The current economic downturn has caused many Brazilian
companies to file for judicial reorganisation in local courts
(a procedure similar to Chapter 11 of the US Bankruptcy Code).
Many of these filings involve multiple companies from the same
economic group, whose reorganisation – it seems
– must be completed together to be successful.
However, Brazilian bankruptcy law does not have clear rules for
these situations and the case-law is still evolving to address
insolvency proceedings involving economic groups. The following
discussion addresses joint filings and substantive
Joint filing is becoming more popular and is increasingly
accepted by courts in Brazil. It occurs when two or more
entities request their judicial reorganisation together in one
filing, so that the reorganisation is processed in the same
casefiles, with the same judge and trustee. In principle, it is
simply a matter of procedural convenience, to avoid each entity
starting its own process. By itself, it does not authorise
substantive consolidation or any other disregarding of capital
Substantive consolidation is currently one of the most
sensitive bankruptcy issues in Brazil. It relates to the
amalgamation of assets and debts of the entities subject to the
insolvency proceeding, by presenting a single reorganisation
plan to be voted on by the creditors. Although each legal
entity in the debtor group continues to exist separately,
substantive consolidation treats the economic group as a single
enterprise with respect to capital structures, and disregards
any structural subordinations that existed. In order to vote on
the plan, creditors are uniquely listed in classes as per their
legal classification. This can cause a dilution of creditors'
voting rights or grant an unfair position regarding the nature
or classification of the credit against different
Many decisions authorising joint filings and substantive
consolidations do not engage in a proper analysis of the
corporate structure, financial situation and capital structure
of the entities involved, nor do they make a detailed
investigation of matters such as the commingling of assets.
They often take the view that banks that lend to an entity that
is part of a larger group rely on the financial strength of the
group, and therefore know, or should know, that the borrower
may be involved in a joint insolvency. In practice, cash-rich
entities have been amalgamated into insolvency proceedings with
cash-strapped or irrecoverable entities, jeopardising the
interest not only of their creditors, but also a larger number
of stakeholders, sometimes in a bid to preserve the enterprise,
whatever the cost.
The lower bankruptcy courts in São Paulo tend to
require expert evidence on a company's economic viability
before authorising a judicial reorganisation. A similar
approach would be desirable before authorising joint filings
and substantive consolidations.
Brazilian case-law on insolvency is still developing.
Lenders should be aware that there will be a degree of
uncertainty for some time, and should look into not only the
debtor but the whole economic group to which the debtor
Rafael Baleroni and Fábio Rosas