Insolvency and directors' duties in Brazil: overview

Q&A guide to insolvency and directors' duties in Brazil.

The Q&A global guide provides an overview of insolvency from the perspective of companies that are operating within a domestic and/or international group of companies, and considers the various complexities that this can introduce into insolvency procedures. It also has a significant concentration on duties, liabilities, insurance, litigation, and subsequent restrictions imposed on directors of an insolvent company.

To compare answers across multiple jurisdictions, visit the Insolvency and Directors’ Duties Country Q&A tool.

This Q&A is part of the Insolvency and Directors’ Duties Global Guide. For a full list of contents, please visit www.practicallaw.com/internationalinsolvency-guide.

Contents

Corporate insolvency proceedings

1. What are the main out-of-court and court-sanctioned insolvency proceedings involving a liquidation of the company's assets?

The Brazilian Bankruptcy Law (Federal Law No 11,101/2005) regulates business insolvencies in Brazil. There are also specific rules on:

  • Civil insolvency proceedings, aimed at consumers and non-business entities.

  • Insolvency of financial institutions, co-operatives and other entities excluded from the scope of the Brazilian Bankruptcy Law.

A bankruptcy liquidation proceeding for businesses (Falência) is available under the Brazilian Bankruptcy Law.

Chapter V of the Brazilian Bankruptcy Law regulates the liquidation proceeding. It can be initiated either by the debtor (voluntary petition) or by creditors (involuntary petition) in accordance with the requirements of Article 94. In summary, the liquidation proceeding consists of the sale of all the company's assets to pay the creditors under the priority rule provided for in Article 83.

The decision commencing the bankruptcy liquidation stays all pending individual enforcement actions or collection suits filed against the debtor. Further, on commencement of the liquidation, the court appoints a judicial administrator to manage the bankrupt estate and any act of disposition or encumbrance of the estate's assets requires prior authorisation by the bankruptcy court. The creditors' committee can approve forms of sale or encumbrance of assets which do not follow the ordinary proceeding provided by the Brazilian Bankruptcy Law.

For creditors to commence a liquidation proceeding, they must file a petition for involuntary liquidation of the debtor in accordance with the relevant requirements (see Question 3, Bankruptcy liquidation proceeding). The debtor can file for its own voluntary liquidation, stating the reasons why it is impossible to continue its activities. The filing must be accompanied by the relevant documents (see Question 3, Bankruptcy liquidation proceeding). The debtor is only discharged after five years (ten years if a bankruptcy crime has been committed) following the termination of the liquidation proceeding.

Other insolvency proceedings

There are a few other specific insolvency proceedings that are only applicable to specific types of companies. Consumer goods and services companies, for example, are subject to civil insolvency proceedings regulated by the Code of Civil Procedure. Banks cannot file for reorganisation, and can only be subject to liquidation after going through previous administrative insolvency proceedings conducted by the Central Bank (intervention and extrajudicial liquidation under Federal Law No 6,024/1974). Government-owned companies, healthcare companies, insurance companies, private pension entities, companies that hold power concessions and co-operatives are other examples of companies that are subject to specific legislation.

 
2. Are there statutory proceedings allowing for a rescue/restructuring of the debtor company's operations and debts?

The following rescue/restructuring proceedings for businesses are available in Brazil (Brazilian Bankruptcy Law):

  • Court-supervised reorganisation proceedings (Recuperação Judicial).

  • Expedited reorganisation proceedings (Recuperação Extrajudicial).

Court-supervised reorganisation proceedings

The court-supervised reorganisation proceeding under the Brazilian Bankruptcy Law resembles Chapter 11 of the US Bankruptcy Code.

The reorganisation proceeding can be initiated by a debtor that meets the requirements of Article 48 of the Brazilian Bankruptcy Law. Creditors cannot file for reorganisation of the debtor. The debtor files a petition for restructuring accompanied by the documents stated in Article 51 of the Brazilian Bankruptcy Law. From the date of the filing, the debtor remains in control of the business, but cannot pay affected creditors nor sell fixed assets without prior approval from the court or from the confirmed plan of reorganisation. If the documents are in order, the court issues a decision commencing the reorganisation proceeding. In that decision, the court appoints a judicial administrator (with powers to monitor the proceedings) and stays all enforcement actions against the debtor (with only a few exceptions (see below)) for 180 days. The debtor has 60 days to file a plan of reorganisation (plano de recuperação judicial) in court, which is negotiated with the creditors and submitted for approval at a creditors' meeting and to court for confirmation. The court must confirm the plan within the 180-day stay period.

The reorganisation proceeding encompasses pre-filing claims against the debtor. Claims not affected by the plan of reorganisation proceeding include:

  • Post-filing claims (créditos extraconcursais).

  • Tax claims (although there are specific rules for the debtor to pay tax in instalments).

  • Claims secured by a chattel mortgage (alienação fiduciária) or a fiduciary assignment (cessão fiduciária em garantia).

  • Lease and rental agreements (arrendamento mercantil).

  • Amounts advanced to the debtor under a foreign currency sale agreement (adiantamento a contrato de câmbio para exportação).

Creditors subject to the plan are divided into four classes of claims for the purposes of voting on the plan at the creditors' meeting:

  • Labour creditors.

  • Secured creditors (up to the value of the collateral).

  • Unsecured creditors (including general unsecured creditors, and privileged and subordinated creditors).

  • Creditors that meet the criteria to be considered very small or small business companies.

The Brazilian Bankruptcy Law specifies the voting and approval proceedings for each class of creditors, and establishes that the approval must be confirmed by the bankruptcy court to become binding on all affected creditors. The debtor remains under reorganisation until all obligations provided for in the plan that are due up to two years following court confirmation are complied with.

The Brazilian Bankruptcy Law also contains specific rules for the reorganisation of very small and small companies.

