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Abuse of vote by prevalent creditors in reorganizing bankruptcies: the unintended 
consequences of judicial activism. 
 
Orlando Celso da Silva Neto 
 
“Debtors, like some poets, do not go ‘gentle into that good night’. They 
struggle to keep their firms alive, even if sometimes the firm would be 
better-off dead by any rational calculation. They are often assisted in 
those efforts at life-support by a bankruptcy Code that materially 
strengthen their hands in negotiation with the creditors”. 
Merton H. Miller1 
 
Introduction. 
 
Some bankruptcy judges in Brazil have been ignoring statutory provisions 
commanding forced liquidation in the event a debtor fails to obtain confirmation of its 
reorganization plan. They do it because they believe preserving the firm maximizes value 
to those involved and that creditors’ voting for rejection act egotistically. I argue that 
these judges are mistaken and that their decisions have had unintended but foreseeable 
negative consequences, resulting in relevant social losses. Due to current incentives 
structure, bad plans will be approved, and only those that are unacceptable will be 
rejected. If a plan is so bad that does not get approval by creditors, debtor should not be 
allowed an opportunity to attempt to reorganize. To confirm my argument, I analyze the 
results of reorganizations where a rejected plan was forcefully imposed by courts, and in 
most of the cases I find that the consequences of court’s decisions were contrary to the 
intended objectives. The results of this paper are relevant because court decisions that 
ignore statutory commands are justified by a belief that reorganizations will result in value 
maximization for stakeholders, a belief I show to be wrong. 
 
The Brazilian bankruptcy law: general provisions concerning plan submission and 
approval/rejection. 
 
1 Leverage. In: Bhandari, Jagdeep and Adler, Barry. Corporate bankruptcy: economic and legal 
perspectives. Cambridge University Press, 1996. 
As we will see in this paper, in Brazil life-support comes not from the Code, but from a twisted 
interpretation of law by courts. 
2 
 
 
Brazil’s bankruptcy act (Law 11.101/2005) is about to turn 20 years old in the 
summer of 2020. The law it superseded was enacted in 1945 and was widely considered 
to present inadequate tools for reorganizing a distressed yet viable firm2. 
The new law, enacted in 2005, received wide praise as a modern, state of art tool, 
one that would allow struggling companies to reorganize successfully. Its inspiration 
came from the U.S Bankruptcy Code and Germany’s InsolvenzOrdnung. The new law 
expressly states, in its reorganization chapter, that its goals are to allow the reorganization 
of distressed firms as going concerns, thus preserving jobs, production, asset value and 
maximizing creditors’ recovery3. The law considers preservation of the distressed yet 
viable company as a going concern (through its reorganization procedure) as a usually 
better (in the sense that it preserves more value) solution than its liquidation4. Warren and 
Westbrook5 affirm: 
 
“[Chapter 11] reorganization is held up as the alternative to liquidation, a 
solution that can put more dollars in the pockets of the creditors, save more 
jobs, and preserve local tax bases. At least as to the first objective, Professors 
Bris, Welch, and Zho say the data back up the claim. In their study of 
confirmed plans, they conclude that ‘the average Chapter 11 case retains 
value seventy-eight percent better than the average Chapter 7 case’” 
 
 The reorganization of a business depends on debtor’s ability to have its plan 
confirmed by a qualified majority of creditors present in the general assembly. Debtor has 
60 days, after its initial submission is admitted by the bankruptcy judge, to submit a plan 
 
2 Araújo, Ferreira and Funchal (2012) affirm: 
“The old reorganization procedure, the concordata, basically only postponed debt payment and did not 
lead to actual restructuring, with no renegotiation between parties. The procedure also incentivized an 
informal use of the system to promote consensual renegotiations, notwithstanding an insufficient legislative 
framework capable of fostering workouts. The old bankruptcy procedures’ inadequate design, distorted 
incentives and lack of effective mechanisms to support corporate restructuring resulted in disproportional 
default rates of potentially viable companies.” 
3Article 47 of the Bankruptcy Act (Law 11.101/2005). “The aim of the judicial reorganization is to 
overcome the debtor's economic and financial crisis situation as to allow the maintenance of the productive 
source, of workers' jobs and of creditors' best interests while ensuring the company's survival, its social 
purpose and encouraging economic activities.” 
4 But see Baird and Rasmussen (The end of bankruptcy. Stanford Law Review, 2002): “To the extent we 
understand the law of corporate reorganizations as providing a collective forum in which creditors and 
their common debtor fashion a future for a firm that would otherwise be torn apart by financial distress, 
we may safely conclude that its era has come to an end.” 
5 Elizabeth Warren & Jay L. Westbrook, The Success of Chapter 11: A Challenge to the Critics, 107 Mich. 
L. Rev. 603 (2009). Available at: http://repository. Law.umich.edu/mlr/vol107/iss4/2. 
http://repository/
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and a variable term (usually another 120 days or more) until its plan goes through the 
assembly’s discussion and confirmation vote. 
 This period has been called the ‘negotiation phase’, because it is in this period that 
debtor must convince creditors that the plan is an effective and capable instrument on the 
path to a real reorganization, to an effective operational turnaround. Creditors’ assembly 
will be composed by four classes defined by statute (labor creditors, lienholder creditors, 
unsecured creditors and small-medium businesses). All classes must individually approve 
the plan, and if one or more classes reject it, plan is deemed rejected by the assembly, 
even if it receives a general majority of favorable votes. 
 The consequence of rejection, by law, is liquidation, except under strict conditions 
that mandate the judge to confirm the plan (cram down6). Under Brazilian Law, nor 
judges nor creditors can impose an alternate plan without debtor’s consent7. 
 
Secured and Lienholder creditors in the bankruptcy procedure. 
 
