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Light creditor Banco Santander’s maneuver to circumvent protective measures threatens success of reorganization process

by Arthur Almeida, with RDB charts by Jayjeet Sharma

Banco Santander has just obtained a favorable decision in a credit enforcement suit filed against Light SA last week, which has the potential to shake up the bankruptcy case and derail the company's efforts to restructure its claims via a judicial recovery process, despite explicit prohibitions under Brazilian law. If the strategy adopted by the bank to collect on claims allegedly impaired by the controversial restructuring process ultimately succeeds, other creditors could be incentivized to do the same – thereby threatening the implementation of the in-court restructuring process.

Source: Debtwire’s Restructuring Database

Background – the controversial bankruptcy

The Light SA case has been contentious since the very beginning, when the Brazilian electricity provider obtained an injunction preventing financial creditors from commencing or continuing with individual lawsuits, in a pre-insolvency proceeding commenced in April 2023 with a Rio de Janeiro corporate court. The injunction protected both the parent company and its subsidiaries (i) Light Servicos de Eletricidade S.A. (SESA) and Light Energia S.A., despite the fact that these subsidiaries are explicitly prevented by the law from commencing debt reorganization proceedings (arguably including the pre-insolvency filing), as they hold concession agreements with the government.

Source: Debtwire’s Restructuring Database

The protective injunction issued in favor of the group was later confirmed by the court, when the Light group filed for judicial recovery on behalf of only the holdco, and requested the extension of the stay period protection for its subsidiaries that operate concessions. The request was granted by the court, which rejected all the objections filed by Santander and other creditors which have been litigating with the company since the beginning of the pre-insolvency proceeding.

Source: Debtwire’s Restructuring Database

Circumventing protective measures

After these efforts failed to yield the hoped-for results, Banco Santander modified its approach to the case. In the decision that admitted the bankruptcy case for review, the court noted that, as Light SESA and Light Energia did not file for bankruptcy, the protection to them should apply only to the financial obligations linked to the concessionaires that have the holding company as co-obligator. As a result, the other obligations not connected to the filing entity could be enforced by creditors, including those related to consumption, suppliers, labor claims and indemnities.

Relying on this portion of the bankruptcy court decision, on 20 July, Banco Santander sent Light an official letter stating that it decided to forgo the guarantee provided by Light SA for the BRL 58.4m swap contract the bank reached with Light Energia. On the same day, Santander filed the credit enforcement petition, arguing that, as a consequence of the release of the guarantee, the debt was no longer linked to the parent company. Therefore, according to the bank, it was no longer impaired by the bankruptcy process, which means that it could be enforced. The lawsuit was filed with a Sao Paulo Civil court, which is the venue provided for in the swap contract to resolve disputes between the parties.

Light responded to the petition by accusing Santander of being opportunist and acting in bad faith, arguing that it was trying to circumvent the effects of the protective decisions issued in favor of the company. The rulings issued by the bankruptcy court, according to Light, were in line with the principle of company preservation set forth in Section 47 of Brazilian bankruptcy law and may not be violated by an individual execution measure commenced by a creditor against the collective restructuring procedure.

Enforcement suit admitted – potential domino effect puts judicial recovery at risk

In a decision issued on 26 July, Judge Clarissa Rodrigues Alves, of the Fourth Civil Court of the Sao Paulo Central Forum admitted the case filed by Santander and ordered Light to provide the payment of the debt and related expenses within the three days following official notification. Alternatively, Light may respond to the enforcement suit by filing a motion to stay execution (“embargos a execucao”) within 15 days following the official notification. Another option is to provide the payment of 30% of the debt by the same deadline and split the payment of the remaining claims in six monthly instalments, according to the decision.

The ruling in favor of Santander will likely incentivize the other financial creditors impaired by Light’s judicial recovery to seek similar individual decisions in the following days. Additionally, we expect that not only a response, but also several appeals and “conflict of authority” proceedings will be lodged by creditors, and the company as well, along with injunction requests, increasing litigation as usually occurs in unprecedented situations like this in Brazil.

After all disputes are ultimately decided by the courts, it seems that a definitive ruling in favor of the creditors could put the success of Light’s judicial recovery at risk.