Mapping the Territory: Navigating Bankruptcy Sales in Brazil, Colombia, and Mexico (The Latin American Lawyer)
As Latin America grapples with the effects of COVID-19 and companies seek to divest assets in connection with their reorganization plans, Jones Day lawyers Enrique J. Martin, Dan Moss, Wade Angus, José Antonio Vázquez, Luis A. Vélez, and Arturo de la Parra write that a key question is whether local bankruptcy laws allow for the divestiture of such assets.
Under the U.S. Bankruptcy Code, ailing companies may divest assets either through relatively quick Section 363 sales or through a Plan of Reorganization, both of which entail a transparent, court-supervised, sale process that is designed to achieve the highest and best value for the assets that are delivered to the buyer free and clear of all claims and interests (e.g., no successor liability). As Latin America grapples with the effects of COVID and companies seek to divest assets in connection with their reorganization plans, a key question is whether local bankruptcy laws allow for the divestiture of assets through the bankruptcy laws. To navigate the complexities of divestitures through bankruptcy proceedings in the region, we have prepared a brief summary of the legal framework for bankruptcy sales in Brazil, Colombia and Mexico.
Brazilian bankruptcy law allows debtors in a recuperação judicial (a court-supervised judicial recovery process that resembles a Chapter 11 proceeding) to sell a division or assets of business divisions (unidades produtivas isoladas – "UPIs") free and clear of all liabilities, including liabilities arising out of tax and labor claims. Although the sale of a division or assets can be part of a debtor’s judicial recovery plan, Brazilian bankruptcy law does not expressly provide for the sale of the entire business or substantially all of its assets. A UPI transaction is supervised by the Brazilian bankruptcy court and must be completed through an auction process - either with live bidding or the delivery of sealed proposals. The division or assets are sold to the highest bidder, even if the highest bid is lower than the appraisal value. Notice of a UPI sale must be published in a widely circulated newspaper prior to the auction date. The debtor, creditors or the Public Attorney’s Office have a limited window to challenge a UPI sale. The bankruptcy court will rule on any challenge within five days and if the challenge is dismissed the assets then transfer to the buyer.
Colombia's insolvency statute provides for reorganization or mandatory liquidation. However, Colombian bankruptcy law does not expressly allow debtors in reorganization proceedings to sell their core assets free and clear of liabilities. In response to COVID, a debtor may sell its non-core assets as part of the reorganization process, and use the proceeds to pay its debt without court approval. Even though uncommon and not expressly provided for in the law, a sale of core assets during reorganization would require the approval of a majority of the participating creditors and confirmation by the court. If a debtor enters mandatory liquidation, the debtor must proceed with an auction (usually piecemeal), and agreements with stalking horse bidders are prohibited. Given Colombia's restrictive reorganization laws, distressed asset deals are not common.
Mexican bankruptcy law allows for partial and complete sales depending on the stage of the bankruptcy proceeding. During the initial mediation (etapa de conciliación), the debtor and the creditors may reach an agreement on a reorganization and the mediator may sell non-core assets in a court-sanctioned public auction. Assets that are perishable, costly to maintain, or likely to substantially decrease in value may be sold without an approval. During the bankruptcy stage (étapa de quiebra), a debtor may sell separate assets, core assets or even the whole company to maximize sale proceeds. Any such sale must also occur through a court-sanctioned public auction. However, the debtor may propose an alternative sale mechanism if it can reasonably prove that it maximizes sale value.
While Colombia does not expressly provide for debtors in reorganization proceedings to sell their core assets, Brazil and Mexico do provide for a mechanism for divestitures through bankruptcy proceedings. Companies that have debt governed by U.S. law (e.g., Delaware or New York) or assets or operations within the United States should also evaluate whether filing under Chapter 11 of the U.S. Bankruptcy Code would be a beneficial forum to market and sell their assets. Chapter 11 is a recognized and reliable process by which many multinational entities effectuate asset sales, balance sheet reorganizations, and operational restructurings. If a Latin American company must restructure its operations and finances under local court structures, parties should consult with counsel whether a Chapter 15 bankruptcy proceeding may be initiated in the United States. Under Chapter 15, U.S. courts recognize foreign restructuring proceedings and are the vehicle by which foreign restructurings are implemented in the United States, particularly if a foreign entity has U.S.-based creditors or U.S.-based assets that serve as collateral. Companies in Latin America that intend to divest assets as part of their bankruptcy proceedings should consult with counsel in all relevant jurisdictions before deciding on a particular course of action. In addition, buyers interested in acquiring distressed assets throughout the region should consult with advisors in the applicable jurisdictions to assess the impact of each country’s regulations on the target asset.
Reprinted with permission from the September-October, 2020 issue of The Latin American Lawyer. Copyright 2019 Iberian Lawyer. Further duplication without permission is prohibited. All rights reserved.