Ms Gabriela Martines Gonçalves
Partner

TozziniFreire’s partner in the Restructuring and Insolvency practice area, Gabriela specialises in corporate recovery and insolvency proceedings (judicial and extrajudicial reorganisation, including bankruptcy and liquidation procedures), debt collection/execution-related proceedings, assisting creditors in the negotiation, restructuring, and recovery of their credits, as well as investors in the structuring and implementation of transactions and related matters, developing procedural strategies in cases of high market complexity. Her expertise also encompasses coordinating fixed-income or offshore transactions and interacting with different components of the financial market.

She is skillfull in bilateral and syndicated loan restructuring operations for the implementation of debt renegotiation structures of diverse banking products in local and foreign currency, as well as negotiating debt restructuring of various natures ans implementing the best guarantee structure to meet the clientes best interest.

Ms Victoria de Azevedo Torres Silveira
Associate

TozziniFreire’s associate, Victoria has defended clients in extraordinarily complex judicial proceedings, in addition to defending the interests of national and foreign creditors in judicial reorganization and bankruptcy proceedings. A member of the restructuring and insolvency team since 2023, she has been a key member of our practice, responding with excellence to consultation on the most varied topics of insolvency law and its practical application for companies, as well as contributed to the preparation of newsletters and articles published in renowned specialist magazines. She assists creditors, investors, and suppliers, as well as clients interested in the acquisition of distressed assets or business in a restructuring situation.

BRAZILIAN INSOLVENCY LAW: PROCESS, TRENDS, AND FUTURE OUTLOOK

1. Legal System Overview

Introduction

Federal Law No. 11,101/2005, commonly referred to as the Brazilian Bankruptcy Law, sets forth a structured framework for addressing insolvency through three primary proceedings: judicial reorganisation, extrajudicial reorganisation, and liquidation.

The overarching goal of both judicial and extrajudicial reorganisations is to facilitate the restructuring of viable companies while effectively managing their debts, thereby preserving business operations and safeguarding jobs.

In contrast, liquidation procedures are applied when a company is deemed non-viable, leading to the removal of the debtor from management and the appointment of a judicial administrator to gather, appraise, and sell the company’s assets, ensuring that creditors are paid in accordance with established legal priorities.

Judicial Reorganisation

To begin this procedure, the debtor must file a petition with the appropriate court (needing to have jurisdiction over the debtor’s principal place of business). To qualify for this process, the debtor must not be in bankruptcy, must not have had another judicial reorganisation granted in the past five years, and must not have been convicted of any bankruptcy-related crimes.

Upon filing, the judicial request binds all pre-petition claims against the debtor, which includes claims that are contingent, unliquidated, or uncertain, with specific exemptions for tax claims, social security debts, and certain secured claims. If all legal requirements are satisfied, the court appoints a judicial administrator and issues a “Processing Order, “ which initiates a Stay Period of 180 days. This Stay Period can be extended for an additional 180 days if the debtor did not contribute to the need for an extension.

During this time, most legal actions against the debtor, including foreclosure actions, are suspended, and essential assets for the debtor’s operations cannot be sold or removed without prior court approval.

After publishing the list of creditors in the Official Gazette, creditors have 15 days to file proof of their claims if they wish to contest the list. Following 45 days, the judicial administrator presents a revised list, which the creditors can contest within 10 days. Concurrently, the debtor must submit a reorganisation plan to the court within 60 days of the publication of the granting decision.

Failure to do so may result in the debtor being declared bankrupt. Creditors then have 30 days to object to the plan. If no objections are raised, the plan is automatically accepted. However, if objections do arise, the court must convene a creditors’ meeting to discuss and vote on the plan, during which the debtor may propose modifications.

In judicial reorganisations, creditors are categorised into four distinct classes for voting purposes: (i) Class I – labor creditors; (ii) Class II – secured creditors; (iii) Class III – unsecured creditors; and (iv) Class IV – micro and small business creditors. Generally, the approval of the plan requires majority support from the creditors present.

The voting rules differ among classes: labor and micro/ small business creditors are counted by headcount, while secured and unsecured creditors vote according to both headcount and claim amounts. Shareholders, affiliated companies, and certain designated entities are excluded from voting on the creditors’ plan.

