In the complex landscape of corporate financial restructuring, Brazil’s approach to judicial recovery proceedings offers a unique perspective, especially concerning the role of debt-to-equity conversion. The Brazilian Bankruptcy Law (Law 11.101/2005) has undergone significant reforms, notably impacting the rights and powers of creditors in these proceedings. This article explores these changes, focusing on the introduction of an alternative plan by creditors and its implications for debt-to-equity conversion.

Background of Judicial Recovery in Brazil

Under the original text of Law 11.101/2005, debtors held the exclusive right to propose a recovery plan, distinct from the U.S. approach, where creditors can present a plan after a certain period. This debtor-centric model was rooted in the belief that the debtor is best positioned to devise a viable recovery strategy. However, this framework often led to a lack of active participation from creditors, who are crucial stakeholders in the recovery process.

The Reform of 2020 and Creditors’ Enhanced Role

The reform of the Brazilian Bankruptcy Law in 2020 marked a significant shift. It introduced the possibility for creditors to propose an alternative recovery plan without needing the debtor’s agreement. This change aligns Brazil more closely with the U.S. model, emphasizing the active participation of creditors in the recovery process. This new provision is seen as a major advancement, ensuring that creditors have a say in the recovery plan, particularly when they believe that the debtor’s plan does not adequately protect their interests.

Conditions for Presenting an Alternative Plan

The reform stipulates two scenarios where creditors can present an alternative plan: (i) if 180 days pass without the debtor’s plan being deliberated by the creditor’s assembly, and (ii) if the debtor’s plan is rejected. In the first case, the end of the debtor’s exclusivity period opens the door for creditors to propose their plan, reflecting a similar approach in the U.S. Bankruptcy Code. The second scenario occurs post-rejection of the debtor’s plan, where the judicial administrator can initiate the process for creditors to propose an alternative within 30 days.

Debt-to-Equity Conversion in the Creditors’ Plan

A notable aspect of the reform is the provision for debt-to-equity conversion in the creditors’ plan. This approach allows creditors to convert their claims into equity in the debtor company, potentially changing the company’s control. This option, although complex in its execution, offers a way to restructure the debtor’s capital and provide a lifeline for businesses that may otherwise face liquidation. However, it requires careful consideration of existing shareholders’ rights, including their approval for capital increases and the exercise of preferential rights in the issuance of new shares.

Practical Challenges and Implications

While the reform empowers creditors and introduces flexibility in the judicial recovery process, it also raises practical challenges. For instance, the uncertainty during the 30-day period post-rejection of the debtor’s plan and the complexities involved in debt-to-equity conversion demand careful navigation. Additionally, the execution of such a plan requires balancing the interests of various stakeholders, including existing shareholders and new investors.

Authors: Pedro Henrique Ferreira Leite and Fábio Medina Osório

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