Jayme Petra de Mello Neto
Legal Coordinator at Marcos Martins Advogados
One of the great unregulated areas of Brazilian law is undoubtedly that relating to cases involving transnational companies in crisis. Although we have made significant progress in adopting a more up-to-date model of “company law in crisis” (already consolidated almost as an autonomous branch in France, as droit des entreprises en diffculté) since the introduction of the recovery system in Law 11.101/2005, an important chapter of this sector has been left out by the ordinary legislator, creating a mismatch in the evolutionary march of bankruptcy legislation.
In fact, although Brazil has a large number of internationalplayers in its economy (global players), of both foreign and local origin, it does not have solid, embodied legislation that covers these companies, giving them treatment peculiar to their condition. One or two sparse rules, sometimes conflicting with each other and without a teleological vector, end up creating a sense of disincentive to the presence of global players in the national territory, who come to settle here much more because of their global expansion project than because of the country’s attractiveness.
This unregulated legal field in relation to global players makes it more difficult and insecure for potential foreign investors or Brazilian companies to expand and set up store outside the country. At all times, managers of global players end up facing difficulties and contradictions in tax, commercial, contractual and corporate law.
But it is in the field of “company law in crisis” that the regulatory vacuum hits most clearly, leaving a feeling of insecurity due to the unpredictability of the legal effects at the most critical moment for any company, which in a broad sense is the crisis linked to its solvency.
Unfortunately, the story here is one of missed opportunities!
With a bankruptcy law that portrayed a world between wars, incompatible with the economic model in force at the beginning of the 21st century, Brazil set about revising its law on companies in crisis based on the model proposed by UNCITRAL, reflected in the Legislative Guide on Insolvency Law. Dating back to 2004, the model is clearly based on the Bankruptcy Reform Act of 1978 in the United States, which introduced the reorganization model, commonly referred to as Chapter 11. This UNCITRAL legislative standard, which effectively launched Brazil on the same wave as the rest of the world, was actually presented as a double regulation: on the one hand, the general reorganization and recovery rule, adopted; on the other, the rule on transnational insolvency.
Also included in an Uncitral model law – Model Law on Cross-Border Insolvency and Guide to Enactment – transnational insolvency procedures were not adopted in Brazil, missing a historic opportunity, since in 2005, the spirit of revising the old bankruptcy model was present.
Although it has existed since 1997 as a model law, there is no known reason why the authors of the bill that became Law 11.101/2005 did not open a specific chapter on the subject. In 2005, Brazil was playing a leading role in international investment, with Brazilian companies expanding and a strong influx of foreign companies arriving to complete their expansion projects and global investments. So the time was right, but the chance was missed.
According to the model law’s own statement of objectives, a transnational insolvency process, through cooperation between judicial authorities and different sovereignties, aims to (i) provide greater legal certainty for the company and the investment; (ii) promote fair and efficient transnational insolvency administration that protects all creditors, third parties involved and the debtor himself; (iii) the protection and maximization of the debtor’s assets; (iv) in addition to facilitating the recovery of companies in crisis, in order to protect investment and preserve jobs. It can be seen that the objectives chosen in a transnational procedure coincide with those typically set out in article 47 of Law 11.101/2005[1].
Transnational insolvency should be the natural complement to Law 11.101/2005, considering the role of the globalized economy in Brazil’s current economic structure. If there is a very relevant legal effect of globalization and commercial expansion, especially after the collapse of the Soviet bloc in the 1980s, it can be said that it is the challenge to the notion of sovereign borders, especially if viewed under the traditional doctrine of national security, in which sovereign borders are insurmountable walls.
The vector brought about by the economic expansion of borders and, without being too bold, by the virtualization brought about by the Internet, is that the closed walls must give way to an efficient system of legal protection that takes into account the peculiarities and regionalism of all those involved and that multiple jurisdictions can act in harmony, recognizing each other, even if certain concepts are foreign to one of them.
This sense of harmonization of jurisdictions is contained in the model law on transnational insolvency itself, which needs to be a system of assistance between courts in pursuit of the stated objectives.
