Practising Law Institute Commercial Law and Practice Course Handbook Series PLI Order No April-May, 2008

Transcription

1 Page 1 Practising Law Institute Commercial Law and Practice Course Handbook Series PLI Order No April-May, th Annual Current Developments in Bankruptcy & Reorganization *445 CURRENT DEVELOPMENTS UNDER THE NEW BANKRUPTCY AND RESTRUCTURING LAW IN BRAZIL Christopher Andrew Jarvinen Paul, Weiss, Rifkind, Wharton & Garrison LLP Luiz Fernando Valente de Paiva Pinheiro Neto Advogados Copyright (c) 2008 Practising Law Institute; Christopher Andrew Jarvinen and Luiz Fernando Valente de Paiva CHRISTOPHER A. JARVINEN Copyright (c) 2008 All Rights Reserved. *447BIOGRAPHICAL INFORMATION Christopher Andrew Jarvinen is a senior associate in the bankruptcy and corporate reorganization practice group of Paul, Weiss, Rifkind, Wharton & Garrison LLP and recently completed a secondment with Pinheiro Neto Advogados. Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, NY Phone: Fax: cjarvinen@paulweiss.com Education J.D., Boston College Law School M.A.R., Yale University M.T.S., Harvard University A.B., Brown University LUIZ FERNANDO VALENTE DE PAIVA Luiz Fernando Valente de Paiva is a partner and chairman of the corporate restructuring practice group of Pinheiro Neto Advogados and the director of courses on the new law offered by the Fundação Gertulio Vargas to judges,

2 Page 2 judicial officials and lawyers. Pinheiro Neto Advogados R. Hungria, São Paulo - SP Brazil Telephone: Fax: lfpaiva@pinheironeto.com.br Education: LL.B., São Paulo Catholic University LL.M., Commercial Law, São Paulo Catholic University (in progress) I. INTRODUCTION *449Table of Contents II. INSOLVENCY OPTIONS A. Out-of-Court Reorganization (Recuperação Extrajudicial) B. Judicial Reorganization (Recuperação Judicial) C. Bankruptcy Liquidation (Falência) III. AMENDMENT TO ARTICLE 199 IV. INITIAL EXPERIENCES WITH OUT-OF-COURT REORGANIZATIONS V. CROSS-BORDER INSOLVENCY VI. CONCLUSION *451 I. INTRODUCTION In 2005, Brazil enacted the Nova Lei de Falências e Recuperação de Empresas (Law N o ) ( New Bankruptcy and Restructuring Law or NBRL ). [FN1] The NBRL introduced substantive changes to the statute governing corporate insolvencies. Most significantly, the NBRL created two new legal proceedings, the Out-of-Court Reorganization (Recuperação Extrajudicial) and the Judicial Reorganization (Recuperação Judicial), both of which authorize debtors to obtain court approval for reorganization plans negotiated with creditors. [FN2] The purpose of this article is to supplement our prior article, The New Bankruptcy and Restructuring Law in Brazil, 888 PLI/Comm 33 (2006). [FN3] After outlining additional key features of the NBRL's primary insolvency proceedings that have been utilized by debtors and creditors during the past three years, this article discusses an amendment to the NBRL and two recent Out-of-Court Reorganizations.

3 Page 3 II. INSOLVENCY OPTIONS A. Out-of-Court Reorganization (Recuperação Extrajudicial) An Out-of-Court Reorganization authorizes a financially distressed business entity to negotiate a plan of reorganization (known as a pre-packaged plan ) in private with all of its creditors or one or more classes (or groups) of creditors with a similar treatment of claims. [FN4] If the company obtains the required creditor support for a pre-packaged plan, and satisfies other statutory requirements, it may initiate an Out-of-Court Reorganization and seek its homologation (i.e., approval) by a court. The latest unofficial statistics indicate that nine petitions seeking to commence Out-of-Court Reorganizations were filed during 2007, *452 compared with two filed during [FN5] Also, courts homologated 5 pre-packaged plans during 2007, compared with none during [FN6] Several notable features of the Out-of-Court Reorganization include: Two Types: The NBRL recognizes two distinct categories of Out-of-Court Reorganizations, including (1) a Collaborative Reorganization (Recuperação Homologatória) in which the pre-packaged plan enjoys the unanimous consent of all of the creditors that are subject to it, and (2) an Imposed Reorganization (Recuperação Impositiva) in which the company obtains support for the pre-packaged plan from creditors representing more than three-fifths (60%) in amount of all claims (where the pre-packaged plan covers all statutorily allowed claims against the company) or each type of claim subject to its terms. General Filing Requirements: In order to file an Out-of-Court Reorganization, a business entity must demonstrate, among other things, that (1) it has been regularly engaged in a business activity for at least two years, and (2) it has obtained the minimum required percentage of creditor support for the pre-packaged plan. Additional Filing Constraints: A company may not commence an Out-of-Court Reorganization where: (1) the company is undergoing a Bankruptcy Liquidation and has not yet obtained a discharge of liabilities by a final, non-appealable court order; (2) the company, or one of its directors, officers or the controlling shareholder, has been convicted of one of the crimes specified in the NBRL; (3) the company has a pending application to commence a Judicial Reorganization; or (4) the company has, within the past two years, been granted a Judicial Reorganization under Article 58 of the NBRL or obtained homologation of a prior pre-packaged plan. *453 Control of the Debtor: The debtor's officers and directors remain in control of the debtor's business. Neither a trustee nor an official committee is appointed. Limited Automatic Stay: The general automatic stay applicable to debtors pursuing a Judicial Reorganization does not apply. Rather, the filing of the Out-of-Court Reorganization triggers a limited automatic stay only with respect to actions (e.g., collection actions) related to the claims that are subject to the pre-packaged plan. Cramdown: In an Imposed Reorganization (Recuperação Impositiva), a form of cramdown exists. A homologated pre-packaged plan binds both consenting and dissenting creditors that are subject to its terms. Claims Exempted: Certain types of potentially significant claims are not subject to an Out-of-Court Reorganization, including claims arising from: (1) taxes; (2) labor or occupational accidents; (3) the owner (or committed seller) of real property (imóvel) where the relevant agreement contains an irrevocable or irreversibility clause (including real estate developments); (4) the owner in a sale contract with title retention (reserva de domínio); (5) advances of money on an export exchange contract (Adiantamento sobre Contrato de Câmbio (ACC)); (6) the owner of a chattel mortgage on movable or immovable goods, such as a fiduciary sale agreement