The plan can be approved through a “cram down” mechanism if it meets specific criteria: support from at least two of the four creditor classes, majority approval from the creditors present based on the number of claims, and backing from one-third of the dissenting creditors. If the plan is accepted, the court evaluates its legality and grants homologation, resulting in the novation of all credits subject to judicial reorganisation.

If the plan is rejected, the judicial administrator must present an Alternative Plan for the creditors to vote on within 30 days. This Alternative Plan must be supported by creditors representing over 25% of total claims or at least 35% of those present at the meeting. If the Alternative Plan also faces rejection, the court will decree the debtor’s liquidation.

Once the approved plan is ratified, the debtor remains under judicial reorganisation for a period of up to two years, during which it must comply with the plan’s terms. Should the debtor default upon the termination of the judicial reorganisation, creditors may request liquidation or initiate enforcement proceedings against the debtor to recover payments according to the approved plan.

Extrajudicial Reorganisation

Extrajudicial reorganisation allows debtors to negotiate debt restructuring outside the court system, typically with specific creditor groups such as financial institutions or secured creditors. In this process, the debtor actively negotiates a restructuring plan, often referred to as a pre-packaged restructuring, and seeks court ratification to make the plan binding for non-adhering creditors.

Before filing, the debtor negotiates the terms and determines which creditors will be included in the restructuring. The Brazilian Bankruptcy Law mandates a minimum quorum for the homologation of the restructuring plan, ensuring that a majority of creditors, by amount, agree to the terms.

Once the court ratifies the plan, it becomes binding for all creditors, including those who did not agree to the terms. Throughout this process, the debtor retains possession and control of the company, allowing shareholders, officers, and directors to continue managing operations.

Certain creditors, such as those holding exempted claims, are not included in the extrajudicial reorganisation. The inclusion of labor claims necessitates collective bargaining with the relevant labor union. To confirm the plan, the debtor must secure approval from creditors representing more than 50% of the claims, by amount, in each affected class.

The request for confirmation of the extrajudicial reorganisation plan triggers a Stay Period applicable only to the credits included in the reorganisation. However, this ratification does not prevent exempted creditors or those not included from requesting the debtor’s bankruptcy liquidation.

Bankruptcy

Bankruptcy can occur voluntarily, initiated by the debtor, or involuntarily, initiated by creditors. Creditors can request a company’s liquidation.

under specific conditions, such as the debtor’s failure to satisfy debts exceeding 40 minimum wages or committing fraudulent acts against creditors. In response to a creditor’s liquidation request, the debtor has several options: (i) pay the debt to terminate the process; (ii) file a defense and post a bond with the Bankruptcy Court to prevent liquidation; (iii) file a defense without the bond; or (iv) request judicial reorganisation.

In voluntary liquidation, the debtor must provide reasons for its operational inability and submit necessary documentation, such as a list of creditors. Unlike judicial reorganisation, managers and directors are removed in liquidation, with a court-appointed judicial administrator taking control of the estate. The judicial administrator is responsible for gathering, appraising, and selling the company’s assets via competitive public sales. The proceeds from these sales are then used to settle creditor claims based on the priority order established by Articles 83 and 84 of the Bankruptcy Law.

Shareholders may request rehabilitation only after settling all outstanding obligations. Rehabilitation can occur if all debts are paid, if at least 25% of unsecured debts are settled, or if three years have elapsed since the bankruptcy decree—excluding previously collected assets, which must be liquidated to satisfy listed creditors.

Liquidation signifies a complete judicial dissolution of the company. If any funds remain after asset sales and creditor payments—though this is rare—these amounts are distributed to shareholders based on their equity stakes.

Law 14.112/2020 prohibits extending liquidation effects to other companies within the same group, including controllers and managers of the liquidated company, while allowing for “piercing the corporate veil “ under specific legal conditions to access the assets of shareholders and managers.

II.Recent and Future Market Overview

In 2024, Brazil recorded 2,273 requests for judicial reorganisation, according to Serasa Experian’s Bankruptcy and Judicial Recovery Indicator, the highest number recorded since the institution began tracking this data in 2014. This total represents a 61.8% increase compared to 2023. The only year that approached this scenario was 2016, when 1,863 requests were registered.

A closer examination of judicial reorganisation requests by company size reveals that Micro and Small Enterprises accounted for the majority of the increase, submitting 1,676 applications—a remarkable 78.4% increase from 2023. Medium and large companies accounted for 416 and 181 requests, respectively. This trend underscores how smaller businesses, often more vulnerable to economic fluctuations, are increasingly seeking legal protection to navigate financial challenges.