 Under Brazilian bankruptcy law certain creditors with liens to assets (lienholder 
creditors8) are subject to the plan. Lienholders creditors make a class of their own and, as 
mentioned, plan must be approved by all classes of the creditors’ assembly. Secured 
creditors – those who own the asset in debtor possession - do not participate in the 
reorganization but are affected by it. It is common that the class of lienholder creditors be 
composed of only a few creditors (and sometimes even by only one, two or three), usually 
 
6 Article 58. (…) 
Paragraph 1. The court may grant the judicial reorganization as based on a plan that was not approved under 
Article 45 hereof if such plan jointly obtained in one single meeting: 
I. an affirmative vote from creditors representing over half of the amount of all credits attending the 
meeting, regardless of classes; 
II. the approval of two classes of creditors under Article 45 hereof or, when there are only two classes with 
voting creditors, approval of at least one of them; 
III. in the class that rejected the plan, an affirmative vote of over 1/3 of creditors as counted under 
Paragraphs 1 and 2 of Article 45 hereof. 
7 This is considered by researchers and practitioners one of law´s weak spots and a proposed amendment is 
currently undergoing congressional discussion. 
8 There´s no exact correspondence in legal institutes in Brazil and in the United States. It is important toclarify that secured creditor, as defined in the law (and in this essay), is the creditor that has ownership of 
an asset and can repossess it in case of contractual default. By statute, the only impact bankruptcy has over 
the secured creditor is a temporary hold (suspension) on the right to repossess the asset during the stay 
period. The credit is not affected by the plan, at least nominally. Lienholder creditors are creditors that do 
not have ownership of the pledged asset, that works as collateral to the debt. Lienholder creditors make a 
class of their own in reorganization, participate in the assembly, are subject to plan renegotiation and will 
have some priority in case of liquidation. 
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banks or other lending institutions. Many times, one or just a few creditors have the power 
to decide if the plan is approved or not. 
 
The role of secured creditors in the bankruptcy procedure. 
 
 Before getting into the problem concerning the alleged abuse of vote by lienholder 
and prevalent unsecured creditors, it is important to introduce a related problem 
concerning secured creditors. This will also provide a better understanding and context 
of the judicial bias toward preservation of the company, a bias that goes to the point of 
bending, if not plain ignoring, clear statutory provisions. 
 The Brazilian bankruptcy Act specifies that secured creditors do not participate in 
the reorganization. If debtor defaults the secured contract and does not cure the default 
during the stay period, creditor can repossess the assets that secure the credit. The only 
statutory limitation to the exercise of the repossession right is a stay period of 180 days9. 
The problem here is that, notwithstanding the clear language of statute, courts have 
developed an ‘essentiality theory’, meaning in practice that, if the asset is essential to the 
recovery and reorganization efforts, creditor will not be able to repossess it. 
 This theory, developed by doctrine and adopted by lower courts, has been 
embraced by the Superior Court of Justice, Brazil’s highest non-constitutional Court, with 
jurisdiction and powers to uniformize the interpretation of federal law by lower courts. 
 By adopting the essentiality theory, courts in general, but especially the Superior 
Court of Justice, do not seem to consider that (i) § 3º of Article 49 of the Bankruptcy Act 
does not have the scope and content assigned by the Courts10; (ii) the pledged asset is not 
and has never been legally owned by debtor, and therefore it has never been a debtor asset 
(even if integrates the business), (iii) there are severe systemic consequences deriving of 
 
9 This is what statute clearly states. The interpretation by courts has been far different and this author has 
strongly criticized the negative effects of court interpretation. See Silva Neto, O. Credit guaranteed by asset 
ownership (alienação fiduciária): an economic analysis (original in Portuguese: O crédito garantido por 
alienação fiduciária: uma análise econômica). In: Cascaes, Pedro (org) Bankruptcy and reorganization. 
(original in Portuguese: Falência e recuperação de empresas). Emporio do Direito, 2017. This, however, is 
not within the scope of this paper. 
10 Article 49. 
Paragraph 3. When the creditor is a holder of assets and real properties in a fiduciary condition, a lessor, 
owner or committed seller of real properties under an agreement containing an irrevocability or 
irreversibility clause, including in real estate developments, or an owner in a sales agreement with reserve 
of ownership, such creditors’ credit is not subject to the effects of the judicial reorganization and property 
rights shall prevail over assets or contract terms while complying with applicable laws; however, 
throughout the stay referred to in Paragraph 4 of Article 6 hereof, it is not allowed to sell or remove from 
debtor's establishment the capital assets critical to carry out business activities. 
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this understanding, which signals to the market an uncertain transactional cost and a 
negative incentive towards this kind of deal, and finally (iv) Court ignores that the law 
has granted debtor a 180 day period to renegotiate. If Congress wanted the suspension to 
go on indefinitely, it would have said so. 
It is during this stay period that debtor must renegotiate its debt, including its 
compromises to secured creditors. It is this period that debtor may convince secured 
creditors to waive their repossession rights and participate in the plan or simply 
renegotiate new payment conditions. 
 Congress has offered the distressed business a vast array of possibilities to 
reinvent and reorganize itself, but certainly not this ‘extra option’ (the ‘essentiality theory) 
granted by Brazilian courts. Superior Court of Justice’s current interpretation creates 
negative incentives and foster debtor’s opportunistic behavior, deviating from the well-
construed statutory system of rules. 
 To the best of this author’s knowledge, no other legal system has (or has seen) 
anything similar. It is often said that Brazil’s bankruptcy Act is inspired by the U.S 
bankruptcy Code and Germany’s InsolvenzÖrdung. Section 50 of the Insolvenzordnung 
clearly states that lienholder and secured creditors shall have its credits resolved 
separately11. In Germany, the bankruptcy administrator may sell a pledged asset as a 
subpart of a business on a reorganization procedure but must arrange for lienholder 
creditors to receive their credits12. Secured creditors do not participate in the bankruptcy 
and will either repossess their assets or be fully paid, agreements between secured 
creditors and bankruptcy administration being commonplace13. 
 
