LEGAL ANALYSIS: Oi Judicial Recovery prioritizes company preservation, sets precedent on restructuring foreign financing vehicles - Debtwire

LEGAL ANALYSIS: Oi Judicial Recovery prioritizes company preservation, sets precedent on restructuring foreign financing vehicles

20 November 2017 - 12:00 am

When Oi SA (Oi) filed its Judicial Recovery protection request back in 20 June 2016, it requested that the Brazilian court also oversee the restructuring of the debt of certain foreign affiliates organized for the sole purpose of raising foreign investments, namely Dutch affiliates Portugal Telecom International Finance BV (“PTIF”) and Brasil Holding Cooperatief UA (“FinCo”). We have extensively covered this situation here at Debtwire due to the lack of clarity as to whether Brazil is the proper domicile to restructure obligations of foreign domiciled legal entities under Brazilian law. At the time, a group of Oi bondholders led by Capricorn Capital, Ltd. (“Capricorn”) and Sygyzy Capital Management, Ltd. and (“Sygyzy”) appealed the court’s acceptance of such foreign affiliates into the Judicial Recovery, instead preferring a previously instituted bankruptcy process for those entities in the Netherlands. Specifically, the bondholders were looking to foreclose on those entities’ key assets through the Dutch court — certain stock options in the Brazilian parent that, if exercised, would have put those bondholders in the driver’s seat of the Brazilian restructuring.


Notably, the Netherlands Supreme Court even formally declared those subsidiaries bankrupt while a ruling on the bondholders’ appeal was still pending in Brazil. But the Rio de Janeiro State Court of Justice has recently rejected the bondholders’ appeal, holding that the preservation of the company must prevail against individual creditors’ interests. This precedent may not bode well for creditors of foreign affiliates of Brazilian companies seeking to reorganize and may lead to jurisdictional standoffs, as we discuss below.


CLICK HERE for the Debtwire legal analyst team’s primer onthe Brazilian restructuring system.




Oi’s request for Judicial Recovery protection included filings by five Brazilian Companies (Oi, Telemar Norte Leste SA, Oi Movel SA, Copart 4 Participacoes SA and Copart 5 Participações SA), and two Dutch Companies (PTIF and FinCo). Grounded on the Section 3rd of Brazilian Reorganization law – which rules on the COMI[1] definition by stating that a Judicial Recovery protection request must be filed in the Court of the main place of activities of the company or, if the company is headquartered abroad, in the Judiciary District of its subsidiary – the Lower Court accepted the inclusion of the Dutch subsidiaries in its restructuring process in Brazil.


Creditors Capricorn and Sygyzy appealed that decision, arguing that PTIF and FinCo could never be included in a Brazilian Reorganization process, considering that the companies are Dutch organizations that were already in a liquidation proceeding in the Netherlands. The creditors’ main argument was the Brazilian Judiciary Branch would be violating the Netherlands’ sovereignty by simultaneously accepting another insolvency process for the same company. The situation became even worse when the Dutch Branch ultimately ruled[2] the companies bankrupt, a ruling that was not recognized by Oi’s Brazilian Restructuring Court – while appeals over their inclusion in the Brazilian process were still pending on this issue.[3] Further, creditors argued that although the affiliates were constituted abroad for the sole purpose of acquiring international funding for the Brazilian organization, their financial restructuring should never be admitted in Brazil without explicit statutory guidance.


However, Court Judge Cezar Augusto Rodrigues Costa of the 8th Civil Chamber of the Rio de Janeiro State Court of Justice denied the creditors’ arguments and granted the Judicial Recovery protection for the Dutch affiliates. Basing his decision on the principle of “company’s preservation” stated in Section 47[4] of Brazilian Reorganization Law, the Court ruled that foreign companies may be restructured under a Brazilian Court’s oversight where those companies were constituted abroad not to develop operational activities, but specifically to work as financial vehicles in order to issue foreign bonds and receive corresponding revenues.


Lastly, the Court held that both financial vehicles PTIF and FinCo are wholly owned subsidiaries and their key “assets” are precisely the shares which are located in Brazil, Brazilian law should apply to regulate the destination to be given to such assets, pursuant to Section 8th[5] of Decree-Law number 4.657/1942 (“Law of introduction to the norms of Brazilian Law – LINDB”).