Expedited reorganisation proceedings

This proceeding involves a prior out-of-court negotiation between the debtor and its creditors, who then file for court confirmation of a pre-packaged reorganisation plan. The expedited reorganisation proceeding can only be filed by the debtor (creditors cannot file for expedited reorganisation of the debtor), but the pre-packaged plan must have been signed by the consenting creditors. The pre-packaged reorganisation plan may address all claims in a specific class or group of claims of the same nature and with similar economic interests, subjecting them to similar conditions of payment (paragraph 1, Article 163, Brazilian Bankruptcy Law). Therefore, a pre-packaged plan will only affect a class or group of claims (such as the class of unsecured claims). However, there are some classes of claims that cannot be addressed by a pre-packaged reorganisation plan, such as labour claims, tax claims and other claims that are not subject to a court-supervised reorganisation proceeding.

For a pre-packaged reorganisation plan to become binding on all the creditors subject to it, it must be previously approved and executed by creditors that hold at least three-fifths of the affected claims (Article 163, main section, Brazilian Bankruptcy Law). If this condition is met, any claim (matured or not) existing at the time the plan is entered into is subject to its effects. This includes claims held by creditors who did not approve or sign the plan. If the plan is approved by less than three-fifths of the affected claims, the debtor can still file for confirmation of the plan, but the plan will only be binding on the creditors that expressly approved and executed the plan.

 
3. What are the general requirements for commencing insolvency proceedings?

Court-supervised reorganisation proceedings

This proceeding can only be initiated by the debtor. The debtor must, at the time of the petition, have been doing business regularly for over two years and meet all of the following requirements:

  • It must not be bankrupt (or if it has been, the resulting liabilities must have been discharged by a final decision).

  • It must not have conducted a court-supervised reorganisation plan confirmed by the court within the last five years.

  • It must not have had a plan of reorganisation for small companies confirmed by the court within the last five years.

  • The senior partner of the controlling equity holder must not have been convicted of any of the crimes provided for in the Brazilian Bankruptcy Law.

The proceeding is initiated by the debtor filing a petition seeking reorganisation. The petition must be supported by (Article 51, Brazilian Bankruptcy Law):

  • A statement of the material aspects of the debtor's insolvency and the reasons for the economic and financial crisis.

  • Accounting statements for the last three financial years and those drawn up especially to support the petition, prepared in strict compliance with applicable rules.

  • A full itemised list of creditors, stating the address, type, rating and updated amount of the respective claim.

  • A full list of employees.

  • A certificate of the debtor's standing at the Public Registry of Companies, with updated articles of incorporation and minutes of appointment meetings.

  • Evidence of the appointment of current senior managers in their current positions.

  • A list of the private assets of the debtor's controlling shareholders and senior managers.

  • Updated statements of the debtor's bank accounts and of any financial investments of any kind.

  • Certificates of the protest offices in the judicial district of the debtor's domicile or headquarters and branches.

  • A list, signed by the debtor, of all lawsuits in which it is a party, including labour-related suits, with an estimate of the respective disputed amounts and their respective certificates.

Expedited reorganisation proceedings

The expedited reorganisation proceeding can only be filed by the debtor (creditors cannot file for expedited reorganisation of the debtor), but the pre-packaged plan must have been signed by the consenting creditors. The filing must include submission of similar documents to those provided in a court-supervised reorganisation proceeding (see above).

Bankruptcy liquidation proceedings

This proceeding is initiated by the filing of a petition seeking the liquidation in bankruptcy of the debtor. The petition can be filed by:

  • The debtor itself (voluntary liquidation).

  • Any creditor or group of creditors (provided those creditors hold claims with the value of at least 40 times the minimum wage).

The debtor may also have a liquidation proceeding opened against it if, as a respondent in an enforcement action, it does not either:

  • Pay or deposit the claimed amount.

  • Present to the court sufficient assets for attachment within the legal term.

The creditors can also file for insolvency if there are certain circumstances listed in the Brazilian Bankruptcy Law which indicate the debtor's insolvency. Involuntary liquidations are far more common in Brazil than voluntary liquidations.

A petition filed by the debtor for voluntary liquidation must state the reasons why it is impossible to continue its activities. The petition must be accompanied by the following documents:

  • Accounting statements for the past three financial years and those statements drawn up especially to support the petition, prepared in strict accordance with the applicable corporation law. These consist of the balance sheet, an accrued income statement, an income statement from the past financial year and a cash flow report.

  • A nominal list of creditors, stating their address and the amount, kind and rating of their respective claims.

  • A list of properties and rights constituting the assets, with the respective estimate of the amount and documents evidencing ownership.

  • Evidence of the debtor's status as a business person, or its articles of association or bye-laws (or if there are none, a list of all partners, their addresses and their personal assets).

  • The mandatory books and accounting documents required by law.

  • A list of officers during the past five years, with their respective addresses, offices and corporate holdings.

 

Insolvency of corporate groups

4. Are there joint insolvency proceedings available that can apply to a whole group of companies? Do all members of a corporate group have to proceed under the same type of insolvency proceeding?

There are no specific rules on the insolvency of company groups. However, it is common for companies belonging to the same corporate group (that is, the parent and subsidiaries) to file for joint court-supervised reorganisation proceedings or expedited reorganisation proceedings. This may or may not include substantive consolidation and is usually admitted by case law in specific cases. It is also common for courts to extend the effects of a bankruptcy liquidation to companies that are related to the debtor company if the requirements for lifting the corporate veil are met.

The court of the debtor's principal place of business has jurisdiction to hear its bankruptcy liquidation or the reorganisation proceedings (Article 3, Brazilian Bankruptcy Law). For this purpose, case law interprets the principal place of business as the place from which the company is managed, although this determination could be controversial in many cases.

If the enterprise group members file jointly, the chosen court must determine whether the group's principal place of business is located within its jurisdiction (and therefore to extend its jurisdiction to the companies from other locations). As a result, courts may have jurisdiction over companies from diverse locations, as long as the group's principal place of business is located within that court's jurisdiction. The fact that there is a joint filing does not necessarily mean that there will be a substantive consolidation or that there will be only one plan of reorganisation for all the family group members.

However, if a subsidiary has already commenced a liquidation or reorganisation proceeding, the parent company can still file for insolvency, but it must be filed with the court where its principal place of business is located. As a result, different courts may have jurisdiction over the proceedings filed by the parent and the subsidiary.

