The Use of Chapter 15 by Brazilian Companies: A Case Study

Many Brazilian companies are facing financial distress as a result of the general slowdown of the Brazilian economy, the decline of the Brazilian real relative to other currencies, and the corruption scandal involving Brazil’s state-controlled petroleum giant Petrobras. In an effort to address their financial issues, a significant number of Brazilian companies have sought relief under Brazil’s bankruptcy laws. A distressed Brazilian company with operations, assets and creditors in the United States may also seek recognition of its Brazilian proceedings and enforcement of its restructuring in the United States. That relief is available under Chapter 15 of the United States Bankruptcy Code.

Approximately thirty Chapter 15 cases involving Brazilian debtors have been filed since 2005 when Chapter 15 came into effect. In most instances, the relief requested from the bankruptcy court has not been contested. However, as discussed in “Review of Chapter 15 Cases in 2014: Relief Available to a Foreign Representative,” International Restructuring NewsWire (Winter 2015), that is not always the case. For example, an ad hoc group of noteholders objected to the Brazilian electric power company Rede Energia S.A.’s request for an order enforcing its Brazilian restructuring plan under Chapter 15. The bankruptcy court overruled the ad hoc group’s objections, finding that Rede’s foreign representative had satisfied his burden under Chapter 15 and that enforcement of a plan approved by the Brazilian court, a court of “civilized jurisprudence” that followed procedures that satisfied United States standards of fairness, would not violate public policy. More recently, OAS S.A. and certain affiliates filed Chapter 15 petitions seeking recognition of their Brazilian proceedings with the United States Bankruptcy Court for the Southern District of New York. See In re OAS S.A., 533 B.R. 83 (Bankr. S.D.N.Y. 2015). There, the bankruptcy court granted recognition to OAS’s Brazilian restructuring proceedings over the objections of two creditors. This latter case is the subject of this article as it provides further insight into Chapter 15 recognition of Brazilian foreign proceedings.

OAS Group Seeks Chapter 15 Relief in the United States

The OAS Group is a group of companies that provide a range of services, including construction, engineering, and works management, in twenty-two countries in Latin America, the Caribbean and Africa. In November 2014, Brazil’s state-con-trolled oil company Petrobras, the subject of a widely-reported anticorruption investigation in Brazil, blocked OAS from bidding on new contracts with Petrobras. The inability to bid on new Petrobras contracts caused Standard & Poor’s to down-grade OAS’s credit rating from B+ to BB-. Faced with the credit rating downgrade and cash flow problems, OAS decided in January 2015 to cease paying its financial creditors while it developed a global restructuring plan. Following OAS’s defaults, several creditors commenced litigation against members of the OAS Group in New York.

In March 2015, members of the OAS Group commenced restructuring proceedings in Brazil. On April 2, 2105, four of the Brazilian debtors appointed an individual to act as a foreign representative for purposes of Chapter 15. Thereafter, the foreign representative filed petitions with the United States Bankruptcy Court for the Southern District of New York for recognition of the Brazilian proceedings as foreign main proceedings under Chapter 15. Upon recognition of the Brazilian proceedings as foreign main proceedings, all litigation against the OAS debtors in the United States, including the New York litigation, would be stayed.

Following the filing of the Chapter 15 petitions, one of the four debtors, OAS Finance Limited, became subject to a provisional liquidation proceeding in the British Virgin Islands. The Brazilian foreign representative therefore decided to refrain from pursuing recognition of OAS Finance’s Brazilian proceeding in the United States. Meanwhile, the BVI provisional liquidators (represented by Chadbourne & Parke LLP) filed a separate Chapter 15 petition for recognition of OAS Finance’s BVI proceeding as a foreign main proceeding. The BVI liquidators’ petition was contested. As of the date of the writing of this NewsWire article, the bankruptcy court has not issued a ruling on the Chapter 15 petition for recognition of OAS Finance’s BVI proceeding.

Creditors Oppose Recognition of the Brazilian Proceedings

Two of the plaintiffs in the New York litigation against the OAS debtors objected to recognition of the Brazilian proceedings arguing that (i) the purported foreign representative was not qualified to file the Chapter 15 petitions and (ii) certain Brazilian rules and procedures were manifestly contrary to United States public policy. In addition, the plaintiff-creditors argued that the center of main interest of one of the debtors, OAS Investments GmbH (“OAS Austria”), was not in Brazil and that its Brazilian proceeding therefore could not be recognized under Chapter 15. The bankruptcy court overruled those objections.

1.   The Foreign Representative was Authorized to File the Chapter 15 Petitions

The plaintiff-creditors argued that the purported foreign representative lacked the authority to seek recognition because: (a) the foreign representative had not been authorized by the Brazilian court to serve in that capacity and (b) even if court authorization was not required, the OAS debtors lacked the authority to appoint a foreign representative. In addition, the plaintiff-creditors claimed that the foreign representative should be disqualified because he was not neutral. The bankruptcy court rejected these challenges to the foreign representative’s authority for three reasons.

