Oi's use of mediation creates model for future Brazilian Judicial Recovery processes - Debtwire

Oi’s use of mediation creates model for future Brazilian Judicial Recovery processes

12 September 2018 - 12:00 am

Oi SA’s (Oi) approved reorganization plan stated, among other restructuring measures, that the company may enter mediation with its creditors over disputed claim amounts. Following the plan, the Restructuring Court recently ordered the creation of an online mediation proceeding, to provide the stakeholders with an opportunity to consensually define the amount and the classification of all claims held by creditors who have objected to the creditor list. Due to Oi being the largest Court reorganization process Brazil has ever seen, the supervising Court has found it useful to employ mediation measures throughout the case, issuing orders that set procedures destined to become precedent for Brazilian reorganizations to come. In light of the novelty of these procedures in the context of a Brazilian restructuring, the Debtwire legal analyst team highlights below the positive aspects of using the mediation as a tool for conflict resolution, as well as its compatibility with the Brazilian bankruptcy law framework.
Oi filed its Judicial Recovery protection request on 20 June 2016 and, on 8 January 2018, the Restructuring Court affirmed the creditors’ approval of the reorganization plan. Section 4.8 of the approved debt restructuring proposal set forth that “Oi may perform, after the Judicial Ratification of the plan, mediation procedures to be implemented with the specific purpose of executing arrangements to make liquid credits that are currently non-liquidated”.
Citing that provision, on 20 August the Court ordered the creation of an online mediation proceeding, in order to facilitate settlements between the company and its creditors regarding the amount and the classification of thousands of currently disputed claims, as well as the thousands of other claims objections expected to be filed in the near future regarding “delayed proof of claims” (“habilitacoes retardatarias”).[1]
The Restructuring Court’s reliance on mediation procedures is not new in Oi’s judicial recovery process. Even before the plan approval, it had already ordered mediation as an attempt to solve certain disputes with direct impacts on the development of the Judicial Recovery process and the company’s financial, economic turnaround. Previously instituted mediations concerned the classification of ANATEL’s claims, the corporate rights of large shareholders Bratel SARL and Societe Mondiale Fundo de Investimento em Acoes, and also the conditions for payments to be made to creditors holding smaller claim amounts, such as employees and small suppliers. Although the mediation proceedings regarding ANATEL and the shareholders have not led the parties to a consensual solution to date, the mediation for minor claims led to more than 36,000 agreements, after the State Court rejected several appeals filed by certain financial creditors against using that process.[2]
But how exactly does a mediation proceeding work in Brazil? Is it really compatible with the Brazilian bankruptcy law framework, especially when it comes to (i) the principle of “par conditio creditorum”[3] and (ii) the limits of a Restructuring Court’s oversight on the economic aspects of a reorganization plan? After the new Civil Procedural Code (CPC) went into effect, in March 2016, mediation and conciliation proceedings became real options for solving disputes in Brazil – including collective renegotiations implemented through a Judicial Recovery process.
Mediation and Judicial Recovery
Law number 13140/2015 (Mediation Law) defines mediation as a way of settling disputes through a proceeding conducted by a third, neutral non-interested person appointed by the parties to the dispute – or appointed by a Court and accepted by the parties. The mediator does not have decision-making power but can facilitate communication and help the parties find consensual solutions. The benefits of using mediation include saving money and time, in comparison with a judicial litigation process. Also, there is no harm in using mediation, as the parties are not committed to anything discussed during the proceeding and the dispute would remain exactly as it was before the mediation. Even when the mediation does not lead to an agreement, it at least helps parties evaluate the consequences of the conflict and hone in on the center of the dispute.
Furthermore, Law number 13105/2015 (Civil Procedural Code – CPC) sets forth the mediation attempt as one of the procedural steps for judicial processes in general, which therefore must be stimulated by courts, attorneys and public prosecutors whenever possible. Although not a reorganization law in and of itself, the CPC is a “gap filler” provision,[4] made applicable in reorganization and insolvency processes when the specific statutes governing those laws are silent on a particular administrative issue covered by the CPC – which seems to be the case, as Law number 11101/2005 (Brazilian Reorganization Law) neither allows nor forbids the use of mediation in bankruptcy processes.