11 Section 50: Separate Satisfaction of Pledgees. 
(1) Creditors holding a contractual pledge, a pledge acquired by attachment or a legal lien in an object 
forming part of the assets involved in the insolvency proceedings shall be entitled to separate satisfaction 
in respect of main claim, interest and costs from the pledged object under sections 166 to 173. 
12 The InsolvenzOrdnung allows for a mandatory discount of 9% (or more, if negotiated between the 
administration and creditors) on the credit value of the secured creditor. The incentive for creditors to accept 
higher discounts come from the fact that the administrator may choose to liquidate the business, rather than 
reorganize, threatening the recovery of the credit. 
13Under the U.S bankruptcy Code, as a rule, reorganization plans will not affect liens. 
 US Bankruptcy Code, Section 1141 (c) 
““property dealt with by [a chapter 11] plan is free and clear of all claims and interests of creditors”. 
 This is excepted if a modification is expressly provided for in the plan and the affected creditor 
has ‘participated in the plan’. The relevant question is what does ‘to participate in the plan’ mean? In other 
words, the issue is whether express acceptance by creditor of waive of lien is required or simple silence and 
omission suffices. It seems that the predominance of a more restrictive understanding, under which simple 
omission does not authorize cancellation of the lien. 
Acceptance Loan Co., Inc. v. S. White Transp., Inc. (In re S. White Transp., Inc.), 2013 BL 207801 (5th 
Cir. Aug. 5, 2013). 5th Circuit has decided that in order for a lien to be deemed extinct by plan it “requires 
more than mere passive receipt of effective notice” of the chapter 11 case.” 
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The role of lienholder creditors on the bankruptcy procedure (and the nature of the 
problem). 
 
 Lienholder creditors, unlike secured creditors, participate in the plan and vote as 
a specific class. This class must approve the plan by a dual count - most of its members 
and most of the credits, in both cases counted among those present in the assembly. As 
mentioned, most times this class is composed of a few creditors (usuallybanks or other 
lender entities) with a prevalent creditor14 (a creditor that has most or a very relevant 
percentage of the total amount of credits in the class). It is true a creditor in such 
circumstances has a lot of leverage to negotiate with debtor. His rejection vote can by 
itself mean rejection of the plan and subsequent liquidation of the company. On the other 
hand, it is also true that lienholder creditors will have an incentive to approve well-
conceived plans, as these will permit recovery of the debt and the possibility of repeated 
financial operations in the future, while a liquidation might mean that the creditor would 
only partially recover its credit1516. 
 Whatever the factual circumstances, which vary from case to case, the law does 
not make voting rights contingent on or limited by the number or relative importance of 
creditors in the class. Under the 2005 bankruptcy law, the vote is valid, either ‘Aye’ 
(confirm) or ‘Nay’(reject). 
 This system creates an incentive structure in which debtor has to produce a plan 
at least good enough to convince the prevalent creditor that he´ll be better off approving 
it than if the firm were liquidated. Rejecting the plan may mean a real risk of receiving 
only partially (or nothing at all) his credit. 
The law does not require creditors to justify their votes, but some judges (and 
appeals courts) have developed a theory according to which some lienholder creditor 
rejection votes (or some prevalent unsecured creditor votes, if that is the case) may be 
considered abusive and will not be counted. They have applied that theory to a number 
 
14 As a few of the analyzed cases show there may be a prevalent creditor even in the unsecured creditor 
class. This, however, happens less frequently. When it does happen, however, the same problems exist. 
15 In case of liquidation, debts incurred during reorganization, court and legal fees and labor credits have 
absolute priority over lienholder credits. 
16 This is in line with the study by Oreng, Mariana, Saito, Richard e Silva, Vinícius A.B (2019) on bank 
behavior in bankruptcies in Brazil, which shows that notwithstanding the fact that banks usually are 
prevalent creditors with privileges and priority in case of liquidation, they´ll vote for confirmation of plans 
in the vast majority of cases. 
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of cases (and the sample I gathered show a growing trend). There are at least two major 
problems with this interpretation of the law. First, from a purely legal perspective, there 
is no statutory basis for considering abusive a vote freely cast by a lienholder or prevalent 
creditor. Second, and even more pernicious than the first one to the bankruptcy system’s 
logic, is that judge’s disregard of rules have not shown to be efficient. Under a belief of 
‘preserving the corporation’ (supposedly against lienholders, secured and other prevalent 
creditors’ egoistical or predatory behavior), judges allow non-viable corporations to 
continue doing business. In most, if not all cases, this continuance of business has 
occurred on a pathological manner. The supervisory mechanisms contained in Brazilian 
Law are not efficient to prevent opportunistic behavior by management and control. 
Debtors do not restructure and go on defaulting. Maintaining afloat a pathological 
operation may benefit company officers and controlling shareholders, but hurts creditors, 
competition, market and society in general17. 
The aftermath of the cases I have analyzed show just that, and I´ll show what have 
been the consequences and why, although the consequences are unintended, they are not 
surprising. 
 
Case selection and methodology. 
 
Analysis method and sample. 
 
I analyze a sample composed of all cases where abuse of vote by creditors was 
argued in State courts of the country’s six largest economies18. São Paulo, Rio de Janeiro, 
Minas Gerais, Rio Grande do Sul, Paraná and Santa Catarina. 
 