First, citing to the Fifth Circuit’s decision in Ad Hoc Grp. Of Vitro Noteholders v. Vitro, S.A.B. de C.V. (In re Vitro S.A.B. de C.V.), 701 F. 3d 1031 (5th Cir. 2013), cert. dismissed, 133 S.Ct. 1862 (2013), which we discussed in “Fifth Circuit Confirms Denial of Recognition to Mexican Concurso that Releases Claims against Non-Debtors,” International Restructuring NewsWire (March 2013), the bankruptcy court rejected the assertion that a foreign court’s authorization is a prerequisite to serving as a foreign representative. Under the Bankruptcy Code, a person can be a foreign representative if he is authorized to (i) administer the reorganization or the liquidation of the debtor’s assets or affairs or (ii) act as a representative of the foreign proceeding. There is no requirement that the authority be conferred by a court. Indeed, the drafters of the Model Law on Cross-Border Insolvency, which is the basis of Chapter 15, refused to impose such a requirement.

Third, the bankruptcy court held that there is no requirement that a foreign representative be neutral. Indeed, according to the bankruptcy court, the imposition of a neutrality requirement is not supported by the legal authority relied upon by the plaintiff-creditors. Moreover, although the foreign representative had participated in several transactions involving the OAS debtors, there was no evidence that the foreign representative had engaged in wrongful conduct.

2.   Recognition of the Brazilian Proceedings Would Not be Manifestly Contrary to Public Policy

In their second attack, the plaintiff-creditors argued that the Brazilian proceedings should not be recognized under Chapter 15 because certain aspects of the proceedings and Brazilian laws were manifestly contrary to United States public policy. According to the plaintiff-creditors, the Brazilian court had substantively consolidated the OAS debtors without providing parties in interest an opportunity to be heard. The bankruptcy court disagreed. According to the bankruptcy court, creditors had an adequate opportunity to participate in the Brazilian proceedings. Moreover, according to the bankruptcy court, the plaintiff-creditors’ attack was premature because the Brazilian court had not yet substantively consolidated the OAS debtors. The Brazilian court had instead preserved substantive consolidation as an option that could be contested by creditors in Brazil at the appropriate time.

The plaintiff-creditors also argued that the bankruptcy court should not recognize the Brazilian proceedings because the Brazilian restructuring plan would eliminate fraudulent transfer claims and yield unfair distributions. The bankruptcy court refused to consider those objections, finding them to also be premature because the Brazilian court had not yet approved a plan. The bankruptcy court noted that creditors would have an opportunity to challenge any plan proposed in Brazil as well as any request to enforce such a plan in the United States.

3.   OAS Austria’s Brazilian Proceeding was a Foreign Main Proceeding

The plaintiff-creditors’ third attack focused on whether OAS Austria, one of the debtors, had sufficient ties to Brazil for Chapter 15 purposes. This is important because Chapter 15 permits recognition of a foreign proceeding that is a “foreign main proceeding” or a “foreign nonmain proceeding.” A foreign proceeding that is neither cannot be recognized under Chapter 15. In OAS, the foreign representative requested recognition of each of the debtors’ Brazilian proceeding as a foreign main proceeding, which is defined as one pending in the country where the debtor has the center of its main interests or its “COMI.”

The Bankruptcy Code does not define COMI. A debtor’s COMI, however, is presumed (subject to evidence to the contrary) to be where the debtor maintains its registered office, which correlates to a debtor’s place of incorporation. The plaintiff-creditors argued that the COMI of the Brazilian debtor OAS Austria was in Austria where the entity was incorporated and, therefore, its Brazilian proceeding could not be recognized as a foreign main proceeding. After considering the evidence presented, the court found that OAS Austria had minimal connections to Austria. Moreover, according to the bankruptcy court, OAS Austria’s place of incorporation was “immaterial” because creditors located throughout the world “understood that they were investing in Brazilian-based business.” The bankruptcy court thus concluded that Brazil was OAS Austria’s COMI, noting that Brazil was where OAS Austria’s “nerve center and headquarters” were located. Moreover, OAS Austria’s sole shareholder and all of its directors and officers were located in Brazil. For these reasons, the bankruptcy court found that OAS Austria’s Brazilian proceeding was a foreign main proceeding.

Conclusion

Until the Brazilian economy improves, it is likely that more companies will be liquidated or reorganized under Brazilian law. Many of these companies will likely have assets, operations, and creditors in the United States and will likely seek relief under Chapter 15. In two recent cases, including the OAS case discussed in this article, United States courts have rejected challenges to recognition of Brazilian proceedings. In both instances, the courts noted that “Brazilian bankruptcy law meets our fundamental standards of fairness and accords with the course of civilized jurisprudence.” Based on these conclusions, future challengers will face uphill battles in opposing recognition of Brazilian proceedings under Chapter 15.

Francisco Vazquez is counsel in Chadbourne & Parke’s New York Office in the firm’s bankruptcy and financial restructuring group.