There are no specific rules on whether members of a corporate group have to proceed under the same insolvency proceeding. Therefore, it is not required that all companies belonging to the same corporate group proceed under the same type of insolvency proceeding, nor that they file for their respective proceedings in the same jurisdiction. In addition, some companies can file for insolvency while others choose not to. However, if there is a co-mingling of assets or fraud, or another compelling reason, a court can extend the liquidation of one company to other companies, or to all companies in the same corporate group. If a member company is not included in the filing and there are reasons for lifting the corporate veil, the non-filing company is not protected from the actions of its creditors.

 
5. Can the same insolvency office holder(s) administer the assets and the liabilities of the entire corporate group? Is a court hearing required to determine whether administration by the same individual(s) is appropriate and, if yes, does notice have to be given to creditors?

Judicial administrators are appointed by the court in reorganisation and liquidation proceedings (but not in expedited reorganisations). In a reorganisation proceeding, the management of the company will continue administering the assets, and the judicial administrator has a monitoring role. In a bankruptcy liquidation, the judicial administrator has the role to administer, collect and sell the assets of the debtor. There are no specific rules relating to the appointment of a judicial administrator for different proceedings of companies in the same group. If the companies file jointly, or are in liquidation, the court usually appoints one judicial administrator for the whole group. In addition, courts can appoint the same judicial administrator to supervise/manage different proceedings involving members of the same corporate group, although this is not mandatory.

Judges can schedule hearings to gather evidence on every issue they deem necessary, whether or not any interested party has requested it (Brazilian Code of Civil Procedure). Therefore, in theory, judges can schedule a hearing to determine whether the appointment of a single judicial administrator for the enterprise group is appropriate or not. These hearings are not common. However, creditors or other stakeholders can file appeals against the decision appointing the judicial administrator.

 
6. If the law does not permit a single insolvency office holder, are there provisions allowing different office holders to co-ordinate with each other so that the value of the group's assets can be maximised?

If courts appoint different judicial administrators for the insolvency of different members of a corporate group (which is not usual, since the companies usually file or are treated jointly), the judicial administrators can use their discretionary powers to co-ordinate their actions on an ad hoc basis. However, Brazilian law has no rules and courts have no guidelines on this co-ordination of actions.

 
7. Can professional advisers work for the entire corporate group?

It is common for professionals such as law, accounting and auditing firms to work for all companies of the corporate group, unless there is a conflict of interest.

 
8. Are the rules regarding members of a corporate group transferring assets to one another different when one or more members are insolvent?

Transfer of assets among group members must always be made with proper consideration (Article 245, Brazilian Corporate Law). This rule does not change after the company initiates an insolvency proceeding.

However, after the company files for a court-supervised reorganisation, the transfer of fixed assets among members of the corporate family (and to third parties) must be approved by the courts or be allowed in its reorganisation plan. These rules apply whether the companies are submitted to a joint or to separate insolvency proceedings.

In addition, some transfers of assets may be:

  • Considered ineffective where there is already an enforcement action against the transferor (fraud against enforcement).

  • Considered void as an Actio Pauliana (that is, fraudulent conveyance) if the transferor is left without sufficient assets to pay its existing debt.

  • Declared ineffective or void under a bankruptcy proceeding if the requirements for the ineffectiveness or avoidance of acts provided in the Brazilian Bankruptcy Law are met.

 
9. How are claims of one member of a corporate group against other members of the group treated in a formal insolvency processes for those members?

Brazilian Bankruptcy Law provides for specific rules of treatment of inter-company claims under liquidation and reorganisation proceedings.

Claims of one member of a corporate family against other members of the corporate family are valid and enforceable. However, they are subordinated claims in a liquidation in bankruptcy and they have no voting rights at creditors' meetings in an insolvency proceeding. Subordinated claims are the most junior claims under a bankruptcy liquidation and are only paid after all other pre-filing unsecured creditors have been paid in full. These claims are only senior to any value to be returned to the shareholders.

In addition, claims held by related parties (such as the members of a corporate group) are not considered for voting purposes at creditors' meetings held both in reorganisation or liquidation in bankruptcy proceedings.

Substantive consolidation

 
10. Is pooling of assets and liabilities of some or all members of a corporate group allowed, so that a creditor of one member becomes, in essence, a creditor of all members?

Brazilian Bankruptcy Law has no rules on substantive consolidation. As a rule under the Brazilian Corporate Law, limited liability companies and joint-stock companies (the two more widely used types of companies in Brazil) are responsible for their own debt, unless the requirements for lifting the corporate veil are met. Therefore, assets and liabilities of insolvent entities are not in principle pooled together in insolvency proceedings unless there are events such as fraud or co-mingling of assets (although in practice pooling may be considered by the creditors and by the court a necessary pre-condition to restructure a group of companies).

However, it is not uncommon for bankruptcy courts to apply substantive consolidation in both reorganisation and liquidation proceedings, allowing unified lists of creditors and a consolidated voting procedure at creditors' meetings, and pooling assets and liabilities together for the purposes of performing distributions.

There are no rules or guidance on substantive consolidation in bankruptcy liquidation and reorganisation proceedings. In reorganisation proceedings, substantive consolidation is common even when there is no court decision on the matter. However, this pooling is litigated in some cases. In bankruptcy liquidation proceedings, pooling requires a court decision lifting the corporate veil of members of the bankrupt group of companies.

 
11. What proceedings are required for the court to order the pooling of assets and liabilities?

There is no specific procedure for either:

  • Requesting the pooling of assets and liabilities.

  • The court to decide a motion filed by any interested party to apply the substantive consolidation of an insolvent group of companies.

In reorganisation proceedings, pooling is often requested at the filing and the restructuring court may accept it or reject it, on receiving comments from the different stakeholders.

 
12. Is the partial pooling of assets and liabilities allowed? What conditions apply?

Brazilian Bankruptcy Law has no specific rules on partial pooling of assets and liabilities under an insolvency proceeding. Substantive consolidation usually applies to all assets and liabilities of the companies involved. The pooling of assets is often based on cross-collateralisation of debts involving a substantive portion of the group's debts.