17 Writing about a different situation with some similarities, Akerlof and Romer (1993) affirm: “Once 
owners have decided that they can extract more from a firm by maximizing their present take, any action 
that allows them to extract more currently will be attractive-even if it causes a large reduction in the true 
economic net worth of the firm. A dollar in increased dividends today is worth a dollar to owners, but a 
dollar in increased future earnings of the firm is worth nothing because future payments accrue to the 
creditors who will be left holding the bag. As a result, bankruptcy for profit can cause social losses that 
dwarf the transfers from creditors that the shareholders can induce. Because of this disparity between what 
the owners can capture and the losses that they create, we refer to bankruptcy for profit as looting.” 
 It may even be that sometimes the firm is kept afloat without any wanton intent by controlling 
shareholders and management without the extraction of dividends or extraordinary compensation, simply 
because they believe they’ll be able to turnaround the operation and make it generate positive earnings. 
That’s a gamble that may pay-off if successful but will mean lots of social losses – and probably no private 
losses – if it turns out a failure. 
18 Brazil has 27 states. Bankruptcy Law is federal law, but cases are tried in State Courts. I intend to expand 
the research to all Courts. 
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Cases were selected in Courts’ databases (www.tjsp.jus.br, www.tjrj.jus.br, 
www.tjmg.jus.br, www.tjrs.jus.br, www.tjpr.jus.br and www.tjsc.jus.br). These 
databases contain all decisions rendered by the several organs of the Court. The search 
used the terms ‘recuperação+judicial+voto abusivo’ (judicial+reorganization+abusive 
vote) and ‘recuperação+judicial+abuso de voto’ ((judicial+reorganization+abuse of 
vote). 
It was necessary to analyze the entirety of the votes (which included reading the 
entire report and findings), to make sure the controversial issue (abuse of voting rights) 
had been discussed by court19. This information could not be extracted with the use of 
software20. The analysis was executed by me in a period of approximately 4 months prior 
to the completion of the essay. 
In total the search turned 137 (one hundred and thirty seven) matches, which after 
refinement were narrowed to 31 (thirty one) cases where abuse of vote was discussed and 
22 (twenty two) where the ‘abusive vote’ theory was applied. The break-down by state is 
as follows. 
In São Paulo, the search turned 71 matches. It was found that in only 13 cases 
there was a discussion about abuse of vote, and only 9 (nine) referred to situations where 
a vote was considered abusive and disregarded. In another, it was said obiter dictum that 
the vote was abusive, but this was not considered on the final decision; in another three 
the alleged abuse came from unsecured creditors (in one situation the vote for the 
rejection of the plan deemed abusive by the debtor was found to be valid by the Court, in 
one it was annulled because money had been asked ‘on the side’ for the vote) and in 
another the alleged abuse was rejected by Court, which affirmed that creditors can vote 
‘Aye’ or ‘Nay’ for the plan. 
Out of the nine where a rejected plan was confirmed by Court based on abuse of 
vote, three refer to the same case (three different appeals from three different creditors 
against the same decision), so the São Paulo sample is composed of seven decisions that 
confirmed a plan rejected by creditors. 
 
19 The terms searched could also be used on different matters. 
20 As Marcelo Guedes Nunes (Jurimetria, Saraiva, 2016, p. 174) points out: “Statistics research has always 
been dependent on data collection. Collecting data is undoubtedly the most expensive part of any research, 
because it depends on contracting, training and supervising the work of several field researchers, available 
to travel todifferent places, which, through interviews and form filling, will obtain the necessary data. Costs 
related to data collection were deterrent to a national level research, considering the amount of researchers 
needed to collect data” [translation by author, original text in Portuguese]. 
http://www.tjsp.jus.br/
http://www.tjmg.jus.br/
http://www.tjrs.jus.br/
http://www.tjpr.jus.br/
http://www.tjsc.jus.br/
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In Rio de Janeiro the search turned out 12 matches, which after analysis were 
reduced to 4 decisions. In one of them the Appeals Court discussed the abuse of vote 
doctrine but decided that creditors rejecting the plan had not abused their vote. In this 
case, however, rather than ordering liquidation, the Appeals Court simply annulled the 
plan clause that had motivated the rejection vote. In other three cases lienholder creditors 
that voted for rejection of the plan had their votes disregarded as abusive. 
In Minas Gerais the search turned out 5 matches, 4 of which were appeals against 
the same court decision, meaning that the matter was discussed in 2 cases. In one of them 
the claim of abuse was rejected and in the other the appeal was submitted by a relevant 
lienholder creditor that did not participate in the assembly21. 
In Rio Grande do Sul, the search turned out 8 matches, but only two of them 
discussed abuse of voting rights by creditors. In both the vote by prevalent creditors 
(creditors representing majority of the credits of a class) was disregarded and plan was 
confirmed. In one of the cases, plan rejection had come from the unsecured creditors’ 
class and a vote by a creditor representing 86% of the credits of that class was disregarded. 
In Paraná, out of 32 matches, on only four situations abuse of vote was discussed. 
In only one case a vote by a creditor was disregarded. In other situation, the court 
concluded for the validity of votes cast by 10 unsecured creditors and confirmed 
liquidation. In other two situations, Court considered valid the votes for the rejection of 
the plan, but ordered that a new plan be presented by debtor, rather than liquidation. 
In Santa Catarina, the search turned out 9 matches. After said analysis, it turned 
out 3 (three) decisions referred to situations where there was a discussion about abuse of 
vote. In 3 decisions the votes by lienholder creditors rejecting the plan were considered 
abusive and the plan was confirmed, in two decisions rejection votes were not considered 
abusive but the ruling was not (as the law requires) to liquidate the debtor, but rather that 
a new plan be presented. 
The analysis shows a growing trend in discussions about abuse of voting power. 
The years from 2005 (enactment of the law) to 2009 saw no claim of abusive votes. In 
2009, the first year when the thesis (abuse of voting rights) was discussed, there were two 
 
21 In that case, notwithstanding the fact that the creditor had objected to the plan prior to the assembly, his 
intention to reject the plan was not considered because it did not participate in the assembly, which is 
procedurally correct. I could not have access to the presence list from the assembly, this is what is alleged 
in the reasoning of the Appeals Court vote. 
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cases. One each for 2010,2011 and 2013, none on 2012 and 2014, 3 in 2015, 2016 and 
2017, 5 in 2018 and 8 in 2019. 
While absolute numbers are not that expressive, we can see that there is a constant 
and growing trend of court decisions allowing for reorganization when the plan is 
rejected. This is contrary to the Bankruptcy Act’s text, which expressly preconizes that 
rejection of the plan shall be followed by liquidation of the distressed company. This 
clearly indicates that judges and courts are not ‘following the law’ in that aspect. 
 
 
The foundations of the ‘abusive vote’ doctrine. 
 
