Five years ago, Brazilian extrajudicial reorganization proceedings (recuperação extrajudicial, or “EJ”) were seen as an innovative legal tool to restructure U.S. dollar denominated debt issued or guaranteed by Brazilian debtors. In 2017, the restructuring of Odebrecht Oil & Gas marked the first successful large case that used an EJ to implement the restructuring of New York law-governed notes1. Since then, and particularly after 2021 when new changes to the law were introduced, the EJ has been increasingly used to implement debt restructurings due to its numerous advantages2.
In this article, we explore the implications of these reforms on EJ proceedings, and why this route has become an attractive path for debtors.
In an EJ process, the debtor negotiates the restructuring terms with its creditors prior to filing an EJ with the court3. The terms of the restructuring are documented in a plan of extrajudicial reorganization (the EJ Plan). The EJ Plan is usually submitted by the debtor to the EJ Court for confirmation once the plan is approved by creditors holding at least more than half of the claims (in value) of each class of creditors impaired by the EJ Plan. Debtors are generally free to only include specified classes of similarly situated creditors in the EJ Plan and leave the remaining creditors unimpaired, allowing the debtor to manage the plan’s impact on suppliers, customers, and other stakeholders. An EJ Plan, however, is not available to impair labor claims, contingent claims, claims deriving from aircraft leases, and tax claims.
At the time of the EJ filing, the debtor may request either:
- confirmation of the EJ Plan; or
- that the court grant a 90-day stay period for the debtor to seek the EJ requisite majority threshold, provided that at the EJ filing the creditors holding at least one third of the claims (in value) of each impaired class have given their prior consent to the EJ Plan.
At the time of filing, the debtor is provided with a stay of enforcement actions and lawsuits for a period of 180 days. Once the debtor requests confirmation of the EJ Plan, impaired creditors have 30 days to file objections to the EJ Plan based on an exhaustive list of potential challenges, after which the court is expected to enter an order deciding on the EJ Plan confirmation.
In an EJ process, the debtor negotiates the restructuring terms with its creditors prior to filing an EJ with the court3. The terms of the restructuring are documented in a plan of extrajudicial reorganization (the EJ Plan). The EJ Plan is usually submitted by the debtor to the EJ Court for confirmation once the plan is approved by creditors holding at least more than half of the claims (in value) of each class of creditors impaired by the EJ Plan. Debtors are generally free to only include specified classes of similarly situated creditors in the EJ Plan and leave the remaining creditors unimpaired, allowing the debtor to manage the plan’s impact on suppliers, customers, and other stakeholders. An EJ Plan, however, is not available to impair labor claims, contingent claims, claims deriving from aircraft leases, and tax claims.
At the time of the EJ filing, the debtor may request either:
- confirmation of the EJ Plan; or
- that the court grant a 90-day stay period for the debtor to seek the EJ requisite majority threshold, provided that at the EJ filing the creditors holding at least one third of the claims (in value) of each impaired class have given their prior consent to the EJ Plan.
At the time of filing, the debtor is provided with a stay of enforcement actions and lawsuits for a period of 180 days. Once the debtor requests confirmation of the EJ Plan, impaired creditors have 30 days to file objections to the EJ Plan based on an exhaustive list of potential challenges, after which the court is expected to enter an order deciding on the EJ Plan confirmation.
Since January 2021, changes to the Brazilian Bankruptcy Code have increased the attractiveness of the EJ as a restructuring tool by decreasing the required majority for approval, statutorily providing for a stay period, contemplating mechanics for the restructuring of tax claims in direct negotiations with the authorities, and giving legal certainty to the effectiveness of collateral granted during EJ proceedings. We discuss some of these points, and more, below.
Since January 2021, changes to the Brazilian Bankruptcy Code have increased the attractiveness of the EJ as a restructuring tool by decreasing the required majority for approval, statutorily providing for a stay period, contemplating mechanics for the restructuring of tax claims in direct negotiations with the authorities, and giving legal certainty to the effectiveness of collateral granted during EJ proceedings. We discuss some of these points, and more, below.
