Approval thresholds, claims covered, stay of enforcement, new money and operational effects. A decision framework between the two routes of Brazilian Law 11,101/2005.
Law No. 11,101/2005 offers two doors, out-of-court reorganization and court-supervised reorganization, and the choice between them conditions everything that follows, from the universe of creditors reached to the possibility of obtaining new capital.
Out-of-court reorganization is, at heart, an agreement. The debtor negotiates a reprofiling plan directly with creditors and submits the result for judicial confirmation, which extends the effects of the agreement to non-adhering creditors of the covered classes. It is an instrument for reorganizing liabilities, typically financial, with a shorter procedure, less public exposure and lower procedural cost.
Court reorganization is a proceeding. Once it is allowed to proceed, the stay of enforcement, claim verification, supervision by the judicial administrator and, in due course, the general meeting of creditors all follow. In return, it reaches the entirety of the subject liabilities, protects cash against attachment and opens access to instruments the consensual route does not offer.
What neither route does is solve a problem that is not one of debt. Neither corrects negative margins, an inadequate cost structure or lost competitive position. Both buy time and reorganize obligations, and it is within that time that the business must be fixed. Restructuring liabilities without an operating plan is postponement, not solution.
The requirements of article 48 of Law No. 11,101/2005 apply to both routes, since article 161 expressly refers to them. The debtor must have carried on its activity regularly for more than two years and, cumulatively, must not be bankrupt, or must have had the resulting liabilities extinguished by a final judgment; must not have obtained court reorganization in the last five years, including under the special plan; and must not have been convicted, nor have among its managers or controlling shareholder a person convicted, of a crime provided for in the statute itself.
Here lies the first major division. In court reorganization, article 49 subjects all claims existing at the filing date, even if not yet due. Excluded, under paragraph 3 of the same article, are holders of the position of fiduciary owner of movable or immovable property, financial lessors, owners or promissory sellers of real property under irrevocable contracts and owners under retention-of-title sales, whose property rights prevail, although the sale or removal from the debtor's premises of capital goods essential to its business is prohibited during the stay period.
In out-of-court reorganization, the plan reaches only the classes of claims it covers, and paragraph 1 of article 161 excludes tax claims, those under paragraph 3 of article 49 and those under item II of article 86, while subjecting labour and work-accident claims requires collective bargaining with the relevant union. In practice, the out-of-court route is designed for financial liabilities and loses usefulness when the problem is spread across suppliers, landlords and labour contingencies.
In out-of-court reorganization, Law No. 14,112/2020 reduced the confirmation threshold to creditors representing more than half of the claims of each class covered by the plan, and now allows, under paragraph 7 of article 163, that the petition be filed with the consent of at least one third of the claims of each class, provided the debtor undertakes to reach the threshold of the main provision within a non-extendable period of ninety days from the filing. This is a significant opening, because it allows filing with the negotiated core and completing adherence under the protection of the procedure.
Commentators note that the stay under paragraph 8 reaches the creditors covered by the plan and depends on judicial ratification once the threshold is evidenced.
In court reorganization, the plan must be approved by all classes under article 41. In the secured and unsecured classes, approval requires creditors representing more than half of the total value of the claims present at the meeting and, cumulatively, a simple majority of the creditors present. In the labour class, and likewise in the class of micro and small enterprises, voting is by head, by simple majority of those present, regardless of amount. A creditor whose claim has neither its value nor its original payment terms altered by the plan neither votes nor counts towards the threshold.
Once court reorganization is allowed to proceed, enforcement actions against the debtor are stayed and retention, attachment, seizure and search and seizure are prohibited, for one hundred and eighty days from that decision, extendable for an equal period, once only, on an exceptional basis. This is the most robust protection in the system and is frequently the decisive reason for choosing that route.
Out-of-court reorganization now also carries protection, although narrower, applicable in relation to the creditors covered by the plan from the filing of the petition. The difference in reach is decisive where pressure comes from creditors the plan does not cover, in which case confirmation, however well negotiated, does not prevent attachment of cash.