The sample above shows clearly that judges ignore the law, but how do they justify 
what they are doing? Well, one introductory remark is that judges do not think they are 
ignoring or acting against the law, or at least do not expressly recognize it. In their view, 
a vote is only valid if it fits a frame composed by general, open and vague concepts 
contained on the Civil Code22. 
The analysis of the court reports show that judges consider votes abusive based 
on a belief that preserving the corporation is a socially better option than liquidating it 
and that prevalent creditors that oppose plans which obtain reasonable support from 
unsecured creditors act egotistically and against the bankruptcy law stated goals of 
reorganization. On judges’ view, it is not them that are breaking the law, it is creditor(s) 
that are acting against it. 
What constitutes abuse? To answer that question, it is worth looking at a few 
selected cases where the reasoning for the application of the ‘abuse of vote’ doctrine was 
applied. The first time the abusiveness thesis was applied the São Paulo State Court 
decided as follows23: 
 
Reorganization. Plan approved by unanimous vote of labor creditors and 
majority of unsecured creditors, rejected by the single lienholder creditor – 
 
22 Especially article 187 of the Brazilian Civil Code, which states: 
“Article 187 - The holder of a right, upon which exercise, exceeds clearly the limits imposed by their 
economic or social order, good faith or morals, commits an unlawful act.” 
23 Appellate court decisions are formatted according to a structure that begins by the ‘ementa’, a summary 
of key arguments, issues, words and findings. Sometimes the matter discussed is all contained in the 
‘ementa’ (in a short version). Then comes the brief of facts, which is mandatory and consists of a summary 
of case facts and events, followed by the legal reasoning and the findings. The citation above is the 
translated ‘ementa’. 
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Approval of plan by the local judge – Intermediary appeal by a third creditor 
(not the lienholder) — Requirements of inc II, § 1" of art. 58 (approval by 2 
classes) – Fulfillment, as well, of the requirement of inc, I of § 1" of art. 58 
(favorable vote of creditors representing more than half of all credits present in 
the assembly, all classes considered jointly) – Requisite of inc III of § 1" of art. 
58 which will never be met in cases as this one, where there is one creditor only 
rejecting the plan, which consecrates ‘minority abuse’ – Hypothesis not 
considered by statute – Judge that, notwithstanding, fulfills that lacunae – 
Application of article 126 of the Federal Rules of Civil procedure – Decision 
upheld. Intermediary appeal denied24. 
 
 
The court found a few factors important. Among them, the unanimous vote of 
labor creditors, the majority vote of unsecured creditors and the fact that there was only 
one lienholder creditor. It then concluded that the single vote against confirmation would 
amount to ‘minority abuse’ and that the bankruptcy Act did not have a specific rule for 
situations like that, which would allow judges to intervene and solve the ‘anomy’ by 
calling on general principles of good faith. 
In a more recent case, involving a conglomerate famous for being part of the 
‘carwash’ scandal, the plan was also rejected, this time with the opposing vote of a 
significant number of lienholder creditors (13) and of a few other non-secured creditors. 
Notwithstanding the expressive number of opposing creditors, the bankruptcy judge 
confirmed the plan, arguing that they had refused to negotiate and were acting in an 
“economically irrational” manner. His decision was upheld by the Appeals Court as 
follows: 
 
Reorganization. Plan confirmation. Cram down. Opposing vote considered 
abusive. Vote by creditors united by a syndicated loan representing almost half 
of the credits present in assembly. Plan feasibility considered as precondition to 
the exam of the abusiveness of the vote, as well as the argument that the plan isirrational and unfeasible. Existence of one sole and shaky asset, but one that has 
been allowing for relevant payments to labor creditors. Situation where creditors 
cannot demonstrate that liquidation would be better for them. (Mis)management 
of companies and embezzlement being investigated at the lower court level, what 
may result in court ordered substitution of management (art. 64 of the Law) 
without necessarily leading to liquidation. Intermediary appeal denied25. 
 
 
24 São Paulo State Appeals Court, Intermediary appeal (Agravo de Instrumento) 9026505-
60.2009.8.26.0000; Reporter, Judge Romeu Ricupero; Judgement date, August 18th, 2009. 
25 São Paulo State Appeals Court, Intermediary appeal (Agravo de Instrumento) 2082159-
10.2016.8.26.0000; Reporter, Judge Claudio Godoy; JUdgement date March 13th, 2017. 
12 
 
 In this case, the key factor seems to be the fact that the reorganizing company had 
non-operational revenues that were being used to pay employees, while the allegations of 
fraud were not enough to prevent the company to try its reorganization. Social 
considerations about consequences on employees are relevant, but in this case they seen 
to be weak, as labor creditors would have absolute priority over lienholders in case of 
liquidation. 
 Another decision worth mentioning came from the State appeals Court of Santa 
Catarina 
 
 Intermediary appeal. Reorganization. Plan approved by majority of labor and non-
secured creditors. (classes 1 and 3 of art. 41 of Law 11.101/2005) and rejected by 
one creditor representing the majority of lienholder credits (Class 2). Non-
attendance of the requirement of art. 45 of the Law, which requires plan approval 
by all classes. Court order that determines the liquidation of the companies. (art. 
56, § 4º). Appeal by debtors, alleging abuse of voting power by lienholder creditor, 
holder of 71% of the credits of class 2., which makes cramdown application 
unlawful (art. 58, § 1º). 
Impossibility of judicial intervention against assembly’s sovereign decision. 
Absence, in case, of satisfactory and plausible reasoning by Appellee to show his 
considerable loss or harm to its banking activity. Individualistic position that does 
not justify the rejection to the proposals presented by debtors. Principle of the 
preservation of the company, with maintenance of production, or employment and 
interests of other creditors, which shall prevail. Evidence of abuse. Inspiration on 
the U.S originated cramdown, allowing for control of the assembly’s decision. 
Viability of the subsistence of the appealing companies properly shown. Appeal 
granted. Plan confirmed26. 
 
 
 In this case, the 1st degree judge had ordered liquidation, but her decision was 
overruled by the Appeals chamber, which confirmed the rejected plan using, as main 
argument, the ‘absence (…)of satisfactory and plausible reasoning by Appellee to show 
his considerable loss or harm to its banking activity´ which represents a ‘individualistic 
position’. It is worth noting that the court didn´t seem to care to the fact that the law does 
not require creditor to demonstrate a probable loss as justification for his vote against the 
plan. 
 