Outside of the scope of bankruptcy proceedings, there are specific rules on the liability of companies belonging to the same corporate group. It is common, for example, for labour courts, within the scope of labour lawsuits, to hold all companies of a corporate group liable for labour claims (even if the requirements for lifting the corporate veil in civil and commercial matters are not met).

 
13. If the pooling of assets and liabilities is permitted, are there any protections for certain types of creditors?

Secured creditors keep their security interests even if there is pooling of assets and liabilities. Creditors holding chattel mortgages or bankruptcy-proof claims can still enforce their claims outside of the scope of the bankruptcy proceeding.

There is no specific protection for creditors in the case of substantive consolidation, although it is conceivable (but very unusual) that a reorganisation plan may offer certain benefits to a group of creditors affected by the pooling of assets. However, if there is substantive consolidation, even if the plan treats creditors differently, the claims are pooled together for voting purposes.

Secured creditors

 
14. How are secured creditors treated in relation to a group of companies?

In principle, if there is substantive consolidation, all claims are collapsed into one claim. A creditor holding a secured claim against one debtor, and a guarantee (an unsecured claim) against another debtor, may have just one secured claim if the assets and liabilities of both debtors are consolidated. However, case law is not clear on how these claims are classified for the purposes of distribution.

 

Insolvency proceedings for international corporate groups

15. What extra considerations are necessary if one or more members of the corporate group is incorporated under or governed by the laws of another jurisdiction?

If one member of the group is incorporated abroad, the same rules and principles as stated above apply. There are a few cases in which several companies, including companies incorporated abroad, filed for reorganisation under Brazilian law.

However, Brazil lacks a proper legal framework to deal with cross-border insolvencies. There is no provision allowing a foreign court to seek assistance in Brazil in connection with a foreign insolvency proceeding, and Brazilian courts have historically denied exequatur to awards of foreign insolvency proceedings. As a consequence, the Brazilian subsidiary of a multinational corporate group typically initiates an independent insolvency proceeding in Brazil if the parent company files abroad and it is also insolvent. On the other hand, if a foreign company is considered to have its principal place of business in Brazil, Brazilian courts could have exclusive jurisdiction over its insolvency proceedings (Article 3, Brazilian Bankruptcy Law).

 
16. If insolvency/restructuring proceedings are started for corporate group members in different countries, do international treaties or EU legislation apply?

Brazil has not adopted the UNCITRAL Model Law on Cross-Border Insolvency, although there are ongoing discussions on this matter. The only specific provisions relating to cross-border insolvency are contained in the Bustamante Code of 1928 (part of the Inter-American Convention of Private International Law, ratified by Brazil), but they are only applicable to its 15 signatory countries (all in Latin America). The Bustamante Code has seldom been applied in Brazil, and some of its rules are considered obsolete.

 
17. Do domestic courts typically attempt to exercise jurisdiction over all the assets of a company filing locally (regardless of where the assets are located) or do they limit their jurisdiction to local assets?

If a debtor has its principal place of business in Brazil, a local court will assume exclusive jurisdiction (Article 3, Brazilian Bankruptcy Law), and Brazilian insolvency proceedings will apply to all of the debtor's assets, including those assets that are located abroad. However, the interplay with the laws of the jurisdiction in which the assets are located must be considered.

 
18. Do local courts enforce court orders from foreign jurisdictions that attempt to exercise jurisdiction over assets located in your jurisdiction that are owned by a company subject to foreign insolvency proceedings?

Foreign courts can only exercise jurisdiction over assets located in Brazil if the decision is recognised by the Superior Court of Justice (Superior Tribunal de Justiça). The requirements are that the foreign decision:

  • Was rendered by the competent court.

  • Was in a court proceeding in which the parties received summons in a recognised way.

  • Is final and not subject to appeal.

  • Is translated into Portuguese by a certified translator.

  • Does not conflict with Brazilian public order and sovereignty.

If the decision fulfils all these requirements, the Superior Court will issue an exequatur (that is, an authorisation granted by the court permitting the enforcement of a foreign judgment), which will then be forwarded to the appropriate court for enforcement.

The Superior Court of Justice (and the Supreme Federal Court which had jurisdiction over such matters until 2004) has historically denied exequatur to requests of recognition of foreign insolvency proceedings.

 
19. Can the courts co-operate with foreign courts to co-ordinate the administration of group assets?

There are no rules or guidelines for co-operation and co-ordination in cross-border insolvency matters. Brazilian law does not provide for direct communication with courts of foreign jurisdiction, and Brazilian courts have not adopted, either formally or informally, any guidelines on this matter.

Foreign courts can communicate with Brazilian courts by means of a letter rogatory (carta rogatória), transmitted through the Ministry of Foreign Affairs of the relevant jurisdiction. The Ministry of Foreign Affairs will remit the matter to the Brazilian Ministry of Justice (Ministério da Justiça), which in turn will remit the order to the Superior Court of Justice.

However, there are insolvency cases in which Brazilian courts communicated, on an informal basis, with foreign courts (such as in the Varig case in 2005).

 

Directors' duties

20. Does your jurisdiction encourage or discourage overlapping boards or management teams for separate members of a corporate group?

Although there are no specific rules applicable to corporate groups on this matter, those who serve on the board of competing firms, or have a conflict of interest with the company, must disclose these facts at the shareholders' meeting before being appointed (§3º, Article 147, Brazilian Corporate Law (Federal Law No. 6,404/1976)).

If the corporation is publicly held, the disclosure of this information must be done in a special form, as established in normative ruling 376/2002 of the Brazilian Securities Commission (Comissão de Valores Mobiliários).

 
21. What legal consequences are there for the directors of a parent company where they are not directors of the subsidiary but do manage the subsidiary's affairs?

Certain agents who do not hold any office in the company can be held liable as de facto directors or officers of the company.

Most importantly, the controlling shareholder has specific duties towards the company, even if he is not a director of the company. In the context of corporate groups, a controlling shareholder may be held liable if he is found to be favouring one subsidiary at the expense of another (normative ruling 323/2000, Brazilian Securities Commission and Article 246, Brazilian Corporate Law).

Finally, officers, managers and directors, de facto or de jure, are treated as the debtor or the bankrupt person for all purposes of criminal liability (Article 179, Brazilian Bankruptcy Law).