4 Page 4 (alienação/cessão fiduciária); or (7) a leasing contract (arrendador mercantil). [FN7] *454 Lack of Risk of Bankruptcy Liquidation: A significant feature of an Out-of-Court Reorganization is the lack of any risk to the debtor that a court will convert the case to a Bankruptcy Liquidation (Falência) merely where the debtor fails to obtain court homologation of a proposed pre-packaged plan. [FN8] If a pre-packaged plan is not homologated by the court, the debtor may continue to operate its business, file another pre-packaged plan or even seek to commence a Judicial Reorganization. [FN9] As shown by this brief outline, the Out-of-Court Reorganization provides companies a restructuring option that can be easily modified or adapted to address the specific reorganization challenges posed by different creditor constituencies. The Out-of-Court Reorganization option also motivates financially distressed companies to start the process of negotiating with creditors as soon as financial difficulties arise, rather than only after commencing a court-supervised insolvency proceeding. In fact, Brazilian practitioners are witnessing an acceleration of the process of financial restructuring in Brazil. Potential debtors are now negotiating pre-packaged plans with many of the same creditors that would be subject to a Judicial Reorganization. In many cases, companies that ultimately decide to pursue a Judicial *455 Reorganization have already conducted significant negotiations with their major creditor constituencies. Due to the fact that an Out-of-Court Reorganization represents an exceptionally flexible rehabilitation option without the risk of the case being converted to a Bankruptcy Liquidation, Brazilian restructuring professionals believe that it may become the option-of-choice for many financially distressed business entities. Within the first few years of the NBRL, the Out-of-Court Reorganization has already shown itself to be a fast and efficient restructuring option, one that is less expensive and traumatic for business entities. B. Judicial Reorganization (Recuperação Judicial) The Judicial Reorganization is a court-supervised, insolvency proceeding aimed at enabling a financially distressed company to overcome its financial crisis, while continuing its activities, provided that it demonstrates continued economic viability. The Judicial Reorganization embodies many features similar to a chapter 11 case under the U.S. Bankruptcy Code. The latest unofficial statistics indicate that 269 petitions seeking to commence Judicial Reorganizations were filed during 2007, representing an increase of 6.7% over the 252 petitions filed during [FN10] Also, courts confirmed 195 Judicial Reorganization plans during 2007, compared with 156 plans in [FN11] Several important features of the Judicial Reorganization include: General Filing Requirements: Prior to initiating a Judicial Reorganization, a business entity must satisfy various statutory requirements, including: (1) it has been regularly engaged in a business activity for at least two years; (2) it has not undergone a Judicial Reorganization during the past five years; and (3) it has not undergone a special reorganization proceeding authorized by the NBRL for small businesses and small-sized companies during the past eight years. Granting of the Processing: Upon fulfillment of the filing prerequisites, the court will order the processing of the Judicial Reorganization (i.e., permit the debtor to commence its case). The official publication of the decision granting the processing of *456 the Judicial Reorganization creates a variety of deadlines. For example, a creditor must submit proof of its claim within 15 days, and the debtor is required to present its proposed reorganization plan to creditors within 60 days. Control of the Debtor: The debtor's directors and officers remain in control of the debtor's business (unless removed for cause). However, the court will appoint a Judicial Administrator (Administrador Judicial) to police the debtor. Under certain circumstances, a Creditors Committee (Comitê de Credores) may be formed to

