Brazilian petrochemical producer Unigel and Vortx – the trustee for the BRL 500m domestic bonds issued by the company – are fighting over an unprecedented situation in the country’s bankruptcy landscape: the possibility of amending prepackaged plans in the period between the filing of an extrajudicial recovery process and the deadline for obtaining support from the majority of creditors for the prepackaged plan. In this scenario, the Debtwire legal analyst team takes a closer look at both sides’ arguments, highlighting what the court is expected to consider when ruling on this dispute.

Source: Debtwire’s Restructuring Database

Background – unsuccessful out-of-court negotiations and bankruptcy filing

Following months of out-of-court negotiations to restructure its bond debt that failed to result in a deal, in December 2023, Unigel filed a precautionary measure with a Sao Paulo bankruptcy court seeking the suspension of all individual debt enforcement. The filing was made to allow a mediation process with creditors to address its financially distressed situation without the need to file for bankruptcy.

Debt restructuring conversations took place from late 2023 to early 2024. However, the company was unable to reach an agreement with the majority of its creditors, and on 20 February Unigel filed for extrajudicial recovery to restructure roughly BRL 3.9bn (USD 783m) in international and domestic bond debt.

Judge Paulo Furtado de Oliveira Filho, of the Second Bankruptcy Court of Sao Paulo, admitted the bankruptcy protection request the following day. The filing included two similar debt restructuring proposals: one for the holdco Unigel Participacoes and a second for its subsidiaries Proquigel Quimica, Companhia Brasileira de Estireno, Unigel Luxembourg and Plastiglas de Mexico.

Provisional prepackaged plans

Interestingly, the restructuring plans do not lay out a final and definitive repayment proposal, as many of the relevant clauses – including those regarding the newly issued debt instruments, newly issued convertible participating titles and related guarantees – make reference to certain “definitive documents.” According to the bankruptcy petition, the financial terms of the definitive documents are still being negotiated between the company and the so-called “original signatory creditors,” an ad hoc group of international bondholders who are supporting the in-court debt restructuring process.

However, in late February, Vortx filed two motions to challenge the provisional plans and the extrajudicial recovery proceeding, and asked the court to review the decision that admitted the case for review. Among other disputed issues, the trustee contends that an extrajudicial recovery protection request may not be filed with provisional plans, as the lack of clarity regarding the proposed repayment proposals makes it impossible for the creditors to decide whether to support the plan.

Vortx argued that, in contrast to judicial recovery proceedings, in which reorganization plans stem from post-petition negotiations and are presented after a bankruptcy filing, and may be subject to last-minute changings to accommodate relevant creditors’ requests (even during the meeting in which they vote to approve the plan). Vortx also argued that prepackaged plans attached to extrajudicial recovery petitions must be binding and definitive at the moment they are presented. In other words, as prepackaged plans are not submitted to a vote, they are also not subject to subsequent modifications. As a result, Vortx requested that the court order Unigel to present the definitive plans within 48 hours.

The company responded to the trustee’s objections on 11 March, calling its request “unreasonable,” citing that the plans could be subject to change within the 90 days after their filings for the purpose of increasing creditor support for the proposals. A ruling on the matter is expected within the next few days.

Bankruptcy law reform: incentives to prepackaged plans may lead to unanswered questions

Similar to a prepackaged Chapter 11 process in the US, in a Brazilian extrajudicial recovery proceeding, the company and its creditors negotiate debt restructuring measures and the result of the negotiation is presented to the court for sanctioning, in order to be enforceable against remaining dissident creditors – essentially a cramdown process. For this purpose, in the past extrajudicial recovery plans needed to be approved by at least 60% of the claims to be restructured, as set forth in the original version of Brazilian bankruptcy law.

Source: Debtwire’s Restructuring Database

A major reform of the law that became valid in early 2021 modified certain sections related to this reorganization proceeding, in order to facilitate the acceptance of prepackaged plans. Specifically, the reform reduced the plan acceptance threshold to 50%, and allowed the bankruptcy filing (which, if admitted, starts a 180-day stay period protection against individual debt enforcement measures) by evidencing only one-third (33.3%) of impaired claims’ support, provided that the company evidence the remaining quorum support within 90 days following the filing, as is the case with Unigel.

These modifications were designed to provide companies with additional time to achieve the requisite 50% support during the pendency of their cases, while already being protected by the stay period in the meantime. However, the law is silent when it comes to the possibility of presenting amended plans or modifying plan provisions during the 90 days in which the company should obtain the remaining support for the prepackaged plans. The silence may be addressed with a ruling on Vortx’s challenge to the Brazilian petrochemical producer’s restructuring plan.

Conclusion – case law expected to fill the gaps

At first glance, it could be said that prepackaged plans are binding for the supporting creditors once they are filed and, therefore, their provisions may not be changed during the proceeding, otherwise the one-third plan support attached to the bankruptcy petition would become invalid. For the Debtwire legal analyst team, this looks to be unquestionable when the filing comes along with the 50% support required under the law, at the beginning of the proceeding.

On the other hand, it sounds also reasonable that, following the law reform, negotiations to reach the minimum plan support quorum may involve modifications to the original repayment proposals, as those creditors who have not yet adhered could present suggestions for adjustments, and condition their plan support on the acceptance of their suggestions.

In this scenario, the Debtwire legal analyst team believes that amendments to prepackaged plans emerge as the way that better reflects the course of negotiations, in line with the dynamics of reaching a collective bargaining agreement relying on mutual, reciprocal concessions – which is typical in in-court restructuring processes like Unigel’s extrajudicial recovery.

With solid arguments for both sides in an unprecedented situation in Brazilian bankruptcy case law, it will be up to Judge Oliveira Filho to decide which of the positions described above should prevail under the circumstances at hand – a ruling is expected to set a precedent and guide, or at least to be considered, in decisions to be made in similar disputes in the future.