The financial constraints caused by the coronavirus has affected the world’s economy and its outlook is still unknown and gloomy. Companies from all industries worldwide have been taking all sorts of measures to mitigate losses, preserve cash flow and, ultimately, survive. Just like other companies around the globe, the coronavirus has pushed many struggling Brazilian companies over the edge and into bankruptcy.

The International Monetary Fund predicts the Brazilian GDP will fall by 5 percent in 2020 and, have a slim 1.5-percent recovery next year. The consequences are enormous or significant Due to this huge contraction for Brazil, it is estimated that around 2,500 companies in the country may be forced to turn to the courts to avoid bankruptcy. If the numbers are confirmed, that would represent an increase of 40%compared to the record of 1,800 requests in 2016, when the country’s GDP dropped 3.5 %.

The Brazilian legal framework provides for a restructuring alternative (Law no. 11,101/2005) to legal entities in distress that are unable to pay their debts upon maturity. Law no. 11,101/2005 (also referred to as “the Brazilian Bankruptcy Law”) provides tools to restructure debtors’ obligations to continue operations, allowing them to present and discuss with creditors an out-of-court or judicial (in-court) plan aimed at obtaining more favorable conditions for the payment of the debts.

Despite some differences  in the US Bankruptcy Code – by which the Brazilian Bankruptcy Law  was largely inspired – under Law no. 11,101/2005 debtors can also request a 180-day stay period, enabling companies to reorganize their  financial situation. Throughout the stay period, the statute of limitations period of potential claims and collections by creditors of the debtor are suspended (except for tax debts). Law no. 11,101/2005 also provides for a 60-day period from the moment a court’s protection is granted for the debtor to present its out-of-court or in-court plan.

The Brazilian Bankruptcy Law was designed to rescue distressed but viable businesses. In this sense,  restructuring proceedings should be used with caution. Not all  restructuring and rehabilitation, however, is feasible. If not, the company can be discontinued through a bankruptcy liquidation process. Therefore, before requesting a court’s protection from creditors, it is recommended companies’ assess their real financial conditions, taking into account the upcoming effects of the coronavirus economic relief measures for  businesses and their wherewithal to overcome the crisis in the long term.

Finally, companies doing business in Brazil should be  mindful of how to protect their rights and mitigate the risk of payment default by those companies in distress.

If you would like to obtain further information on the  restructuring and bankruptcy proceedings in Brazil, please contact the Brazil Desk of Squire Patton Boggs.