5 Page 5 supervise the Judicial Administrator and the debtor. General Meeting of Creditors: Pursuant to Article 35 of the NBRL, a general meeting of creditors ( GMC ) may be called to decide important issues, such as: (1) approval, rejection or modification of the debtor's proposed plan; (2) forming, or replacing members of, the Creditors Committee; or (3) any other matter that may affect the creditors' interests. [FN12] Automatic stay: After the granting of the processing of a Judicial Reorganization, all claims and enforcement proceedings against the debtor are stayed for a non-extendable period of 180-days. [FN13] Reorganization Plan: The Judicial Reorganization plan must contain an analysis of the debtor's financial and economic condition, as well as evidence of the economic feasibility of its business. The plan should list eligible creditors, the suggested mechanisms for recovery, and the proposed order and condition of distributions to creditors. Creditors may oppose the proposed plan. Should opposition occur, the court will convene a GMC to deliberate and vote on the plan. Claims Exempted: Except for claims arising from labor or occupational accidents (which can be substantial in Brazil), the types of claims exempted from an Out-of-Court Reorganization are also excluded from a Judicial Reorganization. Post-Petition Claims: Although Article 83 of the NBRL provides for the ranking of claims during a Bankruptcy Liquidation, the *457 statute is silent with respect to the treatment of claims held by post-petition creditors (credores extraconcursais). However, the presumption exists under the NBRL that a court will not grant a Judicial Reorganization where the debtor fails to honor its post-petition obligations. In the event that a debtor is unable to do so, a creditor may seek collection of its post-petition claim through other means provided by Brazilian law. GMC - Classes of Creditors: Creditors are divided into three classes at a GMC, according to the nature of their claims: Class #1: Labor and occupational accidents; Class #2: Secured claims; and Class #3: General unsecured claims, claims with special and general privilege and subordinated claims. GMC - Plan Approval (General Rule): All three classes of creditors at a GMC must approve a proposed plan. As a general rule, a proposed plan obtains creditor approval pursuant to the ordinary voting criteria, as follows: Class #1: Approves the plan by a simple majority of the creditors present or represented at the GMC (i.e., per capita voting), regardless of the amount of individual claims; and Class #2 and Class #3: Approve the plan, per class, by creditors present or represented at the GMC holding (a) over 50% of the total amount of claims; and (b) by a simple majority of creditors (i.e., per capita voting). GMC - Plan Approval (Alternative Rule): If the debtor fails to obtain sufficient creditor support for a proposed plan under the general rule, a court may nevertheless confirm the plan and grant the Judicial Reorganization, provided that the plan has obtained, cumulatively, at the same GMC: (1) the favorable vote of creditors representing over 50% of the amount of all claims present or represented at the GMC (regardless of the class involved); (2) the approval of at least two classes, pursuant to the ordinary voting criteria; and (3) the favorable cumulative vote of over one-third (1/3) of the creditors in the class that rejected the plan (computed pursuant to the ordinary voting criteria).

6 Page 6 Plan Approval / Tax Clearance Certificates: If the court confirms the plan and grants the Judicial Reorganization, the debtor must *458 submit tax clearance certificates, [FN14] and the debtor will be monitored by the court for a subsequent two-year period. Cramdown: A confirmed plan is binding on both consenting and dissenting creditors subject to its terms. Debt Succession: Article 60 of the NBRL provides express legal protections to entities that purchase assets from debtors against the risk of debt succession for certain claims (e.g., taxes, social security and labor) where such entity purchases, through a plan of reorganization, a branch or a business unit of the debtor. [FN15] Bankruptcy Liquidation Risk Exists: If the plan is rejected at the GMC, and the debtor is unable to obtain its confirmation using the alternate rule, the NBRL requires the court to declare the debtor bankrupt and convert the case to a Bankruptcy Liquidation (Falência). C. Bankruptcy Liquidation (Falência) A Bankruptcy Liquidation is analogous to a chapter 7 case under the U.S. Bankruptcy Code. Based upon the latest available statistics, 2,721 petitions were filed seeking to commence Bankruptcy Liquidations (both voluntary and involuntary), compared with the 4,192 petitions filed during [FN16] Compared with 2006, the number of Bankruptcy Liquidations actually decreed by courts during 2007 decreased by 25%. [FN17] Several important features of a Bankruptcy Liquidation include: Type #1 - Voluntary Bankruptcy Liquidation: A financially distressed company may voluntarily file for a Bankruptcy Liquidation where it demonstrates that its business is unfeasible, and it files certain statutorily requires documents (e.g., a corporate resolution).*459 Type #2 - Involuntary Bankruptcy Liquidation: A company is subject to an involuntary Bankruptcy Liquidation where (1) it owes a creditor a liquidated debt in an amount of not less than the equivalent of 40 monthly minimum wages in Brazil (approximately US$ 9,000 at current exchange rates), [FN18] or (2) the debtor is pursuing a Judicial Reorganization and fails to fulfill its statutory obligations. Automatic Stay: Once a court decrees a Bankruptcy Liquidation, all actions by creditors to enforce their claims against a debtor are automatically stayed. To receive any distribution from the debtor's estate, creditors must file a claim during the Bankruptcy Liquidation. Management of the Debtor: A court-appointed trustee will replace the debtor's directors and officers. The trustee will serve as the legal agent of the debtor's estate. Collection and Appraisal: The collection and appraisal of the bankrupt estate (including real properties or movable assets subject to in rem guarantees) must occur promptly after the appointment of the trustee. Realization of Assets: The debtor's assets must be realized in an expeditious manner to maximize value (preferably, as a going-concern or in blocks) and the proceeds used to pay the claims of creditors. Ranking of Claims: Pursuant to Article 83 of the NBRL, creditors subject to a Bankruptcy Liquidation are paid on a ratable basis in the following order: (1) labor (capped at 150 minimum wages per creditor) and occupational accident claims; (2) secured claims up to the amount of the encumbered asset value; (3) tax claims (except tax penalties); (4) special privilege claims; (5) general *460 privilege claims; (6) unsecured claims; (7) contractual fines and pecuniary penalties for breach of administrative or criminal laws (including those of a tax nature); and