Case law – mediation to set individual claims
In addition to the proposed generic mediation described above, a mediation process may be implemented to resolve ancillary disputes, for instance, the proceeding recently mandated by Oi’s Court to liquidate the claims impaired by the process. In the US, the use of ADR (Alternative Dispute Resolution) in bankruptcy is common, and has been used in some of the largest and most complicated bankruptcies, including those of Enron Corp and Lehman Brothers Holdings Inc.[5]
In Brazil, mediation has also been central to one other high-profile restructuring process. Following Oi’s example, on 10 September, Aralco’s Restructuring Court granted the Judicial Manager’s request to implement a mediation process with a similar scope to Oi’s latest mediation – to define the amount and class of disputed claims in advance of a meeting where the creditors are expected to vote on the company’s new reorganization plan.[6] Aralco’s Court ruling seemingly evidences that mediation could become a usual procedure in Brazilian Judicial Recoveries for large, complex cases.
As the Brazilian courts have now been tasked with significantly more complex restructurings, it is no surprise that they have found mediation as a preferable means of dealing with certain disputes, and the continued use of ADR in Brazil seems unquestionable. But in popularizing mediation, it is important to set clear practical rules for implementation in a Judicial Recovery, including who would be appointed to work as a mediator. At first glance, it seems that such role could be played by the Judicial Manager, although it is not absolutely clear whether the Judicial Manager would be totally impartial, as one of the main functions in a reorganization process is overseeing the activities of the company. In any event, any mediator in a Judicial Recovery should be a restructuring-specialized professional.
So far, we have seen Brazilian Courts order mediation mostly with respect to liquidating the claims pool. However, considering that, unlike US cases, voluntary filings must first be granted by a Court before any Judicial Recovery process begins, Courts might find even more value in ordering mediation in cases where plan negotiations are derailed, unfruitful, or necessary before deciding to grant the Judicial Recovery petition in order to leverage the company’s desire to start the stay period immediately. Further, we may see common disputes regarding voting processes, quorum and extraconcursal claims submitted to mediation as more Courts look to the model created by Oi and now Aralco. As the Brazilian Courts are not restructuring-specialized, Judges unfamiliar with the Judicial Recovery Process could look to ADR as a means to encourage settlements of complex issues. In each of these cases, ADR might be a key step in making Brazilian restructurings faster and more successful by encouraging consensual exits over lengthy litigations and appeals.
[1]  Pre-petition claims – for instance, labor claims or those stemming from commercial relationships with suppliers – impaired by the Judicial Recovery process for which definition depends on pending objections.
[2]  The creditors argued in the appeals that the company was in fact attempting to purchase the minor creditors’ votes through the mediation, and thus manipulate the quorum approval for an aggressive reorganization plan. Click here for the Debtwire legal analyst team’s primer on this matter.
[3]  A rule according to which reorganization plans must state equal treatment for claims in the same class.
[4]  Click here for the Debtwire legal analyst team’s primer on the main relevant amendments stated by the Civil Procedural Code, including their impact on the day-to-day processes of Brazilian restructurings.
[5]  During a TMA event last month about Mediation and Arbitration in Judicial Recovery, Professor Francisco Satiro de Souza Junior commented on both cases. In Enron Corp (In re Enron Corp., et al., Case No. 01-16034 (AJG) Bankr. S.D.N.Y.), an “examiner” was initially appointed by the Bankruptcy Court to deal with certain problems caused by the participation of ENA – a wholly owned subsidiary – in the company’s payment system but, later, became a “facilitator” for the approval of the reorganization plan, leading to an agreement among the involved parties in 2003. Also, in Lehman Brothers Holdings Inc. (In re Lehman Brothers Holdings Inc., et al., Case No. 08-13555 (JMP) Bankr. S.D.N.Y.) – considered the largest bankruptcy case in history – mediation was used on several fronts, including a structured process focused on the alternative settlement of thousands of disputes involving the termination of derivative contracts. According to the professor, by January 2016, almost 500 disputes had been settled through ADR procedures.
[6]  Aralco’s reorganization plan was approved by a limited quorum of creditors but, on 30 July, the State Court rejected an appeal regarding this matter and determined a new creditor meeting must be scheduled, which all Aralco’s creditors must be allowed to attend and vote.
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.