1. Acceptance Threshold and Consent Process
While confirmation of an EJ Plan requires the consent of creditors holding at least half of claims (in value) of each class impaired by the EJ Plan, there is no requirement on headcount. This requisite majority threshold came into effect in 2021 as part of a reform of the Brazilian Bankruptcy Code, and replaced existing rules which required a consent threshold of more than 60% of claims (in value). The EJ proceedings do not provide for cross-class cramdown, given that each class of creditors must approve its plan. Multiple plans may be filed as part of the same EJ proceeding to restructure different classes of creditors.
This simple majority consent threshold in EJ proceedings is highly attractive if compared to alternative foreign or local restructuring processes, and to the threshold required for contractual amendments of debt documents outside of an insolvency process4.
The negotiations over an EJ Plan often take place privately and, typically, creditors evidence their approval of an EJ Plan by signing the plan that is submitted to the court. However, this may not always be the case where the impaired debt is publicly traded and the holders of claims are pulverized.
In the EJ proceedings of Odebrecht Engineering and Construction (OEC), which was used to restructure seven series of its New York law-governed notes, the debtor launched a consent solicitation process to get the noteholders’ approval to the EJ Plan and ensuing exchange of their notes. Through this mechanism, the OEC EJ Plan obtained the support of approximately 73% of the principal amount of its old notes5. Recent amendments to the law now allow for filing with the support of one third of the claims in value (with a 90-day period to obtain the remainder support for approval of an EJ Plan), but this mechanism has not been used to date.
2. Fast-Track Process
EJ proceedings are often faster and less expensive than many other court-run restructuring processes, either in Brazil or in foreign jurisdictions. It typically takes between two to six months to move from an EJ filing to the court confirmation of the EJ Plan6, depending on the venue, the court’s workload and any litigation. Following the court’s confirmation of the EJ Plan, the debtor and creditors are expected to work on completion of the restructuring transaction, pursuant to the terms and deadlines set forth in the EJ Plan, and the duration of the EJ Plan’s implementation may vary according to the particularities of each case.
1. Acceptance Threshold and
Consent Process
While confirmation of an EJ Plan requires the consent of creditors holding at least half of claims (in value) of each class impaired by the EJ Plan, there is no requirement on headcount. This requisite majority threshold came into effect in 2021 as part of a reform of the Brazilian Bankruptcy Code, and replaced existing rules which required a consent threshold of more than 60% of claims (in value). The EJ proceedings do not provide for cross-class cramdown, given that each class of creditors must approve its plan. Multiple plans may be filed as part of the same EJ proceeding to restructure different classes of creditors.
This simple majority consent threshold in EJ proceedings is highly attractive if compared to alternative foreign or local restructuring processes, and to the threshold required for contractual amendments of debt documents outside of an insolvency process4.
The negotiations over an EJ Plan often take place privately and, typically, creditors evidence their approval of an EJ Plan by signing the plan that is submitted to the court. However, this may not always be the case where the impaired debt is publicly traded and the holders of claims are pulverized.
In the EJ proceedings of Odebrecht Engineering and Construction (OEC), which was used to restructure seven series of its New York law-governed notes, the debtor launched a consent solicitation process to get the noteholders’ approval to the EJ Plan and ensuing exchange of their notes. Through this mechanism, the OEC EJ Plan obtained the support of approximately 73% of the principal amount of its old notes5. Recent amendments to the law now allow for filing with the support of one third of the claims in value (with a 90-day period to obtain the remainder support for approval of an EJ Plan), but this mechanism has not been used to date.