7 Page 7 (8) subordinated claims. [FN19] Claims Exempted: The NBRL specifically excludes from a Bankruptcy Liquidation any claims or assets: (1) related to the owner of a chattel mortgage on movable or immovable goods, such as a fiduciary sale agreement (alienação/cessão fiduciária); (2) arising from a leasing agreement; or (3) derived from advances of money on an export exchange contract (Adiantamento sobre Contrato de Câmbio (ACC)). Also, Article 84 of the NBRL establishes that extra-composition claims (créditos extraconcursais) have preference of payment over all other claims ranked by Article 83 of the NBRL. The extra-composition claims include the expenses of the estate during the Bankruptcy Liquidation. If the Bankruptcy Liquidation was the result of a conversion from a Judicial Reorganization, the extra-composition claims include the debts incurred by the debtor during the Judicial Reorganization. Deficiency Claim: In those cases where a claim is guaranteed by a specific asset, the portion of the claim which exceeds the value of the asset could be entitled to status as a general unsecured claim. Asset Purchasers - Lack of Debt Succession Risk: The purchaser of the debtor's assets during a Bankruptcy Liquidation does not inherit the debtor's existing liabilities associated with labor, tax or social security claims. III. AMENDMENT TO ARTICLE 199 Since it came into force on June 9, 2005, the NBRL has been amended only once. Article 199 was amended in order to clarify that the rights of a wide-range of lessors cannot be impacted in any way by an Out-of-Court Reorganization, a Judicial Reorganization or a Bankruptcy Liquidation.*461 As background, Brazil's former bankruptcy law prevented an airline from commencing a Concordata. [FN20] At the time, a two-fold public policy rationale supported this prohibition, including (1) the airline industry was considered too important, from a government-strategic standpoint, to permit it to undergo an insolvency proceeding not controlled by the government, and (2) a belief that potential customers would not use an insolvent airline (e.g., based on a belief that an insolvent airline would not adequately maintain its airplanes). Prior to the implementation of the NBRL, an insolvent airline was subject to a government-controlled administrative intervention to maintain the airline's economic activity and to revive market confidence in the airline's restructuring. [FN21] With respect to the NBRL, Article 198 precludes business entities that were ineligible to file for a Concordata from initiating either an Out-of-Court Reorganization or a Judicial Reorganization. [FN22] However, Article 199 of the NBRL specifically authorizes airlines to commence either one of these two insolvency proceedings. [FN23] The drafting problem arose in the Sole Paragraph of Article 199. As originally enacted, the Sole Paragraph stated that the rights held only by lessors of mercantile leases (arrendamento mercantil) were protected in either a Judicial Reorganization or Bankruptcy Liquidation. [FN24] Under Brazilian law, it is not clear whether the term arrendamento mercantil (as used in the NBRL) applies only to mercantile leases or also includes financing and other types of lease agreements. The amendment to Article 199 was prompted by the Judicial Reorganization proceeding of Varig, S.A. (S.A. - Viação Aérea *462 Rio-Grandense), and its affiliates, Sul Linhas Aéreas S.A. and Nordeste Linhas Aéreas S.A. (collectively Varig ). [FN25] Varig was one of the first Brazilian business entities to file for a Judicial Reorganization under the NBRL. [FN26] Varig's restructuring also represented one of the most significant cross-border cases between Brazil and the United States. On the same date that Varig initiated its Judicial Reorganization in Rio de Janeiro, it also commenced an ancillary case under former 304 of the U.S. Bankruptcy Code. [FN27] One of the disputes arising early in Varig's Judicial Reorganization was whether the protections of Article 199 extended to the lessors of both mercantile and financing leases.

