According to the Organization for Economic Co-operation and Development (OECD), the passage of the new Corporate Recovery Law No. 11.101 in 2005 reprioritizes the previous insolvency regime from its preferential treatment of tax claims, lack of consistency and clarity, and its emphasis on liquidation. The new regime aims to facilitate the recovery of troubled firms, thus better safeguarding creditor interests and protecting jobs. The new Law is the culmination of 11 years of effort. In addition to the above reforms, the new Law also facilitates recourse to out-of-court arrangements reached between debtors and creditors. While agreeing that the new legislation offers improvements over the old system, the OECD suggests that five principal challenges facing Brazil's insolvency regime are still outstanding. First, although the prioritization of tax claims is eliminated, labor claims retain top priority. Second, the claims of unsecured creditors remain weak, reducing incentives for credit creation. Third, greater clarification is needed with regard to bank participation in restructuring processes. Fourth, law enforcement and judicial procedures must be streamlined to cut down on the time required to go through the insolvency process. Finally, the special courts that existed in only a very few states should be established more consistently across the country. Although a 2007 report by Janis Sarra of the University of Toronto Faculty of Law states that the new law directly adopts a number of principles that are consistent with World Bank Principles and Guidelines for Effective Insolvency and Creditor Rights Systems and follows the "Legislative Guide on Insolvency Law" put forth by the United Nations Commission on International Trade Law, there is insufficient publicly available information as to the extent of Brazil's compliance with the above-mentioned principles.

General Overview

A 2004 News Update available on the World Bank's Global Insolvency Law Database (GILD) website discloses the terms of piece of legislation that had, at that time, just passed the Lower House of the Brazilian Congress. This was the draft Bankruptcy Law and amendments to the National Tax Code (Supplementary Law No. 118 of 2005). Together, the changes were intended to replace a 1945 Bankruptcy Law that regulated these issues. The draft legislation included procedural changes for claims recovery and reprioritized creditor claims. Passage by the Lower House followed 10 years of effort, and was achieved by a large majority vote (245 for, 24 against, 7 abstentions). The effect is to broaden the recovery process and render it more flexible. It also makes it easier for debtors and creditors to negotiate out-of-court workouts. The News Update asserts that "the most important change in the new legislation is the creation of an institutional environment more favorable to lending, due to the change in the order of creditor priority in the case of bankruptcy." The effect should be a reduction in legal and credit risk in the case of company liquidations. The new law prioritizes the goal of selling a trouble firm while it is still a going concern, which would have the added benefit of preserving jobs. At the time of the News Update's release, passage of the bill was pending Senate approval.

In an article published in Standard & Poor's July 25 issue of Structured Finance, Peter Ecoles reported that the Senate had passed the new legislation, titled the Corporate Recovery Law No. 11.101 in 2005. In addition to the protections discussed in the 2004 News Update, Ecoles notes that the new law should greatly improve creditors' prospects for debt recovery. Nonetheless, Ecoles warned that the new law contained some ambiguities that, in conjunction with the lack of existing case law, could still cause problems for creditors. Writing in 2005 for Deloitte & Touche's World Tax Advisor, Joao Branco notes that "Law No. 11.101/05 aims at faster and more efficient bankruptcy procedures, thus leading to more security on Brazilian contracts and legal arrangements." A 2005 report by the Organization for Economic Co-operation and Development (OECD) discussed the challenges that still faced Brazil's insolvency regime at that point in time. For instance, the OECD felt that the way in which the law dealt with tax succession versus labor claim succession weakened "incentives to purchase assets in the case of judicial recovery" (p. 2). The position of unsecured creditors was not improved - they still ranked third in the recovery hierarchy. Finally, the OECD asserted that "the participation of banks in restructuring [was] unclear" (p. 2) and depended on the way in which the new law was implemented. The OECD suggested that both enforcement and procedures be upgraded in order to make the process less time-consuming, and argued that the creation of specialized courts would contribute to an overall improvement in the system. To be effective, new legislation would have to address these problems.

Dr. Janis Sarra, on the University of Toronto's Faculty of Law, wrote about the new legislation in a February 2007 article titled "Brazil Modernizes its Insolvency Law." According to Sarra, Law No. 11.101 streamlines and modernizes liquidation procedures and establishes a fixed prioritization system for the satisfaction of claims by creditors. The law also requires the appointment of a trustee to manage the process, with oversight provided by the bankruptcy judge. Sarra also notes that the new law eliminates the previous rehabilitation regime with a more modern approach to restructuring that sought to "prevent premature liquidation and to encourage business plans that preserve, where possible, the going concern value of an insolvent firm" (p. 1). The new law permits both court-supervised and out-of-court restructuring plans. Sarra specifically points out that "Federal Law No. 11.101 adopts many of the principles enshrined in the World Bank's 'Principles and Guidelines for Effective Insolvency and Creditor Rights Systems'... and the 'UNCITRAL Legislative Guide on Insolvency Law'" (p. 1). One intended effect of the new law is the encouragement of creditors to cooperate in the development of viable business plans. Another is to reduce the high cost of workouts in Brazil. Further, creditors would gain a greater say in restructuring and liquidation outcomes. The interests of unsecured creditors would also be better protected. If a majority of creditors in each creditor class support a restructuring plan, all other creditors are bound by the plan's terms as well, as is the case in much of the developed world. Sarra also notes that, in the past, tax claims were given preferential treatment, often leaving nothing for secured creditors. The new law changes this situation as well. Sarra does note that the law still prefers employee claims over the claims of secured creditors, but points out that these claims are now subject to a cap, thus attempting to achieve a balance between Brazil's commitment to workers while still providing "greater certainty in lending and liability" for creditors. This attempt at balance is consistent with the World Bank's "Principles and Guidelines." The legislation also provides a clear definition of the rules governing the purchase of some or all of an insolvent firm's assets and operations, reducing the uncertainty regarding the degree of liability a prospective purchaser must assume. According to Sarra, the new law aims to make insolvency proceedings more consistent and transparent across Brazil, again enhancing the available guidance as to insolvency procedures for both stakeholders and the courts.

According to Brazil's Country Profile, published jointly by the International Bank for Reconstruction and Development and the World Bank (IBRD&WB) in 2008, Brazil achieves a ranking of 127 out of the 181 economies surveyed with regard to the ease of closing a business. This is an improvement over 2008, in which year Brazil ranked 134 out of 181. According to the IBRD&WB report, this earns Brazil the status of a "Selected Economy": the IBRD&WB categorizes economies, in descending order, as "best practice," "selected," and "comparator" economies. As of the most recent "Doing Business" snapshot page of the IBRD&WB report, the process of closing a business in Brazil takes an average of 4.0 years, which is longer than the regional average of 3.3 years and more than twice as long as the 1.7 years averaged by member states of the OECD. In Brazil it costs an average of 12% of the estate to close a business, less than the regional average of 15.9% but significantly higher than the OECD average of 8.4%. Average recoveries in Brazil, expressed as cents on the dollar, are 17.1 cents. Regionally, the average recovery is 26.8 cents, and for OECD member states the average recovery is 68.6 cents on the dollar.