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Brazil: Insolvency of foreign entities

Many economic groups have been filing for judicial reorganisation in Brazil, a process similar to chapter 11 of the US Bankruptcy Code. In certain cases, local courts have claimed jurisdiction over foreign entities filing for judicial reorganisation in Brazil, even though Brazilian law does not have any cross-border insolvency rules. Well-known judicial restructuring cases such as OGX, OAS and Schahin have helped develop case law on Brazil accepting the judicial reorganisation of foreign entities. Yet, in a recent case, the court denied such a request and re-opened discussions.

Pre-operational drilling group Sete Brasil requested judicial reorganisation in the city of Rio de Janeiro, with the aim of restructuring approximately $6 billion in debt. Three Brazilian and three Austrian entities filed. The lower court rejected the foreign entities' filing. Both the court and the public prosecutor opining in the case noted that the matter was not entirely settled, saying that there were at least two decisions rejecting such filings before the court in the OGX case claimed jurisdiction to reorganise foreign entities, and innovated on the matter. The prosecutor urged a reanalysis of the issue. The decision was appealed and is pending a decision on its merits.

Arguments rejecting the filing are that Brazilian law does not provide for a judicial mechanism allowing foreign entities to request reorganisation in Brazil. Eventually, a foreign company could be liquidated as per Brazilian proceedings rather than through the law of its place of incorporation. Besides, foreign creditors that executed contracts abroad with a foreign entity, often under foreign law and subject to a foreign jurisdiction, would be entangled in Brazilian insolvency proceedings.

On the other hand, arguments supporting the filing include that courts would have jurisdiction by drawing an analogy with other transnational-related matters that attract Brazilian jurisdiction. In most cases, the foreign entities are corporate vehicles designed to raise foreign debt and not including them in the filing would jeopardise the entire group's turnaround. The centre of main interests (Comi) principle is the background of such a rationale.

Case law is developing in the direction of accepting the judicial reorganisation of foreign entities, but there is no decision yet from the Superior Court of Justice, the highest court in Brazil for non-constitutional matters (such as insolvency). However, assuming that the restructuring of foreign entities is accepted in Brazil, it is unclear to what extent a Brazilian judgment would be recognised in a foreign court if a creditor unwillingly made party to the restructuring sought to attach assets held abroad.

In any event, creditors of foreign subsidiaries of Brazilian groups should consider the possibility of a Brazilian governed restructuring in their credit analyses.

L-R: Rafael Baleroni, Fabio Rosas, Guilherme França

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