negative impact of the Argentine crisis. As a result, foreign creditors may find themselves embroiled in insolvency and bankruptcy proceedings filed by Brazilian debtors.
This article examines the procedural aspects of Brazilian insolvency and bankruptcy law, focusing on bankruptcy legislation.
I. GENERAL PROVISIONS
Insolvency and bankruptcy proceedings are predominantly governed by Decree Law 7661, originally promulgated in 1945, as amended by Law 7274 of December 10, 1984, Decree 2279 of 1985 and Law 8131 of December 1990 (hereinafter collectively referred to the "Bankruptcy Law"). The Bankruptcy Law is supplemented by provisions of the Civil and the Commercial Codes.
Brazilian law prescribes that a debtor's assets generally guarantee payment of its debts, unless a particular creditor has been afforded a preference by law or contract. (Civil Code, Article 1556.)
The Bankruptcy Law distinguishes between bankruptcy and insolvency proceedings. Commercial bankruptcy is only available to business debtors, including sole proprietors. Bankruptcy proceedings involving non-commercial entities and individuals are regulated by the Civil Code and the Code of Civil Procedure.
Once bankruptcy proceedings are initiated, the bankruptcy court is afforded ancillary jurisdiction over all issues related to the assets in bankruptcy. All creditors must participate in such proceedings (Bankruptcy Law, Article 23). Although secured creditors are protected by security and mortgage interests, and as such are not directly affected by bankruptcy proceedings, it is noteworthy that Brazilian law greatly erodes such interests by affording other creditors priority over secured interests. (See, Section VI, supra.)
II. INSOLVENCY PROCEEDINGS
Insolvency proceedings allow the debtor to enter into a period of reorganization. Brazilian doctrine defines reorganization as a judicial indulgence granted to commercial debtors to partially discharge or postpone the payment of their obligations for purposes of avoiding or staying a potential bankruptcy.
The Bankruptcy Law contemplates two types of reorganization: "preventive" reorganization to avoid bankruptcy; and 2) "suspensive" reorganization to stay ongoing bankruptcy proceedings and to avoid the liquidation of the debtor.
A. Preventive Reorganization
The debtor is the only party that may request a preventive reorganization. The appropriate motion should be filed with the court of general jurisdiction where the debtor is located. In Brazil, there are no specific bankruptcy courts. If the debtor has various establishments, the motion should be filed where its principal place of business is located.
The motion must substantiate the debtor's state of insolvency. The debtor shall attach the following documents: (1) articles of incorporation or similar documents proving that the debtor has been in existence for over two years; (2) the entity's partnership agreement or current bylaws; (3) authenticated/audited balance sheets (not required for small companies, as defined by law); (4) proof that no protested documents exist--protests filed within the 30-day period prior to filing the motion are admissible; (5) proof that the debtor and its principals have not been convicted of fraud or other financial crimes proscribed by the Bankruptcy Law; (6) evidence that the debtor has not filed for preventive reorganization during the preceding five years; (7) verification that the debtor's assets are sufficient to satisfy at least 50 percent of its unsecured debts; (8) evidence that the debtor will be able to become a viable entity after conclusion of the reorganization; (9) an inventory of all assets; (10) a list of de bts; (11) a list of creditors, indicating the addresses thereof and the nature and amount of the debts; and (12) a proposed payment schedule. …