2. Fast-Track Process
EJ proceedings are often faster and less expensive than many other court-run restructuring processes, either in Brazil or in foreign jurisdictions. It typically takes between two to six months to move from an EJ filing to the court confirmation of the EJ Plan6, depending on the venue, the court’s workload and any litigation. Following the court’s confirmation of the EJ Plan, the debtor and creditors are expected to work on completion of the restructuring transaction, pursuant to the terms and deadlines set forth in the EJ Plan, and the duration of the EJ Plan’s implementation may vary according to the particularities of each case.
|
Debtor |
Filing Date |
Confirmation Date |
Court |
Length of Proceedings (From Filing Until EJ Plan Confirmation) |
|---|---|---|---|---|
|
Odebrecht Oil & Gas |
May 23, 2017 |
October 19, 2017 |
4th Commercial Court of the Judicial District of Rio de Janeiro |
Four months and 26 days |
|
Odebrecht Engineering and Construction |
August 20, 20207 |
October 26, 2020 |
1st Bankruptcy Court of the Judicial District of Sao Paulo |
Two months and six days |
|
Andrade Gutierrez |
September 29, 2022 |
November 29, 2022 |
1st Corporate Court of the Judicial District of Belo Horizonte |
Two months |
|
Ocyan |
December 12, 2022 |
March 20, 2023 |
4th Commercial Court of the Judicial District of Rio de Janeiro |
Three months and eight days8 |
EJs give contesting creditors limited ability to raise objections to the EJ Plan. Once the court receives an approved EJ Plan, it orders the publication of a notice opening a 30-day window for creditors to file potential objections. The law limits the nature of possible objections to a defined list, including:
- a failure to comply with the required consent threshold;
- fraudulent transfers; and
- a breach of any other legal requirements.
Following that 30-day period, the court opens a five-day window for the debtor to respond to objections (if any), after which the court is expected to decide on the EJ Plan confirmation.
The confirmation order may be subject to appeal, however the filing of appeals does not have any automatic suspensory or injunction effects, unless otherwise ordered by the court of appeals in case of irreparable harm and likelihood of success on the merits.
EJs give contesting creditors limited ability to raise objections to the EJ Plan. Once the court receives an approved EJ Plan, it orders the publication of a notice opening a 30-day window for creditors to file potential objections. The law limits the nature of possible objections to a defined list, including:
- a failure to comply with the required consent threshold;
- fraudulent transfers; and
- a breach of any other legal requirements.
Following that 30-day period, the court opens a five-day window for the debtor to respond to objections (if any), after which the court is expected to decide on the EJ Plan confirmation.
The confirmation order may be subject to appeal, however the filing of appeals does not have any automatic suspensory or injunction effects, unless otherwise ordered by the court of appeals in case of irreparable harm and likelihood of success on the merits.
3. Growing Number of Precedents and Developing Case Law
The growing number of EJs that have been filed over recent years has provided debtors, creditors (including foreign entities and investors), judges, and practitioners with a deeper knowledge and higher degree of confidence and predictability on the EJ process. Although many questions on EJs remain open and untested, such as the scope and limits of class composition (e.g., impairment of similarly situated creditors in a single class for voting purposes, but not identically positioned in the debtor’s capital structure), many other open points have been tested and decided by the courts, including the possibility to use a variety of restructuring tools. The predictability of the restructuring process tends to be higher in cases where the EJ is filed with specialized bankruptcy courts, such as the Sao Paulo and the Rio de Janeiro district courts.
4. Variety of Restructuring Options and Components
EJ proceedings give the debtor and creditors flexibility to choose among various restructuring options in exchange for the cancellation of their existing claims, such as the conversion of debt into equity, the issuance of new debt, participatory or convertible instruments, and corporate governance protections. In many instances, to address different interests from the creditor group, EJ Plans provide a menu of restructuring options to choose through an election process that is launched after the entry of the EJ Plan confirmation order. For example, participatory instruments or convertible notes may be issued in lieu of equity for creditors who have restrictions on holding equity but wish to benefit from equity upside.
