Transnational Insolvency in Brazil

The Brazilian Bankruptcy Law — enacted in February 2005 — has not adopted the UNCITRAL Model Law regarding transnational insolvency. In fact, Brazilian law is laconic in this regard and only says that the court of the place where the debtor has its main establishment or where the branch of a foreign company is located is the competent court to grant judicial reorganization or to declare the debtor bankrupt (art. 3º). Such legal provision is evidently insufficient to deal with as complex an issue as transnational bankruptcy and judicial reorganization. Despite that, there have been several cases where foreign companies have filed for judicial reorganization together with other companies of the same enterprise groups — for example, OAS, OGX and, more recently, OI.

Although all cases have material differences regarding the causes of the financial and economic crisis and the sector in which the companies developed their activities in Brazil, at least one common factor can be identified: The foreign companies were used as mere financial vehicles for Brazilian companies to issue debt.

These cases have raised a number of discussions among Brazilian specialists. On the one side, the courts’ arguments to accept the inclusion of foreign companies in a reorganization proceeding in Brazil may be summarized as follows: (1) foreign companies only served as vehicles for the Brazilian companies to issue debt securities and raise money abroad to explore certain operational activities in Brazil; (2) foreign and national entities form a single economic group that develops a single business activity; (3) funds to pay the debts of the foreign companies come from the business activities that the Brazilian companies develop in Brazil; and (4) business decisions were made in Brazil, and the relationship between the Brazilian and the foreign companies was clearly one of subordination rather than of coordination.

On the other side, opponents have argued the following: (1) if the debtors do not comply with the terms of the reorganization plan, Brazilian courts cannot place the foreign companies into bankruptcy, thereby creating an unacceptable legal advantage to foreign entities; (2) reorganization in Brazil would create uncertainty because it would subject foreign creditors to payments in a different country and subject them to jurisdictional laws that are different from those the parties agreed upon in their agreements; (3) in order to accept a Brazilian court’s jurisdiction to process a foreign company’s request for reorganization, it is necessary to substantively consolidate the assets of said companies, but a Brazilian company cannot consolidate assets of a foreign company, especially if they are not headquartered in Brazil; and (4) Brazilian law cannot be applied and its remedies cannot be used to protect foreign companies without violating the sovereignty of each country.

In the cases of OAS and OGX, for example, the appellate courts of the States of São Paulo and Rio de Janeiro, respectively, decided that foreign companies may file reorganization proceedings together with other companies of the same enterprise group. In both cases, however, special appeals are pending before the Superior Court of Justice (STJ).

In a more recent example filed before the Bankruptcy Court of the 7th Business Court of Rio de Janeiro (the Brazilian Bankruptcy Court), the same issue was featured in the court’s analysis. In the referred case, OI S.A. and six other companies (the “OI Group”), including two Dutch companies controlled by OI S.A., filed for judicial reorganization. The Brazilian Bankruptcy Court decided that the Dutch companies could also file for judicial reorganization in Brazil. The court’s decision states that Brazilian legislation was not designed to deal with modern business structures, in which companies explore business in certain countries, regardless of having established physical headquarters therein. In the OI Case, the foreign companies were mere financing vehicles used by the economic group to raise funds for the operational activities to be developed in Brazil.

Based on these factual premises, and also bearing in mind the goals of the legislator when enacting the Brazilian Bankruptcy Law, the court authorized the companies to file for judicial reorganization in Brazil, where they engaged in their economic activities. This decision was later confirmed by the Appellate Court of the State of Rio de Janeiro,[1] which provided the following facts to substantiate its ruling: the OI Group's operating activities are carried out mostly in Brazil; the Dutch companies are wholly owned subsidiaries of OI S.A., have no operational activities and were created to obtain financing for the Brazilian companies in the international market; and the assets eligible for payment of the creditors are within the national territory. The court further clarified that the effects of the decisions are limited to the national territory, not affecting, in principle, any assets located outside Brazil. For those decisions to be effective elsewhere, cooperation between the Brazilian and foreign courts would be required.

In July 2016, the U.S. Bankruptcy Court for the Southern District of New York recognized the Brazilian judicial reorganization of the OI Group as a foreign main proceeding under chapter 15 of the U.S. Bankruptcy Code. Subsequently, the Dutch companies, which were subject to the suspension of payment proceedings in the Netherlands, had such proceedings converted into liquidation. The liquidator of one of the Dutch companies then brought back the discussion as to whether Brazil or the Netherlands should be considered the center of main interest of the two companies. The New York court concluded that there were no grounds to use its discretionary power to terminate or modify the prior definition of “center of main interests” as would have been allowed by § 1517(d) of the U.S. Bankruptcy Code.

The reorganization plan of the OI Group was approved by creditors on Dec. 20, 2017, and homologated by the Brazilian Bankruptcy Court on Jan. 8, 2018. Another relevant aspect of the OI case is that the Brazilian Bankruptcy Court further decided that the decisions rendered by the Dutch Court liquidating the Dutch companies must first be homologated by the STJ to produce effects in Brazil. Without such homologation, the trustees would be allowed to present arguments, but the managers of the Dutch companies previously appointed by OI S.A. would continue to represent the Dutch companies in all legal forms.

It is relevant to point out that the STJ has ruled on several occasions that a bankruptcy decision from another jurisdiction must be homologated by the STJ in order to be enforced in Brazil. This requirement is as bureaucratic as it is inconsistent with the speed-up logic of reorganization proceedings. In other words, it consumes an amount of time that the parties involved in bankruptcy cases usually do not have.

In this particular instance, jurisprudence shows that STJ has already refused to homologate a foreign court decision liquidating a foreign holding company because it held 99.5 percent of the shares of a Brazilian company that was under judicial reorganization at the time. STJ understood that the homologation of the foreign decision would give to the holding company the power to undermine the reorganization of the Brazilian subsidiary (Grupo Manacá case) and affect Brazilian court sovereignty.

The Brazilian government is preparing a bill of law to reform Brazilian Bankruptcy Law. If everything moves along as planned and the Brazilian congress has the chance to amend the Brazilian Bankruptcy Law, uncertainties might be reduced and bureaucracy could be eliminated in this field.


[1] AI 0051668-49.2016.8.19.0000, 8ª Câmara Cível, j. 31.10.2017.