 The Superior Court of Justice upheld a decision from the São Paulo State appeals 
Court as follows: 
 
26 Santa Catarina State Appeals Court, Intermediary appeal (Agravo de Instrumento) 2015.045438-8, 
Reporter Judge Ronaldo Moritz Martins da Silva, judgement date February 18th, 2016. 
13 
 
 
Special Appeal. Business Law. Reorganization.Plan. Court Approval. Cram 
down. Requirements of art. 58. § 1º, Law 11.101/2005. Exceptional mitigation. 
Possibility. Preservation of Corporation. 
1. Law n° 11.101/2005, intent to avoid ‘minority abuse’ or ‘individualistic 
positions’ prevailing over the social interest of overcoming the corporate crisis, 
allowed for, on § 1º of article 58, a mechanism that authorizes the judge to 
confirm the plan, even against the assembly’s decision. 
(...) 
4. In this case, the requirements of Inc. I e II of art. 58 were met, and, in what 
concerns the requirement of inc III, plan obtained ‘qualitative’ approval by 
lienholder creditors, because approved by more than half of the value of the 
credits present in the assembly, “3 lienholder creditors present, plan was 
accepted by one of them, holder of a credit equal to 97,46376% of the total debt 
of the class" (p. 130). However, it did not meet the quantitative requirement, 
because approved by one third of creditors of the class, while the law requires 
‘more than one third’. Further, reorganization was approved on May 15th, 2009, 
being in full progress. 
5. Thus, to avoid ‘abuse of the right of vote’ on the exact moment of the attempt 
to overcome the crisis the judge shall act sensibly on the analysis of cram down 
requirements, preferring an exam based on the principles of preservation of the 
corporation, opting to flex the requirements, especially when a lone creditor 
dominates absolutely the vote, overcoming what seems to be the communion of 
creditors’ interests. 
(....)27 
 
 Here the main argument is that when a creditor dominates absolutely the vote, 
voting against the opinion of most of the other creditors would be abusive. This is to say 
if a creditor has a relevant credit position in his class, he can only vote for confirmation. 
 If we look at all the decisions that considered votes by prevalent creditors abusive, 
the same arguments – with little variation – will appear recurrently. There is a plethora of 
‘legal’ arguments used by judges to disregard votes by relevant lienholder creditors. 
These include ‘failure to negotiate’, ‘failure to justify rejection vote’, ‘absence of 
demonstration that creditors would be better-off with liquidation28’ ‘abuse(?)’, 
‘egotistical behavior29’, ‘bad faith conduct’ and others. 
 
27 Brazil. Superior Court of Justice. REsp 1337989/SP, Reporter, Justice LUIS FELIPE SALOMÃO, Fourth 
Collegiate, Judgement date May 08th, 2018, Published in the Court Gazette on June 4th, 2018. 
28 In these decisions, it is almost as if the courts wanted to apply a ‘best interest of creditors’ test. This is 
odd, because there is no such test in Brazilian law. In the U.S it is applied on behalf of creditors to deny 
reorganizations, not against creditors (for failing to make such a proof). 
29 This can indeed be the case, from the viewpoint of a lienholder creditor with a claim over an asset valued 
higher than total debt. This is not forbidden by law and is purely rational. Oddly, while the literature 
suggests that secured or lienholder creditors are likely to act in that manner and prefer liquidation over 
reorganization, a study by Oreng, Saito and Silva with the analysis of 125 plans in Brazil has shown that 
there is very little ‘class conflict’. In Brazil, lienholder creditors tend to approve plans. They affirm: “Ayotte 
and Morrison (2009) argue that when senior creditors are oversecured, i.e., when their claims are worth 
14 
 
In addition to the legal arguments, other non-legal considerations play their parts. 
These include: a) a belief that ‘preserving companies’ represent/retain more social value 
than liquidation; b) a belief that lienholder creditors that reject plan approved by other 
classes vote in an egotistical and selfish manner; c) a belief that the public policy goals 
stated by the law will be better accomplished if the plan is confirmed by court, even if 
liquidation is the remedy prescribed by law. 
 
Was judicial activism efficient? 
 
 As mentioned, the public policy goals promoted by the Bankruptcy Act are 
fostering the reorganization of distressed firms as going concerns, thus preserving jobs, 
production, assets’ value and maximizing creditors’ recovery. A successful 
reorganization, albeit hard to measure, is one that accomplishes such objectives30. 
Under the law’s original formula,creditors vote on the viability of the plan and 
judges can only confirm plans rejected by the assembly under strict cramdown conditions. 
It was the lawmakers clear desire to let creditors decide on the reorganization attempt. No 
audit, no economic assessment, no justification for voting is necessary or required under 
the bankruptcy Act provisions. 
 We have seen that in some cases judges decided not to follow this set of rules and 
have justified their decision based on one or several of the reasons seem above. They 
 
less than the value of the firm’s assets, cases are more likely to result in liquidation, while the opposite 
holds when they are undersecured. In these cases, “creditor conflict is likely to be most pronounced” (p. 
514). To see if this holds for our cases, we calculate the senior bank debt to residual value ratio, which 
averages 0.28 for the entire sample. Using a total senior debt/asset valuation ratio, the average value is 
0.42. Both figures indicate that senior M. Oreng, R. Saito, V. A. B. Silva 14 creditors are oversecured. This 
result contrasts with Ayotte and Morrison’s argument, as our average reorganization approval ratio is 
78%.” 
30 Determining whether something, someone or some institution has failed or has been successful requires 
establishing standards and goals that are both objective and measurable. It is often a hard task, as Warren 
and Westbrook point: 
‘The idea of success in an ongoing, viable business can be elusive. On the one hand, a confirmed plan does 
not guarantee a successful future for the business. The evidence that a number of companies return to 
Chapter 11 after confirming a reorganization plan suggests that not all business will enjoy smooth sailing 
post-bankruptcy. Even if a company does not soon return to the bankruptcy court, the definition of ‘success’ 
in this context is subject to considerable debate. How long does a company have to exist post-
reorganization before it is deemed a ‘success’? Must it be alive for ten years? Five years? Two years? 
What if it shrinks in size? Must it be profitable all or part of that time to be a success? What if it is purchased 
in year three? These and many similar questions make it difficult to pinpoint what constitutes success 
following confirmation.” 
They also argue that ‘the claim of failure of Chapter 11 has been easy to make’ due to a couple of early 
studies that have used poor data and wrong methodology, but have reached widespread divulgation. 
15 
 