3. Growing Number of Precedents and Developing Case Law
The growing number of EJs that have been filed over recent years has provided debtors, creditors (including foreign entities and investors), judges, and practitioners with a deeper knowledge and higher degree of confidence and predictability on the EJ process. Although many questions on EJs remain open and untested, such as the scope and limits of class composition (e.g., impairment of similarly situated creditors in a single class for voting purposes, but not identically positioned in the debtor’s capital structure), many other open points have been tested and decided by the courts, including the possibility to use a variety of restructuring tools. The predictability of the restructuring process tends to be higher in cases where the EJ is filed with specialized bankruptcy courts, such as the Sao Paulo and the Rio de Janeiro district courts.
4. Variety of Restructuring Options and Components
EJ proceedings give the debtor and creditors flexibility to choose among various restructuring options in exchange for the cancellation of their existing claims, such as the conversion of debt into equity, the issuance of new debt, participatory or convertible instruments, and corporate governance protections. In many instances, to address different interests from the creditor group, EJ Plans provide a menu of restructuring options to choose through an election process that is launched after the entry of the EJ Plan confirmation order. For example, participatory instruments or convertible notes may be issued in lieu of equity for creditors who have restrictions on holding equity but wish to benefit from equity upside.
Restructuring Components of Recent EJ Proceedings Used To Restructure U.S. Dollar Denominated Debt
|
Debtor |
Amount of Debt Restructured |
Nature of Restructured Debt |
Restructuring Components |
|---|---|---|---|
|
Odebrecht Oil & Gas |
$5bn |
New York law governed, dollar denominated notes |
– New secured notes – Participatory debt instrument |
|
Odebrecht Engineering and Construction |
$3.4bn |
New York law governed, dollar denominated notes |
– New notes – Participatory debt instrument – Corporate governance protections |
|
Andrade Gutierrez |
$525mn |
New York law governed, dollar denominated notes |
– New secured notes |
|
Ocyan |
$2.7mn |
New York law governed, dollar denominated notes |
– New secured notes – Convertible notes – Carve out – new equity – New money – Corporate governance protections |
5. Debtor in Possession Financing
Although the administrative super-priority status for DIP financings is not explicitly contemplated under law for EJ proceedings, EJ Plans may include the provision of new money by existing creditors or third party lenders, who can often obtain significant protections9. In this case, the EJ Plan would provide for the terms and conditions of the DIP loan, including the scope and nature of any collateral, which can be in the form of fiduciary liens10. The 2021 reforms to the Brazilian Bankruptcy Code included a new protection to DIP lenders, whereby the granting of collateral to good-faith DIP lenders shall not be overruled or reversed following the completion of the DIP transaction or the transfer of the DIP loan, provided that such a transaction has been set forth in the EJ Plan or confirmed by the bankruptcy court.
6. Availability of Chapter 15 Recognition
Similar to Brazilian judicial reorganization proceedings (recuperacao judicial), U.S. Bankruptcy Courts have granted recognition to EJs and have enforced EJ Plans in Chapter 15 proceedings. Debtors may seek a recognition order at the EJ filing and an enforcement order later, upon confirmation of the EJ Plan by the Brazilian court. Alternatively, they may seek recognition of the EJ as a foreign main proceeding and enforcement of the EJ Plan at the same time, following the Brazilian court’s confirmation order. EJs have been recognized and enforced in the Chapter 15 cases of Odebrecht Oil & Gas, Odebrecht Engineering and Construction, Andrade Gutierrez, and Ocyan.
Not long ago, EJs provided debtors and creditors with limited predictability over the restructuring process due to its innovative aspect. Today, the growing number of filings, coupled with the restructuring-friendly terms of EJ proceedings and the additional protections provided in the 2021 reforms, have provided companies, creditors, and practitioners with enough confidence to transform EJ proceedings into the ‘go-to’ court-run restructuring process for a number of situations, including occasions where the debtor seeks the restructuring of a single class of debt obligations.
We expect that EJs will continue to grow as an attractive court-run process to address cross-border restructuring situations, raising the debtor’s and creditors’ confidence in the process.
Attorneys affiliated with Cleary Gottlieb do not practice Brazilian law. Any views expressed herein are not and should not be construed as legal advice and should be discussed with Brazilian counsel.
Built with Shorthand