The Oi Judicial Restructuring
An overview of the Brazilian Bankruptcy Code and the Oi Judicial Restructuring
The Brazilian Bankruptcy Code – Law 11,101/2005 – sets forth three main proceedings: an out-of-court restructuring, known as an extrajudicial restructuring (REJ); judicial restructuring (RJ); and bankruptcy or liquidation.
Bankruptcy involves a liquidation process carried out under court supervision, while both REJ and RJ aim to preserve the business entity and protect both its creditors and its existing workforce by enabling the debtor to restructure its debts and continue to pursue its activities, which is why both procedures may be utilised by an indebted company prior to a bankruptcy to try to overcome the financial distress it faces.
An REJ cannot include claims of labour or tax creditors of any kind and depends on the debtor obtaining the prior approval of three-fifths of the relevant creditors to an REJ plan before filing, thus it is best used to address specific creditor groups or classes where a majority of creditors already support the plan and need to enforce on the remaining holdout creditors.
An RJ must be filed by the debtor (the Brazilian Bankruptcy Code does not allow creditors to file or impose an RJ on the debtor) and involves submitting to its creditors an RJ plan to be approved (or not) by the creditors in a general creditors’ meeting, to restructure and pay its debts, and allow the business to continue.
Upon filing an RJ and once the judge has ascertained that the debtor has presented the documents required by law, the judicial reorganisation procedure is deferred, entailing a number of consequences, especially a stay period of 180 days granted to the debtor, during which actions and executions against the debtor are suspended, and the appointment of a judicial administrator by the judge (despite the name, the judicial administrator does not manage the debtor or replace management).
All claims existing on the date of the RJ filing, except for those expressly exempted, are subject to the procedure, even if not yet due. Said claims and creditors are classified in the following classes:
- labour: holders of labour-related claims or occupational accident claims;
- secured: holders of claims with in rem guarantees (limited to the value of the guarantee);
- unsecured: holders of unsecured claims, with special privilege, with general privilege or subordinated; and
- small businesses: holders of claims from small businesses.
The debtor must present the RJ plan and creditors may file objections to the plan, in which case a general creditors’ meeting (GCM) is summoned to vote on the plan. During the GCM or even before then, creditors may suggest modifications to the plan, but any such modifications will be always subject to the debtor’s consent. If the plan fails to obtain the required creditors’ majorities or if the debtor fails to comply with any of the dispositions of the approved plan within two years as of its approval, the debtor will be declared bankrupt by the judge.
A majority in the GCM is calculated based on the following quorums:
- class 1 (labour claims): simple majority of the labour creditors attending the meetings (by head count only);
- class 2 (secured claims): simple majority of the secured credits and creditors attending the meeting (both by head count and credit values);
- class 3 (unsecured claims): simple majority of the unsecured credits and creditors attending the meeting (both by head count and credit values); and
- class 4 (small businesses): simple majority of the small business creditors attending the meeting (by head count only).
However, provided that the plan does not entail different treatment among the creditors of the class that rejected it, the judge may effectively cram down the creditors, confirm the plan and grant the judicial reorganisation to the debtor even if the plan is not approved by the majority of the creditor classes.
If the plan is not approved in the GCM, the RJ is automatically converted into a bankruptcy and the debtor is liquidated.
Additionally, the Brazilian Bankruptcy Code sets forth that the creditors may form a creditors’ committee, approved by the GCM and comprising one representative, with two alternates of each class of creditors (labour, secured, unsecured and small businesses).
The creditors’ committee shall have the following main duties in an RJ:
- supervise the activities and examine the accounts of the judicial administrator;
- monitor the course of the proceedings;
- inform the judge if it detects any violation or injury to the interests of the creditors;
- verify and issue opinions on any complaints by interested parties;
- request the judge to call a GCM;
- supervise the management of the debtor’s activities, submitting a report on its situation every 30 days;
- supervise the performance of the RJ plan;
- submit for authorisation by the judge the disposal of fixed assets, the establishment of in rem and other guarantees, as well as acts of indebtedness required for the continuation of corporate activities during the period preceding approval of the RJ plan.