undoubtedly mean well31 but what have been the results of their interventions? Have 
companies that would otherwise been liquidated succeeded on their reorganization, 
preserving jobs and production output? Have credit recovery rates improved? Do 
creditors end up better than they would in case of immediate liquidation? 
 I have looked at all the cases on the sample decided before 2018 (it is not possible 
to measure the effects of the 2018/2019 decisions yet) and the results are, to say the least, 
frustrating. Out of the 9 cases where plan was confirmed by judicial decision disregarding 
lienholder creditor votes opposing the plan, on 7 liquidation later was ordered. On all 
those, the reorganization was marked by several defaults on plan commitments32 during 
the attempted reorganization, tax and debt in general increased33, remaining assets lost 
value and several assets were sold along the process, without pre-reorganization creditors 
being paid. On the two cases that have not been converted into liquidation, there are 
several allegations of default on plan commitments. 
 Judicial activism backfired. In the cases where liquidation was ordered (77%), 
jobs were not protected (at least not on the long-term), asset value decreased, production 
output was not preserved (at least not on the long term), distressed debtors increased their 
debt, pre-bankruptcy creditors recovered very little or none of their credit34. All or almost 
all cases where plan was rejected by lienholder or prevalent unsecured creditor vote and 
confirmed by court before 2017 ended up in liquidation. Given the reality of the two cases 
where liquidation was (to present date) not ordered, it is quite possible that a well 
conducted liquidation would have generated more social value than the continuance of 
reorganization. 
 
Explaining the failure of judicial activism (and why it matters). 
 
 It seems unquestionable that the results of judicial activism disregarding votes and 
confirming plan have not been those expected. But why? Could that failure have been 
 
31 This good intention is presumed but can also be seen on the reasoning of most decisions. Judges expressly 
mention that preserving the company (rather than liquidating it) is ordered because it is socially better. 
32 See appendix 2 chart for the list of analyzed cases. 
33 It is not possible to measure job preservation, but labor debt increased in most cases. 
34 It is not possible to measure creditors’ expenses in the bankruptcy process (this would include not only 
court fees, but internal costs as well), but this is certainly another number to add in terms of social losses. 
The literature on bankruptcy costs is very interesting. In the United States, Bris, Welch and Zu (2006) 
analyzed costs for 225 reorganization and 61 liquidations. In Brazil, Jupetique, Martins, Mario and 
Carvalho (2017) studied the costs of 29 reorganizations and 102 liquidations. 
16 
 
foreseen? I believe the causes for failure can be explained and could have been foreseen 
by judges, provided they had at least basic knowledge of what makes a firm effectively 
reorganize and a better understanding of who was in a better position to assess the 
likelihood of a successful reorganization. 
It is important to understand that the set of non-legal reasons35 why judges ignore 
the law – and growingly continue to do so - is twofold. On the one side, an extensive 
belief in preserving the corporation without caring for the social costs; on the other, they 
lack knowledge about business management and also about the factors that make 
reorganization successful or flawed. 
 There is an important context for that judicial stand, and in order to understand 
that context, one has to go back in time. Brazil’s bankruptcy laws and practice have 
historically led to a scenario where credit recovery has been very low36. Bankruptcy 
procedures before the new law were fertile grounds for frauds and other illicit acts37. The 
2005 bankruptcy act specifically intended to improve credit recovery and end the 
fraudulent debtor behavior prior and during the procedure, by radically changing the 
architecture of rules. One of these changes was putting a high priority in creditor 
protection. This made a lot of sense, as a high degree of creditor protection is very 
important for the credit market in general. Jacopo Ponticelli38 affirms that: 
 
“Weak protection of creditors is an important source of financial frictions (La 
Porta et al., 1997; Demirgüç-Kunt and Maksimovic, 1998; Djankov et al., 2007). 
In an attempt to improve firms’ access to external finance, emerging economies 
such as Brazil, China, and Russia have recently introduced new bankruptcy laws 
increasing the legal protection of creditors. 
 
In the same direction, Araújo, Ferreira and Funchal (2012) affirm: 
 
The evidence in the literature indicates the relevance of creditors’ legal 
protection in supporting the development of credit markets. However, as stated 
by Djankov et al. (2008), institutions that regulate insolvency usually perform 
poorly, mainly in developing countries. This happens because bankruptcy 
 
35 A brief explanation of the legal reasons was offered earlier in this paper. 
36 There is no credible study of recovery rates (cents on the dollar) prior to 2005, but some estimates go as 
low as 6 cents per dollar. The World Bank Doing Business Report only startedmeasuring cents per dollar 
recovery in Brazil in 2014. 
37 Many commentators criticize the old law. Adriana Valéria Pugliese (Direito falimentar e preservação da 
empresa, 2013) says that because the old system did not allow for consideration of other specificities of 
debtor´s situation nor allowed for offering of conditions other than those strictly prescribed in the law, 
viable companies had no space for proposing adequate measures for its problems and inviable companies 
would freely postpone liquidation, keeping themselves in the market while increasing harm to its 
competitors. 
38 Court enforcement and firm productivity: evidence from a bankruptcy reform in Brazil, 2014, access at 
17 
 
procedures in these countries are often extremely inefficient (too long and costly) 
and secured creditors rights are not well protected. 
 
The bankruptcy act intended to improve creditor protection, but law on paper is 
just ink on paper if not properly enforced. Jacopo Ponticelli also warns that: 
 
One aspect often overlooked when assessing the potential benefits of these 
reforms is that, to be effective, they need proper and timely enforcement by 
courts. Judicial enforcement, however, is seldom well-functioning in many 
developing countries, where courts in charge of bankruptcy cases are 
characterized by limited expertise and long delays (Dakolias, 1999; Djankov et 
al., 2008). In such cases, even an otherwise desirable improvement in 
bankruptcy rules can prove ineffective”. 
 
