Brazil, one of the main emerging markets in the world and a country with a fast developing business environment, has recently experienced a series of important breakthroughs in building a scenario more favourable to business. The most important initiatives in modernising Brazil’s business environment include the creation, in 2005, of the so-called “Company Recovery and Bankruptcy Law” (LREF), which triggered a vast discussion in the National Congress, and replaces statutes that were in effect over the previous six decades.
Before the enactment of the law, Brazil did not have efficient legislation addressing insolvency cases and capable of facing the demands of a highly competitive economic environment, which continues to evolve at an unprecedented speed. Until the recent past, most of the organisations that became insolvent did not have mechanisms to recover, which resulted in many cases of bankruptcy that could have been avoided.
Previous legislation provided for two solutions: composition with creditors and bankruptcy. The first consisted merely of granting an entity the right to pay existing debts over two years. There was virtually no actual involvement of creditors and did not encompass a recovery plan. Accordingly, it only addressed the effects and not the causes of the problem that triggered the financial crisis. As for the bankruptcy proceedings, they were extremely lengthy, and could extend during up to ten years, and recovery of assets by creditors, if any, used to be very low.
The new law represents a turning point in the history of the relations between debtors and creditors in Brazil, and its underlying principle is that both business activities and jobs should be preserved. And, from the creditors’ standpoint if a company is not viable, the law permits a swift declaration of bankruptcy and asset settlement, which ensures a smaller loss of company assets.
One of the major features of the new law is transparency, as recovery procedures now have greater involvement of creditors, who must approve the recovery plan proposed by the debtor. It also creates the position of the receiver, appointed by a court judge, whose job is to follow up the entire recovery process and provide all the necessary information to the stakeholders.
Brazil’s insolvency index
Additionally, creditors are now divided into three classes – labour, unsecured, and secured creditors, where the latter have priority in the event of bankruptcy.
Another positive aspect of the new law is that it favours the financing of a recovering entity’s operations ensuring that the credit offered after a court recovery request is filed – loans not subject to bankruptcy rules – have full payment priority in the event of the entity’s bankruptcy.
The Company Recovery and Bankruptcy Law helps to improve Brazil’s insolvency index, measured by the World Bank, by expediting bankruptcy procedures, preserving the guarantees held by creditors, and awarding payment priority in the event of bankruptcy, base indicators used to build this index. Accordingly, impacts such as lower cost, increased credit, and development of the market as a whole are expected.
It is worth noting also the significant judicial progress in Brazil, as a result of several training courses for judges on business and corporate matters and the creation of specialised courts to deal with proceedings focused on company recovery.
The new law has already resulted in many recovery success stories, which might have not been the case had they been addressed under the previous law. Significant progress has been obtained; however, it is important to bear in mind the need to improve the Law and create more business courts to address these cases. By breaking historic paradigms on the business relations in Brazil, the new company Recovery and Bankruptcy Law has had very positive effects for the improvement of the business environment in Brazil.
Luis Vasco Elias is partner of the Corporate Reorganization Services in the Corporate Finance practice at Deloitte in Brazil
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