The creditors’ committee’s decisions are passed by majority vote, recorded in a book of minutes and made accessible to the judicial administrator, the creditors and the debtor. If a majority vote on a committee resolution is not possible, the deadlock shall be settled by the judicial administrator or, in the event of his or her incompatibility, by the judge.
The Brazilian Bankruptcy Code’s clear inspiration for the creditors’ committee are the ad hoc creditor committees seen in numerous debt restructuring cases abroad, in which a group of lenders, especially bondholders, concentrates interactions with the debtor on behalf of a bigger group, usually even before the debtor has filed a restructuring plan or proceedings.
The presence of an ad hoc committee greatly rationalises and expedites discussions between debtor and creditors, insofar as it permits lenders that are usually more familiar with the debtor’s situation and specialised in debt restructuring to closely interact with the debtor, facilitating a consensus on a restructuring plan in a more timely fashion.
Despite the law’s clear intent, experience has shown that formal creditor committees, as provided in the Brazilian Bankruptcy Code, are a rarity in Brazil, with very few examples of such committees having been formally formed by the creditors in RJs.
The reasons for the lack of formal creditors’ committees are several, but a main factor is the fear of any creditor committee being held liable for any act or omission, especially if the debtor is subsequently declared bankrupt for any reason. Additionally, the costs it implies, and the very bureaucratic nature of the committee’s duties, make it burdensome for creditors.
The Brazilian Bankruptcy Code also provides that if there is no creditors’ committee, the judicial administrator or the judge shall carry out its duties, so the absence of a creditors’ committee is not directly felt by many creditors.
However, regardless of the lack of formal creditor committees, in the most relevant RJs, such as the Oi Group’s RJ, it is more than natural for lenders to join forces and, informally, act as a committee to bargain and negotiate with the debtor an RJ plan, especially with regard to lenders bound together in terms of sophistication or title, such as bond or noteholders.
These groups of lenders act as ad hoc committees and play relevant roles in negotiating RJ plans in many complex RJ cases, and the Oi Group’s RJ is no exception.
The RJ initiated on 20 June 2016, in the city of Rio de Janeiro, by the Oi conglomerate, formed by the Oi SA, Telemar Norte Leste SA, Copart 4 Participações SA, Copart 5 Participações SA, Portugal Telecom International Finance BV and Oi Brasil Holdgins Cooperatief UA (in conjunction, the Oi Group), was, until recently, the biggest in Brazil, with a total debt of over 65 billion reais.
In addition to its colossal debt, the Oi Group’s judicial restructuring laid bare several limitations and issues the Brazilian Bankruptcy Code has yet to fully address and resolve.
Many important issues are still being discussed with regard to the Oi Group’s RJ, such as recognition of transnational insolvency proceedings, the problematic relationship between corporate and bankruptcy law, and mediation of creditors.
Given the Oi Group’s RJ’s size and number of creditors, which ranged from sophisticated bondholders to those who simply pay telephone bills, the debtor and courts attempted to address several issues innovatively in ways that have still not been repeated in other RJs.
To augment the evident difficulties in negotiating a unified RJ plan for all these creditors, since Oi Group’s parent entity is publicly in the Brazilian Stock Exchange, an intense battle for Oi Group’s corporate control raged (and is still underway) during the proceeding.
The corporate battle between shareholders, many of which are still subject to judicial review or arbitration, so disrupted the negotiations of the RJ plan that the Oi Group’s RJ’s judge, in an unprecedented ruling, held that the shareholders could not substitute the debtor’s key officers, who would be solely responsible for negotiating the plan with creditors, basically stripping certain shareholders of many of their corporate rights.