 
22. What are the main duties and responsibilities of directors and officers to the company, shareholders and third parties? Do they change when the company becomes insolvent?

Directors and officers owe direct duties to the company itself (and not to the shareholders, creditors or employees). The Brazilian Corporate Law establishes the officers' and directors' main duties and responsibilities towards the company (known as fiduciary duties). These include the:

  • Duty of diligence, which comprises the directors' and officers' duty to apply to the company the same diligence and care they would apply if the company was their own.

  • Duty to act in accordance with the articles of association or bye-laws.

  • Duty of loyalty.

  • Duty to keep company information (obtained due to their position) confidential.

  • Duty to inform.

Directors and officers are jointly and severally liable for damages resulting from a failure to carry out their duties and obligations towards the company, even in cases in which a director or officer is not directly responsible for the performance of all duties.

Therefore, for example, the failure to produce and publish annual balance sheets, which may impair the company's normal functioning, may result in the joint and several liability of the directors. This includes those who are not directly responsible for preparing the annual balance sheets.

To avoid joint liability, the director must communicate any failure on the part of a current or former director to perform his corporate duties to:

  • The shareholders at a general meeting.

  • The board, in certain circumstances.

The duties and responsibilities of officers and directors remain the same when the company becomes insolvent, as officers and directors owe duties to the company itself and not to shareholders or creditors. However, officers and directors must comply with the specific obligations provided in the Bankruptcy Law. For example, some acts of transfer of property or payment of creditors may be challenged if there is a bankruptcy proceeding commenced against the company. These violations may create liabilities for directors and officers or may even be considered "bankruptcy crimes".

 
23. How are competing duties addressed where directors and officers of different group company members overlap and there are conflicts of interest between the group members?

Officers and directors of a corporation (Article 245, Brazilian Corporate Law):

  • Must not favour an associated, controlling or controlled corporation to the detriment of their own corporation.

  • Must ensure that the transaction between the corporations is equitable or compensated by adequate payment.

Officers and directors may be liable to the corporation for any loss resulting from any transaction with other group members not performed on an arm's-length basis.

Officers and directors can only deviate from this rule, and harm their company in the name of the group or another group member, if the corporate group was formally constituted through a "group agreement" (Article 265, Brazilian Corporate Law).

However, "group agreements" are extremely rare.

 
24. What specific types of conduct are in breach of the duties and responsibilities of directors and officers?

Failure to take reasonable steps to minimise losses to creditors

Although there are no specific express rules relating to minimising losses to creditors, not doing so may trigger liability for negligent and reckless behaviour. However, there is no relevant case law in this area.

Misappropriation of corporate assets

The misappropriation of corporate assets is a criminal offence, and it also violates the duty of diligence and care provided for in Articles 153 and 154 of the Brazilian Corporate Law. In addition, appropriation, misappropriation or concealment of assets owned by a debtor under a reorganisation or bankruptcy liquidation, including through its acquisition by a third party, is considered a bankruptcy crime (Article 173, Brazilian Bankruptcy Law). Finally, such a misappropriation is also barred by the fraudulent conveyance rules.

Undervaluation of corporate assets in a preference or other transaction to the detriment of creditors

This conduct is considered a criminal offence (Article 168, Brazilian Bankruptcy Law), a civil offence, a violation of corporate law, and would also fall under the fraudulent conveyance and avoidance rules of the Brazilian Bankruptcy Law.

Failure to inform creditors of insolvency

This conduct is not in breach of the duties and responsibilities of officers and directors. However, it could violate the standards of care and diligence established by the Brazilian Corporate Law, subjecting officers and directors to liability. In addition, it could violate the securities law relating to public companies and companies that have issued securities in the capital markets.

Preferring payment to one creditor as opposed to another when insufficient monies are available to pay both

Payment to one creditor in detriment of others is prohibited if the company is already insolvent. If the company is pre-insolvent, payment of creditors may be considered ineffective if performed under certain circumstances (for example, if the creditor is paid before its due date or if it is paid in a different manner than originally agreed). In addition, before filing an insolvency proceeding, or during it, favouring a creditor over the others may constitute a criminal offence (a bankruptcy crime).

Continuing to trade when there is little prospect of being able to pay when due

This conduct could violate general duties of directors and officers.

Other conduct

There are specific rules on the personal liability of directors and officers in relation to labour, tax, environmental and consumer liabilities.

 
25. What civil and criminal liability exists for directors and officers if they breach their duties and responsibilities?

In relation to civil exposure, corporate directors and officers are personally liable when:

  • Within the scope of their powers, they act recklessly, negligently, below the accepted standard of competence for a corporate director, or fraudulently. Directors and officers will only be held liable for damages if it is proven that they acted recklessly, negligently, incompetently or fraudulently. In this case, the company will initially be held liable for damages to third parties caused by the acts of its directors and officers. However, the company will have the right to file a suit against the directors and officers to indemnify losses.

  • They perform acts beyond the scope of their powers (ultra vires). Directors and officers will be held strictly liable for ultra vires acts. In principle, a company itself is not liable for ultra vires acts of its managers. However, if the damaged party was acting in good faith, the corporation may be held liable.

A corporation, any of its shareholders or an injured third party may bring suit against the responsible director in an attempt to recoup losses. This exposure is not modified after the insolvency occurs.

In addition, bank debts are often secured by guarantees given by directors and officers, which, by their nature, cause personal exposure for officers and directors who extended those guarantees.

As for the criminal exposure, a bankrupt corporation's directors and officers will be considered liable in respect of the following criminal acts relating to a bankruptcy (Brazilian Bankruptcy Law):

  • The use of destructive means to obtain resources and to delay the declaration of bankruptcy, such as making sales at prices below the current market value during the six months before filing for bankruptcy.

  • Failure to keep the required books, or their late, defective, or unclear completion.

  • Fraudulent acts, committed before or after the declaration of bankruptcy, for the purposes of obtaining an unfair advantage.

  • Accelerated payment of certain creditors to the detriment of other creditors.

  • Acknowledgment of false or misrepresented credits.

