An Analysis of Reorganizing Bankruptcies in Brazil: Assessing and Understanding Failure or Success.

Abstract

Brazil’s new bankruptcy act (Law 11.101/2005) is about to complete 12 years the summer of 2017. The law it superseded was enacted in 1945 and was widely considered not to present adequate tools for reorganizing a distressed yet viable firm. Its provisions about the liquidation of a distressed and non-viable company were also considered non-efficient. The new law, enacted in 2005, has received wide praise as a modern, state of art tool, one that had all it took to allow distressed companies to reorganize successfully striving yet viable businesses. It was inspired by the U.S Bankruptcy Code and by Germany’s InsolvenzOrdnung. The new law expressly states that its goals are to allow the reorganization of distressed firms as going concerns, thus preserving jobs, production, assets’ value and maximizing creditor’s recovery. I argue in this essay that the goals set by the Brazilian bankruptcy have not been achieved. In addition to my perception as a bankruptcy practitioner, there is a growing consensus among practitioners, scholars, judges and even politicians. I believe that in the topic analyzed conventional wisdom and empirical analysis converge and end up in the same conclusion: the Bankruptcy Act has failed to achieve its goals. I demonstrate that and point some of the reasons why that has occurred. I conclude that there are several probable concurrent causes to companies not reorganizing successfully, noticeably that: (i) Debtor’s failures to present consistent and convincing plans in due time (60 days), helped by creditor’s tolerance to such delays, lead to statutory terms not being met. The possibility that a missed deadline may lead to liquidation is not a convincing threat; (ii) Creditors, with rare exceptions, do not have the information whether or not reorganization is viable and do not seem to care. Rather, they seem to consider that their credit is ‘already sunk’, so whatever comes out of reorganization is considered a ‘plus’ and they will tolerate all sorts of missed deadlines; (iii) Companies that file for reorganizing bankruptcy are heavily indebted and, with few exceptions, have been producing constant operational losses long before filing for reorganization; as a result, the ‘point of no salvage’ has been long crossed and there is no real possibility of transforming the struggling business into a viable one; (iv) Minutes of creditors’ meeting do not show any argument about the efficiency of the turn-around measures and feasibility of plan in general, rather the emphasis is on discounts and payment dates. Not surprisingly, plans with very little substance and consistency are approved by creditors; (v) In Brazil, unlike the United States, there is no correlation between a longer confirmation span for the plan and a higher success rate for the reorganization. Longer confirmation periods are only the result of debtor not meeting deadlines; (vi) Brazilian companies usually file late for reorganization, when its debt is overwhelming and reorganization is simply not viable anymore. There is no sanction for such attitude. I conclude that most reorganizing companies do not effectively reorganize, even if they submit a plan and obtain confirmation. During reorganization, their operations continue to produce losses and total debt increases. In spite of its limitations to determine actual success of reorganization, the metrics I used (and the data obtained) were sufficient to determine that (a) the current legal structure does not provide an adequate system of constraints, sanctions and incentives for debtors to comply with the statutory deadlines; and (b) Creditors do not enforce and have no incentive to enforce strict observance of such deadlines.