With these measures and after finally having reached a common understanding with the relevant creditors, an RJ plan was finally approved on 19 December 2017, which was ratified by the judge on 8 January 2018.
However, Oi Group’s RJ is still far from over since the debtor recently filed, on 15 June 2020, a petition requesting a new GCM to vote on an amendment to the approved RJ plan. The new GCM was held on 8 September 2020 and, after many hours and discussions, the amended plan was approved by the majority of the creditors, albeit being heavily criticised by a number of relevant creditors. The judge ratified the GCM’s result on 5 October 2020 and many creditors have already anticipated they will appeal the ruling, based on the amended plan’s abusiveness, in addition to procedural issues regarding the voting of the amendment.
The negotiations pertaining to the RJ plan’s amendment were just as heated as with the initial plan, with a number of new issues, such as how creditors that have already been fully or partially paid in shares are allowed to vote.
In view of the favourable result of the new GCM, the fact is that the ad hoc creditor committee that played an important role when approving the plan has become an integral part once more in approving the plan’s amendment.
Ad hoc committees’ roles in the Oi Group’s RJ
The Oi Group’s debt and level of sophistication, which included the issuance of bonds, debentures and other notes, in addition to being a publicly traded company in Brazil, with the relevant depositary receipts in other jurisdictions, meant that a broad spectrum of creditors were subject to its RJ.
Many of these creditors naturally formed groups with common grounds and proposals to the debtor, effectively resulting in informal ad hoc creditor committees tasked with better negotiating the RJ plan with the Oi Group. These ad hoc groups resulted from the experience that certain creditors had in other RJs or jurisdictions and from the need to concentrate efforts in certain groups of relevant creditors in an RJ of the size and complexity such as that of the Oi Group.
Some of the ad hoc groups, such as those comprising relevant bondholders, were especially relevant in garnering enough votes to approve an RJ plan, without which a rational negotiation would prove immensely difficult. Likewise, this same approach was significant in approving the most recent amendment to the RJ plan.
On the creditors’ side, therefore, these ad hoc groups proved vital not only in rationalising the negotiations with the Oi Group in regard to the plan’s terms and conditions, but also in organising votes for the plan once terms had been agreed upon. Given the need to reach majorities in all the relevant classes for the plan to be approved, garnering votes of the relevant creditors and having them efficiently present and voting at the GCM, which, at that time, could not be held or voted upon virtually, is no small challenge.
On the debtor’s side, the presence of the ad hoc clusters of creditors was immensely important to know exactly which groups of creditors were needed to approve the plan.
In this respect, the Oi Group’s RJ had peculiar features in several aspects. First, there were (and still are) numerous creditors with claims in many billions of reais individually, which in any other RJ would be key to approve a plan, but in Oi Group’s case, given the size of the debt, were held almost irrelevant. However, after forming groups, these creditors gained an increased importance and further enhanced their position.
This was especially vital given a number of public entities that held claims worth billions but were either not engaged in relevant negotiations or simply inclined to vote against any plan that did not include their payment in full. The ad hoc creditor groups acted as effective counterweights to these entities.
Second, given the clashes and battles between the controlling shareholders, and between them and the company’s management, the officers and shareholders in charge of negotiating the plan changed many more times than negotiators of the creditors, who were significantly more able to maintain a fluid continuity throughout the proceeding.
Last, the RJ plan that was finally approved set forth a significant debt-to-equity conversion, which demanded a certain level of sophistication and organisation from creditors.
The same interplay between creditors and the debtor was once more displayed in the GCM, which approved the amendment to the RJ plan, which many important creditors have already opposed. The need for ad hoc creditor groups and committees was felt all over again for the amendment to be voted successfully and will still be needed to defend the amendment’s lawfulness in view of the dissenting creditors’ arguments.
 Herbert Morgenstern Kugler is a partner at Thomaz Bastos, Waisberg, Kurzweil Advogados.