The Brazilian Bankruptcy Law expressly forbids professionals considered liable for criminal acts related to bankruptcy to be an officer or director of any company, for a period of five years after the judicial condemnation.

The Brazilian Bankruptcy Law provides for prison penalties and fines or restitution for certain acts which constitute crimes related to bankruptcy.

 
26. Is potential personal civil or criminal liability a factor in officers and directors deciding if and when to put the company into a formal insolvency/reorganisation procedure?

It is common for directors and officers to avoid filing insolvency proceedings (particularly liquidation in bankruptcy), due to the risk of spill-over effects and the exposure to banks and potential civil and criminal liability.

 
27. Is insurance available to protect directors and officers from claims arising while operating a financially distressed company?

Directors' and officers' insurance (D&O insurance) is available. However, coverage is usually only available for solvent companies and therefore that coverage must be obtained before the company becomes insolvent. Unless there is a clause in the D&O insurance policy excluding or limiting the insurance coverage in the case of insolvency or bankruptcy, the contracted coverage remains valid and effective with respect to the named officers and directors. This is true even if the D&O insurance policy is issued and then the company immediately becomes insolvent or subject to a reorganisation or bankruptcy proceeding.

D&O insurance policies in Brazil are usually issued for a one-year term under a "claims-made basis" (that is, covering potential liabilities reported during the life of the policy but emerging up to 36 months from the expiration of the policy term). Insurance premiums range from around:

  • 0.5% to 3% of the insured value for limited liability companies and closely held corporations (the precise percentage depends on the company's financials, reputation and solidity).

  • 1.5% to 10% of the insured amount for publicly-held corporations, which have a greater liability relating to derivative actions and minority shareholders' lawsuits.

D&O insurance policies cover directors' and officers' personal liability, depending on the terms of the policy, by:

  • Advancing funds for their defence in court and for payment of legal fees and costs.

  • Refunding the amount of awards and damages judicially suffered.

However, D&O insurance is only effective for cases of liability arising from negligence or the non-intentional fault of the director or officer. Brazilian insurance laws prohibit insurance coverage against illicit acts committed with malice/intent, such as wilful misconduct. Therefore, illegal acts intentionally performed by an administrator (for example, bankruptcy crimes) are not included in the insurance coverage.

Directors and officers of joint stock companies and managers of limited liability corporations, including shareholders who are also managers of the company (managing shareholder), can obtain coverage through a D&O insurance policy under the terms and conditions mentioned above.

The insurance coverage usually has many exceptions. The difficulties and the expense related to insurance coverage, together with the extensive personal liability described above, are very important factors in postponing the decision-making process relating to filing. Another important factor is that there is no second chance for directors and officers. Once a company becomes insolvent, directors and officers are subject to a large number of claims which take a very long time to get through the judicial system, particularly if the assets are insufficient to cover the claims (as is usually the case). Although the director or officer can file for individual insolvency, they are only discharged at the end of the proceeding.

 
28. Can directors and officers resign from their positions if the company becomes financially distressed and what difference will this make to their potential liability?

It is not uncommon for directors and officers to resign before the filing of an insolvency proceeding, although the liabilities incurred before their resignation are not discharged by doing so.

 
29. How common is litigation against directors and officers for violation of their duties after commencement of insolvency/reorganisation proceedings? Is the litigation typically successful?

Officers and directors are not usually sued for violation of their duties. However, it is common for creditors to enforce their claims against directors and officers due to their personal liability (deriving from personal guarantees given to financial institutions, for example, or from statutory provisions and case law in the case of tax, consumer and labour claims).

It is common for certain creditors (such as labour creditors) to successfully enforce their claims against officers and directors, to the extent they have assets which can be attached.

 
30. What defences against civil and/or criminal sanctions are available to directors and officers?

Good faith

If there is evidence that directors and officers have been acting in good faith, provided they have not been negligent, they will only be liable in cases in which there is strict liability (such as environmental cases, or in labour and consumer cases).

Due diligence (for example, obtaining valuation of assets)

Obtaining valuation of assets is a good defence against allegations of voidable transactions performed to defraud creditors, or in tax matters.

Reliance on outside consultants or professionals (such as accountants, legal advisers and financial advisers)

This is a useful tool to establish good faith and diligence. However, it is rarely used in Brazilian courts, except to defend allegations of negligence.

Exercise of reasonable judgment with intent to preserve the "ongoing value" of the enterprise

Exercise of reasonable judgment with intent to preserve the "ongoing value" of the enterprise can be used as a defence if certain acts performed by the directors and officers are being challenged.

 
31. If it appears that "going concern values" will result in a higher return to creditors than a liquidation of the assets, can directors and officers be protected if they decide to continue operations to protect the values for the benefit of all creditors?

Directors and officers are usually not held liable for maintaining in operation a company which is on the verge of becoming insolvent. This still applies if the result is an increase of debt owed to creditors, even though the officers and directors were acting in good faith. However, liquidating a viable company through the use of fraudulent or false information could be considered a crime under the Brazilian Bankruptcy Law.

 
32. If a company becomes insolvent, is a director or officer of the insolvent company legally restricted from acting as a director or officer in another company, or from obtaining credit as a promoter of another company?

If their company becomes insolvent, directors and officers are restricted from acting in another company only if either (Article 181, Brazilian Bankruptcy Law):

  • They are convicted of a crime provided for in the Brazilian Bankruptcy Law.

  • The court extends the effects of the bankruptcy to them.

The Central Bank has restrictions when vetting directors and officers that were involved in prior insolvencies.

If directors and officers have been acting in good faith, mismanagement in itself should not be a cause for imposing restrictions on their activities. The most significant restriction is imposed by the large number of lawsuits the officer or director will have to face, which usually impair their ability to develop a new business or acquire assets, or even have a bank account.

 
33. If a director or officer becomes personally insolvent, is he legally restricted from continuing to act as a director or officer of his current company or another company?

Current company

If an officer or director becomes personally insolvent, they are not legally restricted from continuing to act as an officer or director of their current company or another company. That officer or director is not discharged from their personal liabilities and is subject to the applicable collection or enforcement lawsuits. They will only be restricted from acting as administrator of any business if convicted of a criminal offence.

