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Brazilian bankruptcy experts weigh in on in-court restructuring of utilities, impairment of guarantee-related claims and companies restructuring abroad

by Arthur Almeida

During a conference held by the Brazilian Chapter of the Turnaround Management Association (TMA Brasil), restructuring experts weighed in on controversial legal issues regarding distressed concessionaires of public services, guarantee-related claims and Brazilian companies filing for bankruptcy abroad. The case law that was discussed came from high-profile in-court restructurings, including Light SA, Oi SA, Abengoa Construcao, Viracopos Airport, Rodovias do Tiete, Americanas SA, OAS, Ocyan (formerly Odebrecht Oil & Gas – OOG), Atento SAPetroserv Marine and Latam AirlinesDebtwire senior legal analyst Arthur Almeida was in attendance, and distills below the most important takeaways from the event.

Restructuring of utilities – continuity of public service must prevail

The Brazilian Federal Constitution requires the government to provide public services either directly or through private companies via concession or permission regimes. The concessions’ general rules are provided for in Federal Law number 8987/1995, which includes the concessionaire’s liquidation as one of the grounds for the concession’s automatic termination, but does not govern the impact of a service provider filing for judicial or extrajudicial recovery.

The legislative silence is mirrored elsewhere in the bankruptcy law, but this gap is partially filled by Section 18 of Federal Law 12767/2012 – at least when it comes to companies in the energy sector. According to this section, Brazilian in-court reorganization proceedings do not apply to concessionaires of public electric energy services, except after the termination of the concession.

The panelists noted that several concessionaires of public services have filed for bankruptcy in the recent past, including Oi SA, Abengoa Construcao, Viracopos Airport and Rodovias do Tiete. However, the concession agreements these companies held at the time of the bankruptcy filing refer to public services other than electric energy. In contrast, the Light SA judicial recovery – filed on behalf of the holdco as a strategy to circumvent law restrictions – has been testing the limits imposed by Law 12767/2012, and court protective rulings seemingly against the law added more complications to in-court restructurings of this sort of companies.

Source: Debtwire’s Restructuring Database

The panelists agreed that one of the most relevant aspects of bankruptcy processes of utilities refers to the participation of the government, which is represented by the regulatory authority for the sector of the distressed concessionaire. The lack of statutory guidance makes it more difficult for regulators to determine whether their claims are impaired by the process, as recently discussed in a dispute involving toll operator Rodovias do Tiete and the Sao Paulo State Transportation Agency (ARTESP).

As a consequence, it is unclear if regulators should adopt an active role in the discussions involving restructuring measures and repayment proposals, instead of just fighting against the company to have their claims excluded from the process and be either (i) repaid under the concession agreement provisions or (ii) renegotiated in parallel with the judicial recovery.

According to the panelists, the decision to be taken by regulators in situations like that must be largely based on the so-called “principle of continuity,” according to which public services must not be interrupted, as they are essential to the community, save for exceptional situations involving a default of its users, the need for repairs and employees’ rights to strike.

In other words, if a company holding a concession agreement commences a liquidation proceeding, the government must immediately and directly assume the public service that the concession provides until the establishment of a new concessionaire. On the other hand, when it comes to collective debt restructuring proceedings, the extent to which a regulator should become directly involved with the process depends on how much would it contribute to the preservation of the maintenance and the quality of the public service provided by the distressed utility.

Impairment of claims stemming from guarantees reached before, honored after a bankruptcy filing

Another panel discussed the impairment of claims stemming from guarantees, especially those related to insurance and surety (fianca) agreements that contain a clause providing that a bankruptcy filing constitutes an event of default that triggers the guarantors’ obligations. This matter has been a source of endless disputes in Brazilian in-court restructurings, including OAS SA, Ocyan and, more recently, Americanas SA.

As a general rule, Section 49 of the law provides that all prepetition claims are submitted to the reorganization proceeding. However, in these cases, the law does not clarify if guarantors’ claims are prepetition – as were the original claims they stem from – or post-petition, and therefore extraconcursal, considering that the payment obligation arguably arose after the filing.

Source: Debtwire’s Restructuring Database

Several panelists argued that these claims should be deemed prepetition because the guarantees go hand in hand with the loan agreements, which were entered into before the bankruptcy case, and cannot be separated. In other words, by honoring the guarantees and making the payments, guarantors are subrogated to the rights and positions of the original creditors, which held prepetition claims.

Other panel members disagreed, arguing that the focus should be on when the payments in connection with the guarantees are made, rather than the time that the loan agreements and related guarantees were entered into. Applying this latter view, the guarantee payment would turn guarantors into holders of new, post-petition and extraconsursal claims, which would be different from those held by the original creditors.

Brazilian companies filing for bankruptcy abroad

The event also featured a discussion of international bankruptcy specialists concerning domestic companies that have filed for bankruptcy in jurisdictions other than Brazil. Examples include certain affiliates of Latam Airlines, which commenced a voluntary Chapter 11 case in 2020, and more recently, offshore services provider Petroserv Marine and call center operator Atento SA, which had both opted for restructuring their debt via the filing of restructuring proceedings in the UK.

The panelists commented on the requirements provided for in the laws of those jurisdictions to admit a foreign company in domestic insolvency proceedings. When it comes to the US, the Bankruptcy Code allows every person or corporation that resides or has a domicile, a place of business, or property in the US to file for bankruptcy. In addition, the “property requirement” typically serves as the jurisdictional hook for foreign debtors, as it may be easily satisfied by the mere opening of a bank account prior to the bankruptcy filing, or even by the transfer of the retainer fees to the US lawyer that will represent the debtor in the debt restructuring proceeding.

Furthermore, the panelists explained that foreign companies looking to restructure in the UK must have a “sufficient connection” to the jurisdiction in order to be allowed to commence a bankruptcy proceeding there. The requisite connections can include clauses providing that English law governs and similar jurisdiction clauses. Similarly, a UK center of main interests would satisfy the requirement. As with the US law requirement, UK law incentivizes companies incorporated abroad to use their bankruptcy system by making clear that the requisite nexus can be manufactured specifically to entitle the company to commence the in-court restructuring proceeding.

In both cases, the forum choice could be motivated by the legal certainty and predictability that the US and the UK insolvency regimes provide, which typically streamlines reorganization proceedings and makes them more effective. Specifically in the US, the automatic stay and the possibility of accessing a huge market of post-petition financing are among the features that attract foreign companies to restructure their claims there, according to the panelists.