Precedents to be confirmed by the Superior Court of Justice


In prior cases where a request to include foreign affiliates in a company’s Judicial Recovery protection was granted, the Courts also held that the foreign companies were constituted abroad only to work as financial vehicles of the Brazilian controlling entity solely to issue foreign bonds and receive revenues. For instance, in the restructuring process of OAS SA, a corporate group composed both by Austrian and BVI subsidiaries, as well as in the reorganization processes of Eike Batista’s OGX and Base Engenharia (former Schahin Group), similar requests that the foreign affiliates be included in a Brazilian Judicial Recovery process were all granted. Furthermore, in the Judicial Recovery processes of Aralco Group and Lupatech Group the inclusion of foreign affiliates were granted by the Brazilian Courts.


In OGX, while the Judicial Recovery request was initially denied by the Lower Court for the foreign affiliates, the Fourteenth Chamber of the Rio de Janeiro State Court of Justice ultimately granted OGX’s interlocutory appeal of that decision, and therefore the Austrian subsidiaries of the group were also included in the restructuring procedure presided by Brazilian Judiciary Branch. The same thing happened in Sete Brasil Group’s case – foreign affiliates’ participation in the consolidated restructuring process was denied in the first instance, but was granted by the State Court on appeal. Creditors have filed Special Appeals against State Court rulings granted in OAS, Base, Sete Brasil and OGX to the Superior Court of Justice (“STJ”), and Oi’s bondholders are likely to follow suit.


Assuming that the Superior Court will consolidate this precedent, Brazil-based international companies might feel comfortable including foreign financing vehicles in their Judicial Recovery protection requests in Brazil, imposing restructured payment conditions on dissident bondholders and other financial creditors of those foreign entities – especially when foreign affiliates’ assets are located in Brazil. However, the same cannot be said when those subsidiaries’ assets are abroad, as in those cases a foreign jurisdictions’ Court order is expected to prevail against any contrary Brazilian rulings. Specifically in Oi’s case, as the Dutch legal system (i) does not have statutory guidance for cross-border insolvencies commenced in countries which do not belong to the Europe Union and (ii) seemingly is more focused on creditors’ individual recovery rights and interests, rather than protecting company’s preservation and social function, it is likely that bondholders would succeed in foreclosing PTIF and FinCo assets were they located in Netherlands. As they are not, currently there is not much to do rather than appeal lower Court decisions and hope for international cooperation, as well as for a reorganization plan that is not excessively aggressive when it comes to their claims.


This sort of international jurisdictional controversy would be easier to deal with in jurisdictions that have adopted the UNCITRAL model law[6] for cross-border insolvencies, including mechanisms to extend the application of rulings granted by the foreign restructuring court – actually, some of the largest reorganization processes conducted in Brazilian restructuring Courts have filed for Chapter 15 in the United Sates in order to make Brazilian rulings reach and protect assets located in the US – OAS, Oi and, recently, Odebrecht Oil and Gas SA (“OOG”), for instance.[7]  While the Netherlands appears to have no such mechanism, we note that Brazil itself has also yet to adopt the model law. But until then, fighting creditor battles abroad may be just another necessary expense for a Brazilian Judicial Recovery process.




[1]  Center of Main Interests.


[2]  In a hearing held on 19 April, the Dutch Court granted the appeals filed by the administrators of Oi’s foreign subsidiaries to convert their Dutch Suspension of Payments (“SoPs”) proceedings into full liquidations, declaring the companies bankrupt – the Dutch Supreme Court confirmed the decision on 7 July.


[3]  CLICK HERE for our latest review of the Oi and other companies jurisdictional issues, at the Debtwire’s monthly Court Spotlight.


[4]  This principle establishes that judicial reorganization aims to overcome the situation of economic and financial crisis of the debtor, in order to preserve the economic activity and the public interest resulting from the recovery, like the preservation of jobs, tax collection and circulation of goods, products and services, as well as the interests of creditors.


[5]  In order to qualify the assets and regulate the relations applicable to them, the law of the country in which they are situated shall apply.


[6]  This model law is the basis for the US Chapter 15 process.


[7]  CLICK HERE for the Debtwire Dockets regarding OOG’s Chapter 15 filings.


by Arthur Almeida


Arthur Almeida is a former restructuring attorney. Prior to joining Debtwire as a Legal Analyst, he practiced with Passos & Sticca Advogados Associados, as well as working in the legal department of Banco Fibra S.A. Arthur’s experience includes participating in major civil litigation on credit recovery. He has represented creditors such as banks and financial institutions in high-profile restructurings.


Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.