This is the point recent practice has made most visible. Section IV-A of Law No. 11,101/2005, introduced by Law No. 14,112/2020, created a statute of privileges for debtor financing, with judicial authorization, security over non-current assets and proceeds earmarked for funding operations and restructuring expenses. Credit so authorized is paid ahead of claims generally, up to the amount actually delivered, under article 84, item I-B, and the authorization is stabilized against appellate reversal as to amounts already disbursed.
On its wording, that regime refers to financing contracted during court-supervised reorganization. It would be inaccurate, though, to say the out-of-court route is simply excluded. Fabiana Bruno Solano Pereira argues that the regime applies there as well, on a systematic reading of articles 66, 66-A, 67 and 69-A to 69-F and by the analogy authorized in article 4 of the Law of Introduction to the Rules of Law, while noting controversy as to the reach of the priority in article 84, item I-B. Daniel Carnio Costa, taking a partly contrary view, accepts functionally equivalent transactions but denies that super-priority may be conferred by private agreement, pointing to fiduciary security as the way to give the financier economic precedence. Out-of-court plans providing for financing have already been filed, but there is no settled case law on the priority of that credit.
For decision-makers the practical effect of that uncertainty is direct. In court reorganization the financier contracts knowing its position in a possible bankruptcy; out of court, it contracts exposed to the risk that priority will be contested, and that risk translates into price, into additional security or into a refusal to lend. The asymmetry is often decisive for companies whose operations consume working capital on a significant scale. A company that needs cash to operate, and not merely time to pay, finds in the court route an instrument the consensual one does not offer. The contrast between the two moments of the Casas Bahia Group, examined in a dedicated analysis, illustrates the point with unusual clarity, and the financing authorized in the Vasco da Gama proceeding, discussed in another piece in this section, shows the regime at work.
The two routes are not mutually exclusive over time. A company may have an out-of-court plan confirmed and, later, facing a liquidity crisis that reprofiling did not solve, seek court reorganization, subject to the statutory requirements, among them the bar in article 48, item II, which refers to a previous grant of court reorganization and not to the confirmation of an out-of-court plan. The point deserves attention in planning, because the choice of the first door should not be made without considering what it costs in relation to the second.
Out-of-court reorganization is a plan negotiated with creditors and submitted for judicial confirmation, reaching only the classes of claims it covers. Court reorganization is a full proceeding, with a stay of enforcement, claim verification, a judicial administrator and a general meeting of creditors, and reaches all claims existing at the filing date, subject to the exceptions in paragraph 3 of article 49.
Creditors representing more than half of the claims of each class covered by the plan. Since Law 14,112/2020, paragraph 7 of article 163 allows the petition to be filed with the consent of at least one third of the claims of each class, with an undertaking to reach the main threshold within a non-extendable period of ninety days.
Protection exists but is narrower than in court reorganization and reaches the creditors covered by the plan from the filing of the petition. In court reorganization the stay runs for one hundred and eighty days from the decision allowing the case to proceed, extendable for an equal period, once only, on an exceptional basis.
A debtor that has carried on its activity regularly for more than two years and cumulatively meets the requirements of article 48, among them not being bankrupt without extinguished liabilities, not having obtained court reorganization in the last five years, and having no conviction for a crime under the statute, whether personally or of a manager or controlling shareholder.
The bar in article 48, item II, refers to a previous grant of court reorganization within five years. Prior confirmation of an out-of-court plan does not literally fall within that hypothesis, but each case requires specific analysis of the requirements and of the debtor's history.
The Gotlib Rocha Restructuring and Insolvency team acts for companies, shareholders, creditors, investors and financiers in court and out-of-court reorganizations, bankruptcy, debtor financing and distressed asset transactions.
Talk to the teamAbout the practiceThis piece reflects the firm’s analysis of the subject as at the date of publication. It is informative in nature and does not constitute legal advice on any specific matter. For advice on a particular situation, please contact our team.
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