Sector analysis indicates that the Services sector was the most affected, with 928 requests for judicial reorganisation, closely followed by Commerce with 575 applications. The agribusiness sector also experienced significant increases, reflecting broader economic challenges faced by various industries during this period.

This rise in judicial reorganisation requests can be attributed to several economic factors, including high-interest rates, elevated inflation, and slowed economic activity, which have pressured companies to seek alternatives to bankruptcy. Additionally, political instability and ongoing supply chain challenges have exacerbated financial distress among businesses. As companies grow more familiar with insolvency proceedings, filings continue to rise.

An emerging trend sees financially distressed companies increasingly seeking precautionary protection in the courts. This practice is supported by Brazilian Bankruptcy Law, which allows for a Stay Period of 60 days during which companies can negotiate with creditors to restructure their debts. Economists and legal experts predict that the number of judicial reorganisations may continue to rise in 2025, particularly if economic conditions do not improve. Many companies may need to restructure accumulated debts to ensure their sustainability in a challenging economic environment.

III. Recent and Future Legal Developments

The enactment of Law 11.101/2005 – inspired by foreign legislation, such as the US Bankruptcy Code – marked a pivotal change in Brazilian insolvency law by introducing judicial reorganisation as an effective mechanism for restructuring companies. This law incorporated modern management concepts, allowing debtors to present a reorganisation plan to creditors, that promotes negotiation and aims to balance the interests of creditors and debtors, enabling viable companies to navigate financial crises while protecting jobs and the economy.

In response to the COVID-19 pandemic, Law 14.112/2020 introduced significant reforms to the Brazilian Bankruptcy Law. Notably, it included provisions for Rural Producers in reorganisation proceedings, acknowledging the importance of this segment of the Brazilian agribusiness sector.

One of the most impactful changes introduced by Law 14.112/2020 was the formalisation of Debtor-in-Possession (DIP) financing, which allows companies to secure additional financing during their reorganisation process. This provision is crucial, as it enables struggling businesses to access the necessary resources to maintain operations while they restructure their debts.

Furthermore, Law 14.112/2020 enabled creditors to present their own reorganisation plans, encouraging greater involvement from creditors in the reorganisation process. The law also adopted the United Nations Commission on International Trade Law (UNCITRAL) model for cross-border cases, which enhanced predictability and efficiency in resolving international insolvencies. Additional provisions facilitated the installment payment of overdue taxes to alleviate the tax burden on companies undergoing reorganisation.

Moreover, the law reduced the quorum required for the ratification of Extrajudicial Reorganisation Plans from two-thirds to 50%. This change was designed to assist companies in more precarious situations, enabling them to advance their reorganisation plans without resorting to the more lengthy and costly judicial reorganisation proceedings.

2025 – Bill 3/2024

Currently, Bill 3/2024 is under analysis by the Brazilian Senate after having been approved by the House of Representatives. This proposed legislation aims to introduce significant changes to Brazil’s bankruptcy and judicial reorganisation rules. One key proposal is to limit the number of judicial reorganisations that can be overseen by the same judge and judicial administrator, promoting greater impartiality and efficiency within the judicial process.

It also proposes the introduction of a fiduciary manager, who will be elected by the General Creditors’ Assembly (GCA). This manager would have the authority to propose a bankruptcy plan, which would then be submitted to the GCA for approval, thereby enhancing creditor participation in the reorganisation process.

Another of its critical aspects is the proposal to reduce the waiting period for companies to request a new judicial reorganisation from five years to just two years. This change aims to facilitate quicker access to reorganisation mechanisms, enabling companies to respond more swiftly to financial difficulties.

Additionally, the bill seeks to revise the rules concerning the appointment and remuneration of judicial administrators in reorganisation proceedings, aiming for greater transparency and efficiency in their operations.

Conclusion

In summary, the evolution of Brazil’s insolvency framework, particularly through Law 11.101/2005 and its subsequent amendments, including Law 14.112/2020 and the proposed Bill 3/2024, underscores ongoing efforts to improve the business environment in Brazil. These legislative developments aim to support the reorganisation of companies and the preservation of jobs while balancing the interests of creditors and debtors.