If the officer or director files for individual insolvency (under the rules of the Code of Civil Procedure applicable to individuals), they must transfer the management of their personal assets (except for their home) to a judicial administrator appointed by the court, who sells all those assets and pays their debts to the extent their assets permit. They are discharged five years after the individual insolvency proceeding is finalised, which in turn requires that all pending lawsuits be resolved.

Another company

See above, Current company.

 

Online resources

Felsberg Advogados

W www.felsberg.com.br

Description. Hosted by Locaweb. Creation of website by Citrus7. The internal marketing department of Felsberg Advogados maintains the official website and updates it daily. The department is constantly feeding news, information about the office, alerts to the website. Felsberg also has websites in English, German and Mandarin under the same domain with all the institutional information translated.

English Website: www.felsberg.com.br/en/

German Website: www.felsberg.com.br/profil/

Mandarin Website: www.felsberg.com.br/%E9%A6%96%E9%A1%B5/



Contributor profiles

Thomas Benes Felsberg, Managing Partner

Felsberg Advogados

T +55 (11) 3141 9101
F +55 (11) 3141 9150
E thomasfelsberg@felsberg.com.br
W www.felsberg.com.br

Professional qualifications. Lawyer

Areas of practice. Insolvency; debt and restructuring; project finance; international trade; aircraft finance and leasing; arbitration and capital markets.

Non-professional qualifications. University of São Paulo, School of Law, LL.B. 1966; Columbia University , LL.M. 1970; Lectured on conflict of laws at the University of São Paulo.

Recent transactions

  • Representation of Rede Energia in the restructuring of the debt of the group, including in two reorganisation proceedings. The amount at stake is US$4 billion.
  • Representation of the sugar mill Alda in its reorganisation proceeding. Amount at stake is US$200 million.
  • Representation of the electric utility Concessionária de Energia Elétrica do Pará (Celpa) in its reorganisation proceeding and sale of its corporate control to Equatorial Energia, which committed itself to investing US$350 million in the company. The transaction involved the filing of a Chapter 15 case in the US. Amount at stake is US$ 1.5 million.
  • Representation of Infinity Bio-Energy Brazil and its subsidiaries in their reorganisation proceeding, in the acquisition of their corporate control by the Bertin group, and in the series of debtor-in-possession financing transactions of the total amount of US$150 million, by means of bank loans and the issuance of notes abroad. The case involved a filing of a winding-up proceeding in Bermuda. Amount at stake is US$500 million.
  • Representation of Lupatech in its expedited reorganisation proceeding. Amount at stake is US$300 million.
  • Representation of Mabe, the Brazilian subsidiary of the Mexican multinational company that manufactures appliances and holder of the GE brand in Brazil, in its reorganisation proceeding. Amount at stake is US$ 300 million.
  • OGX/OSX: Representation of OSX-3 bondholders, the largest group of OSX creditors in the reorganisation proceeding of OGX/OSX. Amount at stake is US$ 500 million.

Languages. Portuguese, English, German, French, Spanish

Professional associations/memberships

  • Founding member and former chairman of the board of the Brazilian chapter of the Turnaround Management Association (TMA).
  • Sole Brazilian representative of the American College of Bankruptcy.
  • Member of the International Insolvency Institute board.
  • Member of the Legal Council of FIESP (Federation of Industries of the State of São Paulo).
  • Board Member of CESA (Law Firms Study Centre).
  • Member of the OAB commission in Brazil.
  • President of the Association "Columbia University Alumni" of Brazil.
  • First international member and former member of the board of Meritas.
  • Participates actively as a speaker in congresses and conferences in several countries around the world.
  • Only Brazilian member of the "American College of Bankruptcy" and board member of the International Insolvency Institute, also affiliated with INSOL International and other domestic and foreign entities.
  • A consultant for the World Bank in the field of insolvency and creditor's rights, having contributed to the Global Insolvency Law Database (GILD). • Took part in the drafting committees for the current corporate insolvency law.
  • Also affiliated to several national and international entities.
  • Brings together the body of arbitrators of several arbitration and mediation chambers.

Publications

  • Thomas Benes Felsberg and Fernando de Magalhães Furlan, organisers.  Brasil-China: comércio, direito e economia. São Paulo: Aduaneiras, 2005.
  • Thomas Benes Felsberg.  Foreign Business in Brazil a practical law guide. São Paulo: Interinvest de 1976.
  • Thomas Benes Felsberg, Maria da Graça de Britto Vianna Pedretti, and Andrea de Souza Machado. Chapter “Brasil” of the International Project Finance and PPPs': A Legal Guide to Key Growth Markets 2012.
  • Thomas Benes Felsberg, Paulo Fernando Campana Filho: chapter of the Insolvency and Restructuring in 52 jurisdictions worldwide. Bruce Leonard. Getting the Deal Through, 2013.
  • Thomas Felsberg: Chapter "Brazil" of the Collier International Business Insolvency Guide. Lexis Nexis Group, 2014.

Paulo Fernando Campana Filho, Partner

Felsberg Advogados

T +55 (11) 3141 9168
F +55 (11) 3141 9150
E paulocampana@felsberg.com.br
W www.felsberg.com.br

Professional qualifications. Lawyer

Areas of practice. Business law (particularly corporate reorganisation/financial restructuring).

Non-professional qualifications. Universidade de São Paulo School of Law, LL.B., 2003; Intensive Course on Comparative Law, Universität Salzburg, 2005; Master Degree in Civil Law, Universidade de Coimbra, 2007; Ph.D  in Business Law, Universidade de São Paulo; developed thesis on cross-border insolvencies and the reorganisation of multinational corporate groups.

Recent transactions

  • Representation of Lupatech in its expedited reorganisation proceeding. Amount at stake is US$300 million.
  • Representation of Rede Energia in the restructuring of the debt of the group, including in two reorganisation proceedings. The amount at stake is US$4 billion.
  • Representation of Mabe, the Brazilian subsidiary of the Mexican multinational company that manufactures appliances and holder of the GE brand in Brazil, in its reorganisation proceeding. Amount at stake is US$ 300 million.
  • OGX/OSX: Representation of OSX-3 bondholders, the largest group of OSX creditors in the reorganisation proceeding of OGX/OSX. Amount at stake is US$ 500 million.