8 Page 8 In order to avoid this type of dispute in future airline-related Judicial Reorganizations, the Brazilian legislature deleted the Sole Paragraph from Article 199 and added three new Paragraphs. [FN28] The first new Paragraph clarifies the broad range of airline-related leasing agreements that are exempt from either a Judicial Reorganization or a Bankruptcy Liquidation to include rental, financial lease or any other mode of lease. [FN29] The first new Paragraph also indicates that the automatic stay cannot affect the rights of the lessors of these types of leases. The second new Paragraph states that the rights arising from the leasing agreements protected by Article 199 are not subject to either an Out-of-Court Reorganization or a Judicial Reorganization. [FN30]*463 Additionally, it indicates that the rights of such lessors are not affected by the provision contained in the final part of Paragraph 3 of Article 49 that prohibits certain creditors from selling or removing from the debtor's establishment any capital goods (bens de capital) essential to the debtor's business during the 180-day automatic stay period. Finally, the third new Paragraph provides that the rights of lessors protected by Article 199 prevail in a Bankruptcy Liquidation. [FN31] IV. INITIAL EXPERIENCES WITH OUT-OF-COURT REORGANIZATIONS A. Prolan Soluções Integradas S.A. The first Out-of-Court Reorganization (an Imposed Reorganization) was filed by Prolan Soluções Integradas S.A ( Prolan ) in São Paulo during Founded in 1990, Prolan operates in the telecommunications and information technology markets. During the 1990s, Prolan achieved steady growth and profitability due, in part, to the fact that the markets in which it operated in Brazil were closed to foreign competition. With the opening of these markets to foreign competitors during the late 1990s, Prolan and other Brazilian companies operating in these sectors were not prepared for the resulting competitive pressures. As a result, many of these companies became subject to involuntary liquidation proceedings under Brazil's former bankruptcy law. Due to its favorable market position, Prolan succeeded in maintaining its business activities. However, Prolan's financial position began to deteriorate seriously in 1999 as a consequence of the worldwide information technology crisis and the significant devaluation of the Brazilian currency. After several more years of poor operating and financial results, a number of creditors threatened to commence an involuntary liquidation proceeding against Prolan. To avoid this outcome, Prolan filed a Preventive Concordata (Concordata Preventiva) (a type of insolvency proceeding that existed prior to the NBRL). [FN32] *464 After the NBRL came into force during June 2005, Prolan attempted to negotiate a collective agreement (acordo privado) with all of its creditors. If successful, the collective agreement would have resulted in (1) Prolan making distributions to its creditors in amounts less than the distributions required by the Preventive Concordata, (2) Prolan's ability to avoid any obligations arising under the Preventive Concordata, and (3) termination of the Preventive Concordata. However, Prolan needed all of the creditors affected by the Preventive Concordata (i.e., the unsecured creditors) to agree to the collective agreement. Although Prolan was able to obtain support for the collective agreement from the vast majority of such creditors, not all agreed to it. As a result, Prolan could not voluntarily terminate its Preventive Concordata. Due to its worsening financial situation, Prolan was on the verge of having the court convert its Preventive Concordata into a Bankruptcy Liquidation. In order to avoid this outcome, Prolan sought to obtain creditor approval for an Out-of-Court Reorganization pre-packaged plan. First, Prolan called a general meeting of its creditors in order to negotiate the terms of the pre-packaged plan. [FN33] Believing that transparency at the creditors meeting would foster an effective negotiating environment, Prolan provided its creditors with its business plan, cash flow projections and proposed distributions. In general, Prolan's plan consisted of identical payments to each of its creditors, up to the amount of their allowed claims. The payments would occur over a three-year period. Based on the proposed payment schedule, Prolan estimated that one-third of its creditors would be fully-paid at the end of each of the three years. Also, the plan provided that creditors could be paid quicker based on Prolan's future performance because the company agreed to increase the amount of its distributions to creditors in proportion to the growth of its future revenues. In other words, Prolan agreed to accelerate distributions

9 Page 9 to creditors if the company attained certain performance goals. *465 Although Prolan required support for the pre-packaged plan from unsecured creditors holding more than 60% of the amount of the claims that were subject to its terms, Prolan actually achieved a 92% acceptance rate (i.e., approximately R$ 30.4 million out of the R$ 33.0 million of unsecured claims). The pre-packaged plan also provided an option for creditors holding more than R$ 3 million in labor claims to adhere to it voluntarily. [FN34] On April 3, 2006, Prolan distributed its Out-of-Court Reorganization and filed with the court, along with its initial petition, the proposed pre-packaged plan and other documents required by the NBRL. Next, Prolan sent statutorily prescribed notices to all of its creditors which it also published in official legal publications. A few creditors opposed the pre-packaged plan, alleging that Prolan listed their claims in amounts lower than the actual amounts due. In response to these objections, Prolan amended the pre-packaged plan to state the correct claim amounts but left unaltered the conditions of payment. [FN35] Another creditor objected on the grounds that the documents submitted by the company did not satisfy certain legal formalities. Prolan successfully contested the creditor's assertion. In Brazil, the Public Attorney's Office is empowered to provide a report to the court regarding the merits of pending cases. The report may be reviewed by the court in making its decision. Through its general grant of power, the Public Attorney's Office has extended its authority to issue reports related to proposed pre-packaged plans. [FN36] However, the Public Attorney's Office never provided a report regarding the merits of Prolan's pre-packaged plan. On September 9, 2006, Prolan's pre-packaged plan was homologated by the 2nd Lower Bankruptcy and Reorganization Court. Within days of the court's decision to homologate Prolan's pre-packaged plan, two creditors filed motions for clarification. One creditor alleged that Prolan failed to include the full amount of its claim in the pre-packaged plan. The other creditor, which had voted to reject the pre-packaged plan, asserted that the decision should be clarified to state that its claim was not subject to the Out-of-Court *466 Reorganization. In essence, the creditor was challenging Prolan's right to cramdown the pre-packaged plan on dissenting creditors. A month later, the court rendered its decisions on the motions for clarification. It granted the motion filed by the creditor that sought to have the full amount of its claim recognized. However, the court rejected the motion filed by the creditor that opposed cramdown. Among other things, the court held that Prolan had obtained the statutorily prescribed minimal percentage of creditor support (more than 60% in amount of claims affected by the pre-packaged plan), and the NBRL authorized Prolan to cramdown the pre-packaged plan on dissenting creditors that were otherwise subject to its terms. In summary, Prolan's Out-of-Court Reorganization represented one of the first major tests of the NBRL. Not only did the company successfully restructure its debts so that it could remain a viable business entity, the case demonstrates the proactive and flexible manner in which financially distressed companies have begun to approach the issue of corporate restructuring in Brazil. B. Frigocharque Paulista Ltda In one of the first successful Out-of-Court Reorganizations under the NBRL, Frigocharque Paulista Ltda. ( Frigocharque ) restructured debt totaling over R$ 20 million. Frigocharque obtain homologation of its pre-packaged plan in the 1st Lower Court in Cajamar, a city located in the State of São Paulo, on July 11, Frigocharque, a well-known processor and marketer of meat and its by-products (particularly beef jerky), encountered financial distress as a result of a number of external shocks, including: (1) the recent strengthening of the Brazilian currency which hampered the company's exports (particularly to the United States); (2) an increase in domestic competition which lead the company to slash prices for several of its staple by-products (e.g., beef jerky); (3) the excess supply of leather on the international markets (a by-product sold by Frigocharque); and (4) the outbreak of foot-and-mouth disease in Brazil (and the subsequent temporary international ban on Brazilian meat product exports).

