BRAZIL Trends and Developments Contributed by: Lucas Akel Filgueiras, Pedro Miranda, Giovana Bosso and Caroline Cidri, Akel Advogados
Akel Advogados Alameda Santos, 2335 – Cj. 91, Cerqueira César - São Paulo CEP 01419-101 Brazil Tel: +55 (11) 5200 0388 Email: contato@akeladvogados.com.br Web: www.akeladvogados.com.br
Piercing the Corporate Veil in Brazilian Judicial Reorganisation Cases Judicial reorganisation is a procedure provided for in Law No 11,101/2005 (the Brazilian Bankruptcy Law, or LRF). It replaced the former “concordata regime” and is designed to help distressed companies restructure in order to continue their economic activities. There is frequent confusion in Brazil between busi- ness/entrepreneurial activity (the economic opera- tion that generates value) and company/entrepreneur (the natural or legal person formally in charge of the venture) responsibilities. As a result, protection is too often extended to the latter, when, in fact, the former should be safeguarded, given its social function. This has led to the inevitable emergence of cases of abuse. The routine, and absurd, creditor haircuts proposed in various judicial reorganisations in Brazil (often exceed- ing 80%, sometimes 90%) is worth pointing out here. These have often come with long grace periods – typi- cally ten to 20 years – before the debtor companies in judicial reorganisation begin servicing the debts they have incurred in the course of business but have failed to honour under the agreed terms. Accordingly, tens of thousands of creditors – most- ly small business owners (suppliers) and small to medium-sized enterprises – are routinely sacrificed to preserve a single company, a corporate group or its controlling shareholders – who are often directly responsible for the crisis or whose continued pres- ence in the market is not viable in the long term.
Another pervasive issue in most Brazilian judicial reor- ganisations is the debtor’s prior “preparation” for filing an application. Practice has shown that a huge number of judicial reorganisation filings are preceded by unlawful acts at the expense of creditors, aiming to secure better terms for the debtor company, its shareholders and its managers. Examples include: (i) corporate reorganisa- tions or assignments of debt and receivables among group entities to concentrate liabilities in the would-be debtor company and keep the receivables with affili- ates that will stay outside the process; (ii) last-minute advance payments to shareholders/executives/third parties; and even (iii) extraordinary stockpiling of inventory without paying suppliers. It is precisely to curb this type of conduct that legisla- tion provided for the possibility of filing an application to pierce the corporate veil. Although still seldom used and approached with some reluctance by judges in charge of judicial reorgani- sation cases, the application to pierce the corporate veil is vital for correcting abuses committed by debtor companies and by those who manage and control them, in the interests of legality, transparency and, of course, creditors themselves. It is a vital tool for ensuring the protection of credit in Brazil; without it, the development of the market would undoubtedly be held back. Procedural aspects Under Article 47 of the LRF, “the purpose of judicial reorganisation is to enable the debtor to overcome
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