Text commented by Bruno de Queiroz - Executive Director of Galeazzi & Associados

This is a compelling article on fraud in Bankruptcy (Chapter Eleven) process in "owner-owned" companies, written by the talented Thomas Felsberg (also a colleague at TMA Brasil) and the equally renowned lawyer Victoria Villela Boacnin. The text provides valuable insights on the subject.

First and foremost, it is highlighted that Bankruptcy (Chapter Eleven) process often fails to resolve the insolvency of family-owned businesses, which constitute the majority of companies in Brazil. This is because the Bankruptcy and Judicial Recovery Law (Law No. 11,101/2005) is based on U.S. legislation, specifically directed towards the restructuring of corporations, which are less common in the Brazilian context.

The authors also address the need for a review of this law, promoting a comprehensive discussion to improve its application and enhance credit recovery in cases of insolvency. Although the law underwent a revision in 2020, there are still points that require adjustments.

There has been a significant increase in Bankruptcy (Chapter Eleven) process requests from large companies recently, emphasizing the importance of a serious debate on the subject. There are distorted interpretations of Bankruptcy (Chapter Eleven) legislation in Brazil, and it is essential to apply it correctly to minimize losses resulting from insolvency.

Furthermore, most Brazilian companies have concentrated control, with one or a few partners, and many are family-owned businesses. This means that even if Bankruptcy (Chapter Eleven) process is successful and there is restructuring, the debt burden remains with the controllers and family members, especially in family businesses.

This occurs due to two factors: (1) it is common in the Brazilian market for controllers to provide guarantees for bank debts, a practice rare in the United States; and (2) when a judicial recovery plan is approved and debts are restructured, guarantees are not affected. This creates a peculiar situation where guarantees are not restructured, while the original debt undergoes changes.

The result is that controlling shareholders often have little incentive to resolve Bankruptcy (Chapter Eleven) process, as they will continue to guarantee obligations until full payment.

The alternatives proposed by the authors should lead to an in-depth debate on the subject, aiming to continue the process of modernizing insolvency legislation in Brazil. The impacts on the economic environment and credit recovery would be extremely positive.

This is an excellent article, and I strongly recommend reading it!

(Source: Brazil Journal, 2023) 

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