10 Page 10 These external factors imposed a vicious cycle on Frigocharque. The considerable reduction in the sales of the company's products depleted its working capital which, in turn, led to further decreases in sales of its products (particularly, with respect to sales of the *467 company's flagship product, beef jerky) because the company was unable to purchase inputs to manufacture its products. Moreover, Frigocharque's financial situation was further worsened by a succession of private negotiations to restructure the company's payment obligations entered into between the company's controlling partners and its major creditors (e.g., financial institutions, businesses that provided livestock, etc.). However, the agreements were never fulfilled by the company which lead to further mistrust between the company and its creditors, as well as an inability by the company to obtain needed credit. As a result, Frigocharque almost ceased production. Recognizing the severity of the situation, Frigocharque retained outside financial and legal advisors during February, After obtaining detailed financial and legal analyses confirming the feasibility of its business and available insolvency options, Frigocharque began the process of developing a strategy to overcome its financial and economic crises. A central aspect of Frigocharque's recovery plan was to raise working capital as quickly as possible so that it could resume full production capacity and expand into new markets. Based on the financial analysis, Frigocharque learned that: (1) Brazil was one of the largest meat exporting countries in the world; (2) the eradication of the foot-and-mouth disease outbreak in Brazil would soon lead to a reopening of foreign markets to Brazilian meat exports; (3) a rapid recovery and growth in exports of Brazilian meat were projected to occur soon; and (4) Brazil's domestic market pointed toward a fast and constant growth in meat consumption as a result of long-term gains in income (particularly, among lower income groups which comprised a substantial portion of the population). Frigocharque believed that resuming full production quickly would enable it to recover its prior revenue levels and profit margins, as well as to pay in full its liabilities within a relatively short period, thus hurting its creditors as least as possible. With respect to Frigocharque's decision whether to commence either an Out-of-Court Reorganization or a Judicial Reorganization, the company initially encountered the issue of eligibility. As discussed above, in order to file for either one of these two insolvency proceedings, the NBRL requires a company to have been regularly engaged in a business activity for at least two years. However, Frigocharque was a part of a business group comprised of four different companies. Although all four companies would need to *468 initiate insolvency proceedings, one had been formed only a few months prior and had ceased its business activities due to the company's financial problems. As such, it was highly unlikely that this company could join the other three in filing either an Out-of-Court Reorganization or a Judicial Reorganization. In order to solve the eligibility problem, the decision was made to merge the other three companies into Frigocharque. The solution made practical sense because Frigocharque originated the business group, carried out its core business activities and the directors and officers believed that the merger would facilitate a business restructuring by generating resources (e.g., overhead savings) to pay the creditors of all four companies. The next stage in Frigocharque's reorganization strategy involved identifying its major creditor constituencies from a business, rather than a legal, standpoint. They included: (1) creditors supplying livestock for slaughter (this group, which held a blocking position with respect to any potential Judicial Reorganization plan, was comprised of numerous small businesses hostile to the company due to the string of broken agreements negotiated by the company's controlling partners); (2) creditors holding chattel mortgages on vehicles, machines and equipment essential to the activities of Frigocharque (this group required special attention in the negotiations because they could not be bound to any proposed plan absent their voluntary consent); [FN37] (3) financial creditors (this group, although few in number, held the majority of the claims against the company and also possessed a blocking position with respect to any proposed Out-of-Court Reorganization or Judicial Reorganization plan); and (4) remaining creditors (this group held relatively insignificant claims).

