BRAZIL Law and Practice Contributed by: Thiago Fernandes Chebatt and Luiz Eugênio Araújo Müller Filho, Müller Chebatt Advogados
7. Bankruptcy and Insolvency 7.1 Impact of Insolvency Processes
clear enforceable titles, disciplined perfection – and to design remedies that reduce dependence on slow, post-default litigation. 6.5 Timing and Cost of Enforcement Enforcement timeframes vary widely. Where security can be realised through streamlined mechanisms and where perfection is clean, outcomes can be mate - rially faster than in full judicial collection; however, contested cases often trigger injunction requests and procedural incidents that extend timelines sub - stantially. Judicial execution can take years when the debtor litigates aggressively or when assets are dif - ficult to locate, attach and sell. Costs include court fees, registry expenses, expert work when valuations are required, and legal fees across both enforcement and parallel restructuring negotiations. For that rea - son, sophisticated underwriting treats timing risk as part of expected loss and uses monitoring and cash controls to reduce the need to rely solely on end-stage enforcement. In practice, early stabilisation often drives better recoveries than protracted liquidation processes. 6.6 Practical Considerations/Limitations on Enforcement Brazilian lenders frequently prefer negotiated out - comes before full-scale enforcement because enforcement can destroy going-concern value and trigger prolonged litigation. Borrowers often seek interim relief to suspend enforcement, and judicial reorganisation can shift the negotiation into a court- supervised forum with a statutory stay. Private credit providers therefore design “intervention tools” that operate earlier, such as cash traps, lockbox-style collection routing, enhanced reporting, and step-in or escalation rights tied to objective triggers. In clubs, decisive enforcement also depends on governance: voting thresholds, clear authority for any representa - tive and coherent release mechanics. The practical reality is that the most valuable leverage is often the ability to stabilise cash flows and governance while negotiating, rather than the theoretical right to liqui - date assets immediately.
Brazil’s main restructuring and insolvency process - es are judicial reorganisation ( recuperação judicial ), out-of-court reorganisation with court homologation ( recuperação extrajudicial ) and bankruptcy liquidation ( falência ). Judicial reorganisation is the most com - mon rescue route and generally provides a stay that restricts individual enforcement while a plan is negoti - ated and voted through creditor classes. The system is debtor-in-possession, supervised by the court and supported by a judicial administrator. Bankruptcy is a liquidation regime under court supervision, with stat - utory priority and asset realisation rules. For private credit providers, the key point is that recoveries are shaped by forum dynamics, including litigation over claim classification, the treatment of guarantees and the practical ability to realise collateral during the stay. 7.2 Waterfall of Payments In bankruptcy, Brazil applies a statutory waterfall that gives privileged treatment to certain categories and addresses secured claims to the extent of collateral value, followed by other priority and unsecured claims. The precise ranking can be technical, especially where claims are partially secured or where privileges com - pete. In judicial reorganisations, strict liquidation priority is not mechanically applied, because plans are negotiated and voted on and must be feasible; operational necessities often drive early payments to preserve continuity. As a result, lenders should model recoveries by combining legal priority with a realistic assessment of the business’s cash needs, the creditor map and the likely plan architecture. The legal ranking provides the framework, but execution and negotia - tions often determine the economic outcome. 7.3 Length of Insolvency Process and Recoveries Timelines are case-specific and frequently longer than stakeholders expect. Judicial reorganisation can extend for years due to disputes over classification, voting rights, plan legality and the treatment of col - lateral and guarantees, while bankruptcy liquidations can also be protracted where assets are complex or heavily litigated. Value erosion is a recurring risk, because working capital constraints, customer loss
26 CHAMBERS.COM
Powered by FlippingBook