Restructuring & Insolvency newsletter: December 2024 and January 2025 updates

Record number of judicial reorganization requests in 2024

As of October 2024, Brazil saw a record number of requests for judicial reorganization, with 1,927 requests filed. This surpasses the previous annual record set in 2016, with 1,863 requests. According to data from Serasa Experian, the total number of requests for 2024 is expected to exceed 2,200 once consolidated data is released.

Significant increase in out-of-court reorganizations

The Brazilian Observatory of Extrajudicial Reorganization (Observatório Brasileiro de Recuperação Extrajudicial) reported a 320% increase in the volume of debts negotiated through out-of-court reorganization in 2024. The total amount of debts negotiated reached BRL 775.6 million, compared to BRL 179.7 million in 2023.

Arbitration clause not applicable in DIP financing for disputes involving the termination of contracts

The Superior Court of Justice (STJ) ruled that arbitration clauses do not apply to disputes involving the termination of debtor-in-possession (DIP) financing agreements. Justice Raul Araújo stated that as the contracting of DIP financing requires authorization from the reorganization court, it falls within the court’s jurisdiction to terminate such contracts. However, Justice Raul Araújo highlighted that disputes arising from the normal performance of the contract remain within the competence of the Arbitration Court.

Judicial reorganization for Itaiquara Alimentos Group reopened

The 2^nd Reserved Chamber of Business Law of the Court of Appeals of São Paulo permitted the judicial reorganization proceeding for Itaiquara Alimentos Group to be opened for 120 days. This decision enables the company to obtain a DIP financing of BRL 85 million, sell assets totaling BRL 480 million, and regularize state tax liabilities. The decision was controversial, with three judges in favor and two against. The company seeks to convene a creditors’ meeting to decide the future of the judicial reorganization.

Judicial reorganization for Wetzel S.A. reopened

The Regional Court of Bankruptcy, Judicial and Extrajudicial Reorganization of Jaraguá do Sul (Santa Catarina) authorized the judicial reorganization of Wetzel S.A. to be reopened in order to facilitate the sale of an iron production plant through an isolated production unit (UPI). A UPI is a legal concept within the Brazilian Bankruptcy Law (Law No. 11,101/2005) that facilitates the clean sale of assets during judicial reorganizations, ensuring their value is maximized by protecting the acquiror from past liabilities associated with the assets. The decision to reopen the proceeding was based on maximizing the sale value of the factory and ensuring non-succession of debts by the bidder, as per Article 60 of the Brazilian Bankruptcy Law. The funds from the sale will be used to pay all creditors of the judicial reorganization proceeding.

Derivative contract credits excluded from Unigel Group’s out-of-court reorganization

The 1^st Reserved Chamber of Business Law of the Court of Appeals of São Paulo decided against including credits arising from derivative contracts in the out-of-court reorganization of the Unigel Group. The debtors requested the inclusion of these creditors two months after filing the initial petition without prior negotiation. The court ruled that this violated the principles of adversarial and full defense and contradicted good faith. According to the ruling, the debtors should have included these creditors from the beginning of the out-of-court reorganization.

Labor Succession in Acquisitions of UPIs

Brazil’s Superior Labor Court (TST) determined that a dairy company must settle the labor debts of an employee who worked at a UPI that the company acquired. Despite recognizing the Brazilian Bankruptcy Law provides for protections that rule out the succession of obligations in UPI auctions, the court found that labor succession resulted from the formal transfer of the employee’s contract. This decision highlights that formal contract transfers can generate labor obligations for UPI acquirers.

For more information on these topics, please contact Mattos Filho’s Restructuring & Insolvency practice area.