11 Page 11 In order to create the environment for productive negotiations with its creditor constituencies, Frigocharque sought to diffuse the existing antagonism that had developed due to the company's broken promises. First, the financial and legal advisers replaced the controlling partners in the company's negotiations with creditors. This action resulted in a significant improvement of relations *469 between the company and its creditors. Second, Frigocharque instituted a transparent process through its advisors to share with creditors the company's financial status (debt, sales, future projections, etc.) and potential restructuring options, including proposed distributions. This further created a constructive dialogue between the company and its creditors. The fourth stage in Frigocharque's reorganization entailed simultaneous negotiations with its creditors. In order to obtain the statutorily required minimal support for a pre-packaged plan from these creditors (which would allow the company to cramdown the plan on dissenting creditors), the company took the path of least resistance - it obtained an agreement from almost all of its major financial creditors and a few large suppliers. Together, the claims of these creditors accounted for more than 60% (the statutory minimum) of all claims that would be subject to the pre-packaged plan. With respect to the creditors holding chattel mortgages on vehicles, machines and equipment essential to the activities of Frigocharque, their rights could not be affected by an Out-of-Court Reorganization or Judicial Reorganization without their voluntary consent. Moreover, this group of creditors reflected diverse economic interests. Some creditors held exclusively chattel mortgage claims and wished to repossess assets and obtain proceeds from their sale as soon as possible, even if repossession of assets impaired the continued activities of Frigocharque. Other creditors held either guarantees much lower than the value of the assets supporting the claims or both chattel mortgage claims and unsecured deficiency claims, and these creditors were interested in negotiating with the company to ensure maintenance of its activities and generation of future funds to pay its debts. However, Frigocharque need to restructure its debts with the holders of chattel mortgages or else it would not be able to continue as a viable business entity. As a result, the negotiations with this creditor group were delicate, multi-faceted, complicated and time-consuming. Despite being subjected to several lawsuits in which creditors successfully repossessed some assets, [FN38] the company was able to obtain sufficient creditor support for a pre-packaged plan from the holders of chattel mortgage claims. *470 One of the primary difficulties faced by Frigocharque was negotiating with its creditors in private. The absence of any deadlines imposed by law often resulted in creditors providing inadequate responses to the company on an individual basis. Also, the lack of any bankruptcy liquidation risk to the company in the event that a pre-packaged plan was not homologated by the court sometimes created undue skepticism on the part of creditors to the company's intentions regarding relatively minor aspects of its proposed restructuring. For example, the company inexplicably encountered strong resistance from some creditors when it proposed to use a well-known index to adjust its debts over time to account for inflation and other financial considerations, rather than one of several other indexes offered by creditors which did not differ materially from the index suggested by the company. Frigocharque was also concerned by rejection of its pre-packaged plan by a court. The company intended to provide different treatments for similarly situated creditors (e.g., unsecured creditors). Under the former bankruptcy law in Brazil which had been in force for six decades, there existed a legal doctrine requiring a debtor to treat similar creditors in a similar manner. However, the NBRL does not impose such a requirement in an Out-of-Court Reorganization. In brief, there was no precedent for the company's proposed restructuring. Frigocharque's pre-packaged plan contained the following primary terms: Treatment of Creditors Covered by the Pre-Packaged Plan: Payment of all claims but providing, depending upon the class or group of claims, different payment deadlines, distribution percentages and adjustments based on a standard index. All payments would be made in 36 monthly installments after an initial 6-month grace period.

12 Page 12 [FN39] Treatment of Other Creditors that Voluntarily Agreed to Adhere to the Pre-Packaged Plan: Any creditor that voluntarily agreed to adhere to the pre-packaged plan would receive its distribution in 84 months. After an initial 24-month grace period, the company *471 would make 12 monthly payments of interest, and the remaining distributions over a 48-month period. Option: Creditors covered by the pre-packaged plan were provided the option of accepting the treatment provided to creditors that voluntarily agreed to adhere to it. No creditor chose this option. Chattel Mortgage Creditors: Creditors holding chattel mortgages on vehicles, machines and equipment that agreed to adhere to the pre-packaged plan would be allowed to maintain their current security interests and would be paid in a manner similar to other creditors that agreed to adhere to it. [FN40] Demand of a Significant Financial Creditor: As a condition for resuming lending to the company, the largest financial creditor required the pre-packaged plan to include terms stating that the company would retain experienced professionals to manage the company. The financial creditor also supported the company's business plan to focus immediately on expanding the production of charque (a type of meat product with a very large market), and later, specialty cuts of meat. Eventually, Frigocharque obtained support for its pre-packaged plan from 98% of the creditors that were subject to its terms. After Frigocharque initiated its Out-of-Court Reorganization during 2007, a few creditors filed minor objections to its homologation which were opposed by the debtor and rejected by the court. The court homologated the pre-packaged plan on July 11, 2007 and the company is scheduled to begin making distributions to its creditors during January, Although the negotiations surrounding Frigocharque's pre-packaged plan were, at times, difficult and time-consuming, the company's decision to pursue an Out-of-Court Reorganization (rather than a Judicial Reorganization) has shown itself to be a good decision in hindsight. The proceeding has been significantly less costly than a Judicial Reorganization. The company also remained in control of the process of its restructuring, and it did not have to deal with either a *472 Judicial Administrator or a Creditors Committee. [FN41] Moreover, Frigocharque was able to avoid the media attention (and its consequent negative impact) that often results when a company initiates a Judicial Reorganization. In brief, the case of Frigocharque shows that an Out-of-Court Reorganization can be an attractive restructuring option for a financially-distressed company in Brazil. V. CROSS-BORDER INSOLVENCY The NBRL does not contain provisions governing cross-border insolvency cases. Also, the Brazilian legislature is not currently considering whether to amend the NBRL to adopt a version of the Model Law on Cross-Border Insolvency that was promulgated by the United Nations Commission on International Trade Law (UNCITRAL). VI. CONCLUSION Although the NBRL has been in force for less than three years and remains a relatively young statute, the initial cases and court decisions generally have supported the primary goal of the NBRL to provide financially-distressed companies the opportunity to restructure their operations through reorganization plans negotiated directly with creditors. To help achieve its public policy objective, the NBRL was designed to incentivize financially-distressed companies to begin the process of negotiating consensual restructuring plans as early as possible with creditors in order overcome their financial and economic crises and remain viable business entities. As shown by the Out-of-Court Reorganizations discussed in this article, Brazilian companies have already begun to embrace this important goal.