Assistance between courts with jurisdiction in theory. Assistance between competing jurisdictions. Technically, the procedural condition for transnational insolvency proceedings is precisely the possibility of assistance between courts. Between the assisting court and the assisted court, there will be a dynamic and efficient relationship aimed at maximizing the debtor’s assets located in different jurisdictions, or rather sovereignties.
Under the model law, the assisting court will not act in competition with the reorganization process taking place before another sovereignty. Based on the concept ofmain establishment, the law and the assistant court recognize that there is aforeign main proceeding that will determine the main cognitive-jurisdictional activities in relation to the recovery of a debtor. The assisted court has the role of resolving and administering the recovery. The assistant court has the role of confirming and protecting the assets and creditors under its jurisdiction for a fairer and more efficient reorganization process.
This is not an abdication of the jurisdictional power of one sovereignty to the detriment of another. What the model law envisages is a system in which, subject to regional and sovereign state differences, local insolvency proceedings have transnational recognition for the benefit of investments, jobs and maximizing the debtor’s assets.
The model law itself contains an exception clause: transnational insolvency proceedings will not apply when there is a clear contradiction between an order or procedure of the assisted court and public policy in the area of sovereignty of the assisting court.
This exception clause represents a viable resource for maintaining the sovereign model while not emptying the role of the local judiciary.
However, a major difficulty would arise for Brazilian law in terms of what constitutes public policy for the purposes of insolvency proceedings. This is because the concept has no a priori definition in Brazil, which would lead to a rather peculiar situation. Either the law establishing transnational insolvency would provide a definition, at the risk of inaccuracy or rapid outdating; or it would be delegated to the Judiciary to decide what could characterize the exception.
Returning to the source of inspiration for the model law and the current reorganization system, North American law has a fairly well-established definition of what public policy is and how it applies to company law in crisis. Although the concept is well established in that state, when the cross-border insolvency system was adopted in 2005, some points were revised, not to exclude them from the scope of public policy, but to adapt them to the reality of assistance between courts.
Thus, the system of prioritizing claims in bankruptcy, for example, is considered a public policy for US law. Traditional rules about which creditor gets what first have always been understood under the public policy system. Thus, in US law, there is a much more complex system regarding the preference of certain claims[1].
In that legislative system, for each type of creditor with priority, there is a double check: theabsolute priority rule(APR), which classifies a specific claim in relation to another of a different nature, for example, the priority of debenture creditors over shareholders; at the same time, there is the proportional priorityrule(PPR), whereby within the same type of creditors are distinguished according to the degree to which priority is established by law or by contract. In this system, it is possible to issuebonds with lower or higher priority, depending on the negotiation and the strength of the creditor.
In Brazil, on the other hand, there is no PPR priority classification as a rule[2]. Thus, formally, there would be no distinction between the creditor with lower or higher priority. In a judicial reorganization plan or bankruptcy governed by Brazilian law, this rule would not apply. But if the debtor had assets subject to US jurisdiction and had initiated a cross-border insolvency proceeding ( Chapter 15 of the United States Code) in a local court, this issue could be discussed.
In a revised position, for cross-border insolvency cases under Chapter 15, the US courts have already accepted the application of the public policy exception to the PPR rule.
In Brazil, where the system of judicial precedents as a source of norms is still in its infancy and quite different from the system established for common law countries, the adoption of the public policy exception clause could represent a challenge and yet another factor of legal uncertainty, which, as stated above, is one of the objectives to be eradicated by the adoption of a transnational insolvency law.
Despite the criticisms and the points that would need to be very well thought out, it is urgent that Brazil adopts a cross-border insolvency system allowing for greater legal certainty for investors, as a factor in the resumption of investment and growth.
Marcos Martins Advogados is following and participating in legislative and academic discussions on the subject to ensure greater efficiency and quality in the delivery of work to its clients.
[Art. 47: The purpose of judicial reorganization is to make it possible to overcome the debtor’s economic and financial crisis, in order to maintain the source of production, the employment of workers and the interests of creditors, thus promoting the preservation of the company, its social function and stimulating economic activity.
[2] This system of preferences is known as Me-first rules.
[3] The distinction could perhaps be made in relation to some rights in rem, such as mortgages, which allow for first-order and other grades. Outside of these cases, there would be no such distinction.
