Limitations of Brazilian law regarding cross-border insolvency


Financier Worldwide Magazine

January 2014 Issue

January 2014 Issue

As free international trade and global financial structures increased over the last three decades, so did the number of companies with multiple subsidiaries and, consequently, assets around the globe. As the sixth largest economy in the world, Brazil is not only an obvious choice for many companies seeking to grow their business, it also has its own multinational companies. 

Although on balance cross-border growth is positive, it brings several problems, including jurisdictional conflicts affecting the interconnected assets, rights and debts of a single company.

The matter becomes even more apparent with the insolvency of a company that has assets and creditors distributed across several countries. This normally results in the loss of asset value and a less efficient distribution of the total proceeds from the sale of goods.

Brazilian legislators have failed to address this matter in the current Bankruptcy Law. Despite being enacted in 2005 and openly influenced by the United States bankruptcy code, which contained jurisdictional provisions under Section 304 (repealed in 2005 and replaced with Chapter 15), Brazilian Federal Law number 11.101/05 did not introduce any solution for cross-border insolvency, leaving the situation to be remedied on a case by case basis, without general guidelines to assist companies in similar circumstances. 

When it comes to insolvency, Brazil has adopted the territoriality model, in which the country has exclusive and indiscriminate jurisdiction over all business and assets located within the Brazilian territory. It means not only that the procedure will take into account solely assets and business located in Brazil, but also that any foreign decision regarding the company’s goods and creditors will have very limited or no applicability. This model is opposed to universalism, in which the jurisdiction of the liquidation court can encompass assets and rights located outside a certain territory. 

The adoption of the territoriality model, which is quite common in civil law countries, causes concern in Brazil for the parties involved, mainly because it is impossible to obtain recognition of foreign insolvency proceedings. For example, a debtor under Chapter 11 in the United States cannot enforce an automatic stay order from abroad even if creditors located in Brazil are being well served by the US bankruptcy court. Furthermore, the Brazilian law has no provision regarding the participation of foreign representatives of the company in the liquidation procedure (similar to Chapter 7 of the US Bankruptcy Code), which creates risks relating to uncoordinated actions and unfair treatment of creditors. 

The lack of provisions for coordinating international matters raises multiple questions with little scope for solutions. A multinational company undergoing a foreign restructuring process will have no protection in Brazil unless it files its own reorganisation proceeding in a local court. If this is the case (i.e., a Brazilian filing), a foreign creditor would have an active voice in the Brazilian subsidiary’s future (e.g., voting on a reorganisation plan) regardless of its position in any other restructuring procedure, creating a potential power imbalance as a consequence of the overlap of insolvency proceedings. 

In the case of liquidation, the Bankruptcy Law provides only for the commencement of a local procedure, in which the court is not obliged or encouraged to hand the company assets to any foreign authority or to coordinate its activities to arrive at a solution seeking the maximum value for such assets. 

The Bankruptcy Law also did not introduce special provisions for international creditors, apart from: (i) the necessity of a bond to initiate an involuntary liquidation procedure, in order to guarantee payment of costs, court fees and damages in the case of a fraudulent claim; and (ii) specific rules related to claims in foreign currencies.

The deficiencies of Brazil’s Bankruptcy Law and the necessity for solutions led local courts and professionals to search for different approaches. In the Parmalat case, the Brazilian subsidiary, which had the biggest plant of the group, was forced to file its own judicial reorganisation claim since it was unable to claim for recognition of theamministrazione straordinaria filed by Parmalat S.p.A. before an Italian court. This resulted in the local court having total jurisdiction over Parmalat’s assets located in Brazil with no regulation regarding an international collaboration. The solution was achieved by a coordinated course of action led by the parties involved. 

However, the path was not without setbacks. Since the Bankruptcy Law does not recognise ancillary restructuring procedings, decisions rendered under European insolvency law could not be enforced in Brazil, leaving a feeling of insecurity between debtor and creditors. 

More recently, Eike Batista’s OGX filed for its reorganisation before a court in Rio de Janeiro, including two international subsidiaries (OGX International, from Netherlands, and OGX Austria). The bankruptcy court granted the processing for all Brazilian companies, but barred the two foreign companies from participating due to lack of provision in the Bankruptcy Law (which, as mentioned, was based on the territoriality model). OGX’s legal counsel indicated that they would appeal the denial, but the lack of legal provisions casts doubt on whether any Brazilian court will accept the extraterritoriality of the law. 

The lack of cross-border insolvency regulation has even worse effects when it comes to the liquidation of a company’s assets. Since the judge and the appointed trustee – two of the more important actors in the procedure – do not have the same level of freedom found in a judicial reorganisation, there is little room for creativity, resulting in a non-rational sale and distribution of assets if the company has any cross-border activities.

To address these problems, some Brazilian scholars suggest that local bankruptcy legislation must move quickly toward the universalism model. This would avoid thead hoc cooperative model that has been used in recent cases and ensure a reliable level of trust and safety for creditors and debtors. To resolve this, most scholars suggest enactment of the UNCITRAL Model Law, created in 1997 to address cross-border insolvency. We believe that the adoption of this model law would represent a huge step forward for Brazil’s legal framework. 

Luis Augusto Roux Azevedo is a partner and Leandro Araripe Fragoso Bauch is an associate at De Luca Derenusson Schuttoff Azevedo Advogados. Mr Azevedo can be contacted on +55 11 30404050 or by email: Mr Bauch can be contacted on +55 11 30404040 or by email:

© Financier Worldwide


Luis Augusto Roux Azevedo and Leandro Araripe Fragoso Bauch

De Luca Derenusson Schuttoff Azevedo Advogados

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