Comparative analysis of judicial reorganization - United States vs. Brazil

1 Legal Foundations

1.1 United States

In the United States, the judicial reorganization process is governed by Title 11 of the United States Code, specifically Chapter 11 (11 U.S.C. §§ 1101-1174). This chapter allows financially distressed companies to reorganize and continue operating while negotiating with creditors.

1.2 Brazil

In Brazil, judicial reorganization is regulated by Law No. 11,101/05, known as the Business Reorganization and Bankruptcy Law (LREF). This law was recently updated by Law No. 14,112/2020, which brought significant changes to the process. Specific provisions on judicial reorganization are contained in articles 47 to 72 of the LREF.

2. Process objectives

2.1 United States

Chapter 11 primarily aims at reorganizing the debtor company, allowing it to continue operations while restructuring its debts. The goal is to maximize the company's value for the benefit of creditors, shareholders, and the economy in general. These objectives are implicit in the structure of Chapter 11, particularly in the sections dealing with the content of the reorganization plan (11 U.S.C. § 1123).

2.2 Brazil

The LREF, in its article 47, explicitly establishes the objective of judicial reorganization:

"Judicial reorganization aims to enable the overcoming of the debtor's economic and financial crisis situation, in order to allow the maintenance of the source of production, the employment of workers, and the interests of creditors, thus promoting the preservation of the company, its social function, and the stimulation of economic activity."

3. Eligibility to file

3.1 United States

In the American system, both the debtor (11 U.S.C. § 301) and creditors (11 U.S.C. § 303) can initiate the chapter 11 process. When initiated by creditors, it is called an "involuntary bankruptcy."

3.2 Brazil

Brazilian legislation, according to article 48 of the LREF, allows only the debtor to request judicial reorganization, provided that certain requirements are met, such as regularly conducting business activities for more than two years.

4. Stay period

4.1 United States

The "automatic stay" is immediately applied after the Chapter 11 filing, as per 11 U.S.C. § 362, suspending all actions and executions against the debtor. This period can last throughout the reorganization process.

4.2 Brazil

The Brazilian "stay period," provided for in article 6 of the LREF, initially suspended actions for 180 days. With the 2020 reform, this period was extended to 180 days, extendable for another 180 days, potentially totaling 360 days of suspension.

5. Company management during the process

5.1 United States

In Chapter 11, the debtor generally remains in control of the company as a DIP - "Debtor In Possession", as per 11 U.S.C. § 1107, except in cases of fraud or mismanagement, when a trustee may be appointed (11 U.S.C. § 1104).

5.2 Brazil

The LREF keeps the debtor in charge of the company's administration (art. 64), but under the supervision of a judicial administrator. In exceptional cases, the judge may order the removal of administrators, appointing a judicial manager (art. 65).

6. Reorganization plan

6.1 United States

The reorganization plan in chapter 11 must be presented within 120 days, extendable up to 18 months (11 U.S.C. § 1121). The content of the plan is regulated by 11 U.S.C. § 1123, which requires the division of creditors into classes and proposes specific treatments for each.

6.2 Brazil

In Brazil, the deadline for submitting the plan is 60 days from the publication of the decision that grants the processing of the reorganization (art. 53, LREF). The plan also divides creditors into classes, proposing forms of payment and restructuring (art. 54, LREF).

7. Plan approval

7.1 United States

Approval of the plan in chapter 11 requires the favorable vote of the majority of creditors in number and two-thirds in value of each class (11 U.S.C. § 1126). The judge can approve the plan even without the agreement of all classes (cram down), as per 11 U.S.C. § 1129(b).

7.2 Brazil

In Brazilian judicial reorganization, plan approval requires the favorable vote of all creditor classes (art. 45, LREF). The Brazilian cram down, provided for in article 58, §1 of the LREF, is more restrictive than the American one, requiring approval from at least two classes of creditors.

8. Financing during reorganization

8.1 United States

DIP Financing is widely used in chapter 11, allowing the company to obtain new financing with priority over pre-existing debts (11 U.S.C. § 364).

8.2 Brazil

Financing during judicial reorganization in Brazil was strengthened with the 2020 reform, which introduced the concept of "DIP financing" in articles 69-A to 69-F of the LREF, although it is still not as developed as in the USA.

9. Treatment of contracts

9.1 United States

Chapter 11 allows the debtor to assume or reject executory contracts and unexpired leases (11 U.S.C. § 365), offering flexibility for restructuring.

9.2 Brazil

The LREF, in its article 49, establishes that all credits existing on the date of the request are subject to judicial reorganization. Article 117 specifically deals with bilateral contracts, with Brazilian law being more restrictive regarding the modification of contracts during the process.

10. Process conclusion

10.1 United States

The chapter 11 process is concluded with the confirmation of the plan by the court, which binds all creditors, even the dissenting ones (11 U.S.C. § 1141).

10.2 Brazil

Brazilian judicial reorganization is concluded by a sentence after the fulfillment of the obligations provided for in the plan that fall due within two years of the granting of the reorganization, as per article 61 of the LREF.

Conclusion

Although there are fundamental similarities between the judicial reorganization systems of the United States and Brazil, such as the objective of preserving the company and the suspension of actions against the debtor, there are significant differences in crucial aspects. The American system tends to be more flexible and favorable to the debtor, especially regarding DIP Financing and cram down. The Brazilian system, in turn, has evolved to incorporate some elements of the American model, as evidenced by recent legislative changes.

The effectiveness of each system should be evaluated considering the economic, legal, and cultural context of each country. While the American model is often praised for its efficiency in restructuring large corporations, the Brazilian model has proven increasingly effective in promoting company recovery, especially after recent reforms.

It is essential that professionals working in this area be aware of the nuances of each system, especially in a context of increasing internationalization of business relations and the possibility of transnational insolvency processes.

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