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Reform of Brazilian Corporate Insolvency Law - Which relevance for German Companies?

Just in time for the expected increase in the number of Brazilian companies in financial distress, Brazil has fundamentally reformed its corporate insolvency law. Due to the traditionally strong economic ties between the Brazilian and German economies, this reform is making waves across the Atlantic. The new insolvency and reorganization rules are of decisive importance for holders of claims against Brazilian business partners, shareholders of Brazilian companies, insolvency administrators of debtors with assets in Brazil and investors interested in Brazilian distressed assets. The current reform heralds a paradigm shift in several areas. These include the more favorable tax treatment of reorganization gains or sales in the reorganization process and the full liability privilege for acquirers of companies or parts of companies. The law now also offers creditors a much stronger negotiating position when structuring the reorganization plan and optimizes out-of-court ways out of the crisis for ailing companies. From a foreign perspective, the long-demanded introduction of detailed rules for the frequently occurring cross-border insolvency scenarios is also to be welcomed. Fortunately, Brazil, like five other Latin American countries before it, followed the UNCITRAL Model Law on Cross-Border Insolvency (a model law from 1997).

It is therefore no coincidence that the German commentary literature is also devoted to the topic of foreign insolvency law, which is becoming increasingly important for the German economy. For example, the 4th edition of the 4th volume of the "Münchener Kommentar - Insolvenzordnung" (Munich Commentary - Insolvency Code), 2021 edition, has now been published, in which a 26-page chapter presents Brazilian insolvency law. In total, the volume contains explanations on 53 countries, including the two other Latin American countries - Chile and Mexico - which are significant for German companies. The main author of the Brazilian chapter is attorney Christian Moritz, who is associated with our cooperation partner Felsberg Advogados in Sao Paulo. A short text excerpt is available here.

The background to the new insolvency law: the previous insolvency law, Lei 11.101, dates back to 2005 - apart from selective amendments in 2009, 2013 and 2014. With the then new instruments of judicial and extrajudicial reorganization, it was considered at the time to be groundbreaking from a legal-technical point of view and ideally suited for the preservation of jobs and economic activity. In principle, it borrowed and continues to borrow closely from the tried-and-true concepts of Chapter 11 U.S. Bankruptcy Code. Nevertheless, over the past 16 years, affected companies and creditors as well as investors have repeatedly faced legal uncertainties and inefficiencies in the implementation of the reorganization procedures. Against this background, there have been several (unsuccessful) attempts to improve these procedures under previous governments. With the reform law, Law no. 14112/2020, signed by the current president on December 24, 2020 (with 14 vetoes) and entering into force on January 23, 2021, this has finally been achieved. The Brazilian Congress overrode 12 presidential vetoes on March 18, 2021, with corresponding majorities - applauded by insolvency practitioners.

For more on Brazilian insolvency law, contact Advogada Anneliese Moritz, FGvW's Latin America Desk.

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