Languages. English, Italian, Portuguese

Professional associations/memberships

  • Founding member of the Brazilian chapter of the Turnaround Management Association (TMA).
  • Member of the INSOL International.
  • Member of committee of the International Insolvency Institute Next Gen.
  • International Association of Restructuring, Insolvency and Bankruptcy Professionals (INSOL International).
  • Participated on the NextGen Programs of the International Insolvency Institute (III) and the National Conference of Bankruptcy Judges (NCBJ).
  • Participated in research groups in the area at the University of São Paulo and contributed for the elaboration of the Brazilian sections of the World Bank Global Law Insolvency database (GILD) and World Bank/FMI report on respect on standards and codes (ROSC).

Publications

  • Paulo Fernando Campana Filho: As amarras da recuperação judicial. O Estado de S. Paulo de 14.1.2013.
  • Thomas Benes Felsberg, Paulo Fernando Campana Filho: chapter of the Insolvency and Restructuring in 52 jurisdictions worldwide. Bruce Leonard. Getting the Deal Through, 2013.
  • Thomas Benes Felsberg , Paulo Fernando Campana Filho: Corporate Bankruptcy and Reorganization in Brazil: National and Cross-Border Perspectives. Bruce Leonard. Norton Annual Review of International Insolvency. Eagan : West, 2009.
  • Paulo Fernando Campana Filho: The Legal framework for Cross-Border Insolvency in Brazil. Houston Journal of International Law. v. 32, p. 97-151, 2010.
  • E. C. Marques, Paulo Campana Filho, T. R. Medaglia: A Crise e Suas Oportunidades de Investimento. Valor Econômico, 5 March 2015.
  • E. C. Marques, Paulo Campana Filho, T. R. Medaglia: Never waste a good crisis. Latin Lawyer, p. 39 – 40, 2015.

Pedro Henrique Torres Bianchi, Partner of corporate and financial restructuring

Felsberg Advogados

T +55 (11) 3141 9177
F +55 (11) 3141 9150
E pedrobianchi@felsberg.com.br
W www.felsberg.com.br

Professional qualifications. Lawyer

Areas of practice. Business law (particularly corporate reorganisation/financial restructuring).

Non-professional qualifications. University of São Paulo, School of Law, LL.B. Master of Laws, University of São Paulo; Doctorate in Law, University of São Paulo

Recent transactions

  • Representation of Inepar and its subsidiaries, including IESA, in the judicial reorganisation proceeding. US$1.5 billion debt.

  • Representation of Ecovix, one of the biggest shipyards in Brazil, in an extra-court reorganisation proceeding, with a debt of US$2 billion. It involved the negotiation of a pre-packaged plan and negotiations with suppliers and financial lenders.

  • Representation of Colombo in its extra-court reorganisation proceeding, which involved the negotiation and filing of a pre-packaged plan with creditors and the structuring of a cash injection. The company, which owns stores in all Brazilian States (US$500 million debt).

  • Representation of Log-In, a company that plans and manages solutions for cargo movement by means of coasting trade. The restructuring involves the negotiation with the financial lenders, with a new guarantees system, in an extra-court restructuring (US$200 million debt).

  • Representation of Vipal, one of the world's leading manufacturers of products for renovation and repair of tires and inner tubes, in its reorganisation proceeding and in the negotiation of a term sheet with its financial creditors, including the sale of its subsidiary FATE Argentina (US$300 million debt).

Languages. Portuguese, English, Italian.

Professional associations/memberships

  • Member of International Association of Restructuring, Insolvency and Bankruptcy Professionals (INSOL International).

  • Member of Turnaround Management Association (TMA).

  • Member of Brazilian Institute of Procedural Law (IBDP).

  • Member of Brazilian Arbitration Committee (CBAr).

Publications.

  • "Disregard doctrine in civil procedure", 2011.

  • "Contemporary Corporate Law I", 2009 (co-author).

Fabiana Bruno Solano Pereira, Partner

Felsberg Advogados

T +55 (11) 3141 3626
F +55 (11) 3141 9150
E fabianasolano@felsberg.com.br
W www.felsberg.com.br

Professional qualifications. Lawyer

Areas of practice. Insolvency; arbitration and mediation.

Non-professional qualifications. Pontifical Catholic University of São Paulo, LL.B; Specialisation Course in Contract at the Pontifical Catholic University of São Paulo; LL.M. in Financial and Capital Markets Law, Institute of Education and Research, Insper; LL.M. degree in Corporate Governance and Practice, Stanford Law School, Stanford, CA

Recent transactions.

  • Participation, as foreign associate of White & Case LLP, in the US chapter 15 proceedings filed by OAS in NY.

  • Participation, as foreign associate of White & Case LLP, in the restructuring of the Schahin group.

  • Participation, as foreign associate of White & Case LLP, in the US chapter 15 proceedings filed by Sifco in NY.

Languages. Portuguese, English, Spanish

Professional associations/memberships

  • Member of International Association of Restructuring, Insolvency and Bankruptcy Professionals (INSOL International).

  • Member of Turnaround Management Association (TMA).

  • Member of Brazilian Arbitration Committee (CBAr).

  • Appointed to be the law firm's Meritas representative (Meritas is a global alliance of full-service law firms, which includes more than 175 law firms worldwide in over 70 countries).

Publications

  • "Nova Crise Economica e Insolvencia Transnacional", published in Valor Economico (April 16, 2015); "Recognition of Arbitration", published in the International Newsletter of Felsberg e Pedretti Advogados e Consultores Legais (September 4, 2012); "Brazilian Code of Civil Procedure amended to expedite enforcement proceedings", published in the International Newsletter of Felsberg e Pedretti Advogados e Consultores Legais (February 5, 2007) (co-author).

  • Annual report on Brazilian Jurisdiction for "Enforcement of Foreign Judgments", co"ordinated by ‘Getting the Deal Through’, and published by Law Business Research Ltd., in October 2011 and October 2012 (co-author).

  • Book with final thesis: "Consequences of Terminating Franchise Agreements" (2014).


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