Insolvency Law in Brazil

Introduction

Insolvency law in Brazil (Direito Falimentar or Direito Recuperacional) is governed by Law 11.101/2005 (the Bankruptcy and Judicial Reorganization Law), which replaced the outdated Decree-Law 7.661/1945. The 2005 Law introduced a modern framework focused on preserving viable businesses through judicial reorganization (recuperação judicial) while providing an efficient process for bankruptcy liquidation (falência) of non-viable enterprises. The law was significantly amended by Law 14.112/2020, which incorporated international best practices aligned with the UNCITRAL Model Law on Cross-Border Insolvency.

Principles and Objectives

The Brazilian insolvency system pursues three main objectives: (i) preservation of viable businesses (preservação da empresa); (ii) satisfaction of creditors’ rights; and (iii) protection of the social function of the enterprise, including employment and tax compliance.

The principle of preservation of the company (princípio da preservação da empresa) is fundamental, recognizing that the enterprise has a social function beyond the interests of its owners and creditors. This principle guides courts in favoring reorganization over liquidation when the business is economically viable.

Judicial Reorganization

Eligibility

Any debtor in financial difficulty (devedor em crise econômico-financeira) that meets the legal requirements may file for judicial reorganization. Excluded entities include public companies, financial institutions, and certain regulated entities (which have their own insolvency regimes).

The debtor must have been in business for at least two years and must not have obtained a reorganization judgment within the previous five years or have been convicted of crimes involving the insolvency process.

Process

The debtor files a petition with the competent court, attaching financial documents, a detailed explanation of the crisis, and accounts of employees and creditors. The court appoints a judicial administrator (administrador judicial) to oversee the process.

Upon acceptance of the petition, the court grants an automatic stay (stay period) for 180 days, during which enforcement actions and execution proceedings against the debtor are suspended. The stay may be extended once for the same period.

Reorganization Plan

The debtor has 60 days (extendable by 60 more days) to submit a reorganization plan (plano de recuperação). The plan must specify: (i) means of reorganization; (ii) debt rescheduling terms; (iii) treatment of different creditor classes; and (iv) governance during implementation.

Creditors are divided into four classes for voting: (i) labor creditors; (ii) secured creditors; (iii) unsecured creditors; and (iv) micro-enterprise and small business creditors. The plan must be approved by each creditor class meeting specific quorum requirements.

Cram-Down

If the plan is rejected by one or more creditor classes, the court may apply a cram-down mechanism, confirming the plan if: (i) it has been approved by the majority of classes; (ii) it ensures that dissenting creditors receive at least the value they would receive in liquidation; and (iii) dissenting creditors are not treated worse than any others in the same class.

Out-of-Court Reorganization

Law 11.101/2005 also provides for out-of-court reorganization (recuperação extrajudicial), a consensual mechanism allowing the debtor to negotiate directly with creditors without court intervention, except for the need to homologate the agreement to bind dissenting creditors.

Bankruptcy

Grounds for Bankruptcy

Bankruptcy (falência) may be decreed: (i) on the debtor’s own petition (autofalência); (ii) for failure to pay an amount exceeding 40 minimum wages without valid defense; (iii) for non-performance of the reorganization plan; or (iv) for fraudulent conduct, including concealment of assets, fictitious transfers, or preferential payments.

Effects

Bankruptcy results in: (i) forfeiture of the debtor’s right to manage assets; (ii) automatic maturity of all debts; (iii) suspension of interest; (iv) formation of the bankruptcy estate (massa falida); and (v) opening of the period for creditors to file claims.

Classification of Credits

Credits are ranked in the following order: (i) labor debts (limited to 150 minimum wages per creditor); (ii) secured credits; (iii) tax credits; (iv) unsecured credits; (v) contractual penalties and fines; and (vi) subordinated credits.

Cross-Border Insolvency

Law 14.112/2020 incorporated the UNCITRAL Model Law on Cross-Border Insolvency, enabling Brazilian courts to cooperate with foreign insolvency proceedings, recognize foreign proceedings, and grant relief to foreign representatives. Brazilian courts have applied the Model Law to coordinate proceedings in cases involving multinational debtors.

Insolvency Crimes

The law criminalizes specified conduct in the insolvency context, including: (i) fraudulent concealment of assets; (ii) fraudulent preference of creditors; (iii) falsification of documents; (iv) omission of information; and (v) violation of the stay period.

Conclusion

Brazilian insolvency law has evolved into a sophisticated framework balancing the interests of debtors, creditors, and society. The 2005 Law’s focus on business preservation through judicial reorganization has saved many viable enterprises from liquidation, while the 2020 amendments enhanced creditor protections and introduced cross-border recognition mechanisms. The Brazilian system continues to develop through case law, particularly regarding the treatment of tax credits, the approval of reorganization plans, and the application of cross-border insolvency principles.