Acquisition of assets in judicial reorganisation proceedings and anti-corruption law



In 2015, Brazil faced a serious political and economic crisis.

According to a survey conducted by the consulting firm Serasa Experian, the filings for judicial reorganisation proceedings in the country increased 46.7 percent between January and November 2015 compared to the same period in 2014. In many situations, these restructurings involve not only the negotiation of more favourable financial conditions and a new repayment schedule with extensions, grace periods and haircuts imposed to the pre-petition claims, but also the sale of assets to partially payoff the indebtedness of the debtor companies.

In this scenario, there may be opportunities to acquire interesting assets at attractive prices. The major concern of acquirers of distressed assets is to avoid future challenges of creditors which may unwind the transaction and/or impose succession liabilities for pre-existing obligations of the debtor entity. In order to mitigate the risks highlighted above and to provide acquirers with the most effective structure from a legal perspective, the acquisition of assets should be conducted through judicial reorganisation proceedings.

The key issue is, however, whether judicial reorganisation proceedings and other forms of out-of-court sales of distressed assets would suffice to protect potential buyers from contingencies arising out of or related to compliance investigations and violation anti-corruption statutes, when the target asset is owned by a group or conglomerate involved in investigations of such nature.

One of the most important restructuring mechanisms brought by the Brazilian Bankruptcy Law is to allow the sale of assets in the context of judicial reorganisation proceedings without the succession of the buyer on past liabilities of any nature of the debtor entity. Furthermore, the Brazilian Bankruptcy Law provides that the sales of assets governed in the reorganisation plan will not be revoked or declared ineffective even if in the future the debtor is put into liquidation or a bankruptcy proceeding.

The following legal steps must be complied with in order to enable the sale of assets without succession liabilities. First, the reorganisation plan must govern the asset sale, and secondly, such plan must be approved by the creditors at a General Creditors’ Meeting and subsequently ratified by the relevant Bankruptcy Court by means of the issuance of an award granting the judicial reorganisation proceeding. In addition, such an award must not impose any liability to the buyer in relation to past obligations of the debtor entity. Moreover, in order to avoid challenges over the adequacy of the purchase price, such price shall be supported by an appraisal report prepared by an independent and reputable appraiser firm, or a Court-appointed expert.

The Brazilian Bankruptcy Law also provides that after creditor and Court approval, a judicial sale must be conducted in order to avoid succession liabilities. The judicial sale may be organised by means of: (i) an auction; (ii) presentation of sealed proposals by the bidders; or (iii) a hybrid proceeding involving sealed proposals and auction.

Scholars’ opinions, however, have softened the requirement of a judicial sale sustaining that a private sale governed by the reorganisation plan would suffice to prevent succession liability to attach to the buyer grounded on the following arguments. First, the reorganisation proceeding, unlike bankruptcy, is not aimed at liquidating the company, but rather to provide mechanisms to restructure viable going concern businesses. Second, the Bankruptcy Law grants the creditors full power and autonomy to better evaluate and decide whether the sale of a particular asset will benefit their interests and will provide the repayment of at least part of their pre-petition claims. Finally, the test of legality is based on the transparency of the sale and adequacy of the purchase price, especially if it is conducted through a competitive bidding process organised by an investment banking firm, financial adviser or independent consultant.

Furthermore, a key contention contrary to the need for a judicial sale is the delay to have the proceeding completed in Court as opposed to the simplicity of a fast track and direct/private sale regulated by the reorganisation plan and a Stock or Asset Purchase Agreement. Moreover, the delay in the completion of the judicial steps may jeopardise the operational capacity of the assets which may ultimately impair their acquisition.

Despite the arguments outlined above, recent Appellate Court precedents state that the judicial sale is a prerequisite set forth in the Brazilian Bankruptcy Law to provide protection to the acquirer against past liabilities of the debtor. Therefore, from a practical standpoint, considering the current prevailing case law, acquirers should follow the judicial sale route, unless they are well aware of the indebtedness of the debtor entity, especially in relation to unimpaired claims to move forward with a direct/private sale (i.e., tax, labour and social security claims, credits related to forward foreign exchange agreements, and credits arising from financial leases, fiduciary ownership or transfer of property claims).

One additional concern of a potential buyer of a distressed asset lies on the fact that such an asset may be owned by an entity or economic group involved in compliance investigations. As a result, the investor must also meet the requirements of the Brazilian Anti-Corruption Law to successfully complete the acquisition of the asset without carrying any contingencies. The Anti-Corruption Law has been in place since the end of January 2014 and governs administrative and civil liability of legal entities perpetrating acts against the national or foreign public administration. The Anti-Corruption Law provides for the strict liability of the entity involved in the actions outlined above, which means that the entity benefiting from an act of corruption is liable on civil and administrative levels regardless of the evidence of intent.

The Anti-Corruption Law provides that in cases of spin-off, merger or consolidation the responsibility of the legal entity that benefited from an illegal action remains, and the economic group as a whole to which such entity is linked is joint and severally liable for such actions. In the case of transformation of an entity into another type of company (i.e., transformation of a corporation into a limited liability company) corporate transformation, the liability is limited to the fine payment obligation and full compensation for the damage caused to the value of the assets effectively transferred.

In practical terms, this means that the buyer of a distressed asset owned or related to an economic group under investigation, administrative or judicial proceedings grounded on compliance issues may have the acquisition impaired or unwind since liability may attach to the target asset as a result of the financial obligations arising from administrative or judicial sanctions applied against the seller.

The only way to mitigate the risks mentioned above would be to complete the acquisition of the asset upon the execution of a leniency agreement by the seller under investigation. The leniency agreement is expressly governed by the Anti-Corruption Law and is defined as an agreement between the competent authority to enforce the law and the investigated entity.

Many doubts remain around the application of this new concept in the Brazilian legal system, which was transposed from the law which governs antitrust and abuse of economic power (Antitrust Act). In order to implement leniency agreements, it is material to have clarity on: (i) who would be the competent authorities to execute the agreement; (ii) jurisdictional scope of the agreement; and (iii) discretion of the authority in executing and potentially amending leniency agreements if new facts are unveiled.

The formation of a body of precedents on the effectiveness and binding nature of leniency agreements is a fundamental step to overcome the crisis currently experienced by the Brazilian Economy and to enable new investments in infrastructure and other sectors which were deprived from relevant funding from private investors even before the launch of the ‘Carwash Operation’ conducted by the Brazilian Federal Police.


Raphael Nehin Corrêa and Carlo Verona are partners at Lefosse. Mr Corrêa can be contacted on +55 11 3024 6246 or by email: Mr Verona can be contacted on +55 11 3024 6189 or by email:

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Raphael Nehin Corrêa and Carlo Verona


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