13 Page 13 [FN1]. The NBRL replaced the former bankruptcy law, Decree-Law No of June 21, [FN2]. The NBRL also preserves a revised, court-supervised Bankruptcy Liquidation (Falência). [FN3]. Our prior article focused on the fundamental weaknesses of Brazil's former bankruptcy law, the public policy underlying the NBRL and certain basic features of the primary insolvency proceedings authorized by the NBRL. [FN4]. An Out-of-Court Reorganization is somewhat analogous to a pre-packaged chapter 11 case under the U.S. Bankruptcy Code because the company files the proposed pre-packaged plan with its petition to initiate the proceeding. [FN5]. from Carlos Henrique de Almeida, Economics Assessor, Serasa ( to Christopher A. Jarvinen (Feb. 6, 2008) (on file with author) [hereinafter Serasa ]. [FN6]. Serasa, supra note 5. [FN7]. Although the NBRL excludes from an Out-of-Court Reorganization the claims described in (1) to (7), there exists legal doctrine in Brazil supporting the right of creditors holdings claims described in (3) to (7) to adhere voluntarily (i.e., subject themselves) to the terms of a pre-packaged plan. For example, in Frigocharque Paulista Ltda. (a recent successful Out-of-Court Reorganization (described herein)), creditors holding claims of the owner of a chattel mortgage on movable or immovable goods, such as a fiduciary sale agreement (alienação/cessão fiduciária), agreed voluntarily to adhere to the homologated pre-packaged plan. However, in the Out-of-Court Reorganization of TMT Tomoco do Brasil Ltda. ( TMT ), the company failed to obtain court homologation of its pre-packaged plan. TMT (a subsidiary of a multinational company based in North America) manufactures, among other products, snow thrower engines and parts for export. In order to obtain sufficient votes to homologate its pre-packaged plan, TMT needed the support of a group of five creditors (banks) holding claims derived from advances of money on export exchange contracts (Adiantamento sobre Contrato de Câmbio (ACC)). Three of the ACC creditors wished to adhere to the plan voluntarily. However, the two dissenting ACC creditors alleged that they held more than 40% in amount of all of the ACC claims. If TMT was able to count together all of the votes in favor of the pre-packaged plan across all statutory classes and groups, TMT would have satisfied the minimum statutory voting threshold (more than 60% in amount of claims). A dispute arose when the two dissenting ACC creditors objected to TMT's attempt to satisfy the 60% voting threshold by counting the claims of the adhering ACC creditors. First, the dissenting ACC creditors asserted that TMT failed to obtain the necessary percentage of support in the specific group of ACC creditors because the dissenting ACC creditors held more than 40% of the total amount of total ACC claims. The dissenting ACC creditors also argued that the claims of adhering ACC creditors could not be counted towards the minimum voting threshold because ACC claims are specifically exempted by statute from an Out-of-Court Reorganization. During March 2007, the court denied homologation of TMT's pre-packaged plan. [FN8]. In a Judicial Reorganization (described herein), the risk exists that a court could convert the case to a Bankruptcy Liquidation. [FN9]. As a result of TMT's inability to homologate its pre-packaged plan, certain creditors began to enforce their rights and cancel important agreements with the company (e.g., to sell product inputs to the company). To obtain the benefit of a general automatic stay, TMT soon commenced a Judicial Reorganization. [FN10]. Serasa, supra note 5.

14 Page 14 [FN11]. Serasa, supra note 5. [FN12]. In a Bankruptcy Liquidation, a GMC also may be called to decide upon any matter that may affect the creditors' interests. [FN13]. Despite the statutory prohibition against extending the 180-day automatic stay (NBRL, Art. 5 at 4), it has been extended by court order in a number of recent Judicial Reorganizations. [FN14]. In practice, courts have been waiving this requirement. [FN15]. Although the explicit statutory language of the NBRL does not appear to provide such protections to purchasers of assets through a Out-of-Court Reorganization, a doctrinal debate currently exists in Brazil as to whether such protections could be extended to pre-packaged plans. To date, however, this issue has not been litigated in an actual case. [FN16]. Serasa, supra note 8. [FN17]. Aspectos juridicos da Previdência e Saúde, (last visited Feb. 6, 2008). [FN18]. Brazil's former bankruptcy law allowed a creditor to commence an involuntary Bankruptcy Liquidation against a company where the amount alleged due to the creditor was extremely low. As a result, small creditors often filed involuntary Bankruptcy Liquidation petitions against companies as a collection tactic to force immediately payment of an outstanding debt. The new threshold requirement required by the NBRL has been credited with a sharp reduction in the number of involuntary Bankruptcy Liquidation filings. [FN19]. The NBRL defines subordinated claims to include (1) the claims provided for by statute or arising under a contract and (2) the claims of stockholders, partners and non-employee senior managers. [FN20]. The New Bankruptcy and Restructuring Law in Brazil at p.8 n.5 (888 PLI/Comm 33 (2006)). In its most basic form, the Preventive Concordata (the primary form of the Concordata) granted debtors a discharge for a percentage of unsecured claims determined by a statutory formula which was capped at a maximum of 50% of total unsecured claims. [FN21]. In the event that the administrative intervention was not successful, an insolvent airline would undergo a bankruptcy liquidation. [FN22]. Article 198 states in full, Debtors ineligible for concordata under specific law in effect on the date of the publication of [the NBRL] are hereby prohibited from filing for judicial or out-of-court reorganization hereunder. [FN23]. The main section of Article 199 states in part as follows, The provisions of article 198 hereof shall not apply to the companies referred to in article 187 of Law No of December 19, The referenced statute applies to, among other entities, airlines. [FN24]. As enacted, Article 199, Sole Paragraph read as follows, Under the judicial reorganization and bankruptcy of the companies referred to in the main section of this article, in no event whatsoever shall exercise of rights arising from lease agreements for aircraft or parts thereof be suspended.