 On the other hand, the Bankruptcy Act also put a lot of importance in preserving 
viable corporations, without defining what a viable corporation is or means. It is fair to 
say that the legislator’s intention was to strike a careful balance between preservation of 
the corporation and creditors’ right. Theoretically, creditors gained a lot of power (if 
compared to the previous procedure) and debtors would have to submit viable, carefully 
drafted, convincing plans, containing relevant turnaround measures, to obtain a trust vote 
(approval) from creditors. Araújo, Ferreira and Funchal (2012) state: 
 
This new design of Brazilian bankruptcy procedures brings new incentives to the 
interested parties. The incentive for debtors to default strategically is reduced, 
for two main reasons: first, the conditions under which debtors can file for 
bankruptcy are limited to those prescribed by law; and second, a reorganization 
procedure can be converted to liquidation at creditors’ discretion, a feature that 
nearly eliminates the use of reorganization as a bargaining mechanism. 
(…) 
The new bankruptcy law design encourages lenders to participate in bankruptcy 
procedures more actively, eliminating the need to extend only short-term debt as 
a discipline mechanism and leading, after the reform, to a debt structure with 
longer maturity (see Diamond, 2004). 
 
 
 They actually measured some promising results in the early years of the law, 
including an increase in debtor-in-possession financing and a reduction on the cost of 
debt financing: 
 
In fact, point estimates indicate an increase of 17.8% in total debt and of 74% 
in long-term debt. There is no evidence of changes in short-term debt (regression 
18 
 
2), and a significant fall in trade credit. We did not expect a big increase in this 
type of credit, since its holders were not benefitted by the new law as were 
secured creditors. In fact, the need for trade credit falls as the availability of 
debt financing increases. 
Finally, regression 5 suggests a reduction of approximately 16% in the cost of 
debt financing. These results are in line with the theoretical literature on credit 
(Aghion and Bolton, 1992; Hart and Moore, 1994, 1998; Scott, 1977; Townsend, 
1979). Creditors now have a higher chance of recovering a larger portion of 
their loans. And the more they expect to receive when their debtors become 
insolvent, the less they will require firms to pay while still solvent, and the more 
they will be willing to lend. Thus, these are signs that the Brazilian bankruptcy 
reform had a positive effect on the supply of credit. 
We also have results on debt maturity. Notice that long-term debt increases while 
short-term debt remains stable, leading to a higher proportion of long-term debt 
in the average firm's capital structure. This result is somewhat similar to what 
both Qian and Strahan (2007) and Bae and Goyal (2009) found. 
 
 
While their conclusion intuitively made sense – and it was supported by a general 
change on the behavior of debtors immediately after the law – the ‘essentiality test’, ‘the 
abuse of vote’ doctrine and other judicial constructions have twisted the scale in favor of 
debtors. 
I don´t have the statistics on what happened to the supply of credit in the years 
after Araujo et al published their paper, or if credit supply has been affected by judicial 
behavior concerning approval of rejected plans based on abuse of vote39. While the 
growing number of court confirmations based on the abusive vote doctrine is cause for 
worry, it is important to mention that to date there continues to be a substantive rate of 
plan approval within the law. 
Waisberg, Sacramone, Nunes and Corrêa (2019) mention that in the state of São 
Paulo 17% (seventeen percent) of attempted reorganizations (filed from January 2010 to 
July 2017) fail and are converted to liquidation before plan vote. 72% (seventy two 
percent) of the plans are approved (either by creditor assembly or without it) and plans in 
11% (eleven percent) of the submissions are rejected by the creditors’ assembly. Out of 
the rejected plans (33), 22 were approved by cram down. While it’s not clear if the authors 
 
39 It is worth noting that it would be very difficult to establish a direct causal relation between the uprising 
of the abuse of vote doctrine and an increase in the cost of credit and/or a reduction on long-term debt. 
Brazil has undergone a harsh recession from 2014 until 2017 and a significant increase in the Federal 
Government’s deficit, with country risk increasing, all leading to an increase in the overall interest rates in 
the economy. Cause cannot be inferred, but there’s an obvious correlation. 
19 
 
of the study count ‘abusive vote’ approval within their ‘cram down’ classification, it is 
unquestionable that most plans are approved with observance of statutory rules. 
The study by Oreng, Saito and Silva show that in the great majority of cases 
lienholder creditors will vote for confirmation of plans. It seems that, contrary to Ayotte 
and Morrison’s findings (2009) for the United States, in Brazil lienholder creditors will 
prefer to participate in the reorganization rather than to push for liquidation. 
If that is so, why did they vote for rejection of the plan in the analyzed cases? One 
possible explanation is that lienholder creditors feared that, because the plan did not 
contain effective turnaround measures, the likely outcome of reorganization was future 
liquidation, with a reduction on expected recovery, due to the fact there would be new 
creditors with higher priority (those that conceded credit during the reorganization), that 
direct costs of bankruptcy would accrue and that pledged assets would lose value. 
This is supported by our research on financials of debtors which had their plan 
rejected. They all were in very poor financial health upon submission of their requests, 
showing continuous operational losses40. These are characteristics that generally indicate 
that these firms were not suitable for reorganization. 
Other reasons had to do with management. Change of management is many times 
relevant for the turnaround. It is a complex situation, but there seems to be a correlation 
between management changes and effective improvement of operational indexes in the 
 
40 Oliver Lukason and Artjom Urbanik (Why reorganizationof firm fails: evidence from Estonia) affirm: 
“When coming to firm specific factors, failed reorganization is often connected with failed turnaround 
(Chowdhury 2002, Sheppard and Chowdhury 2005). Failed reorganizations are linked to wrong timing of 
turnaround and wrong turnaround activities to overcome problems, namely firms tend to start 
reorganization at a too late stage and deal more with operational problems rather than initiating strategic 
reorientation (Chowdhury 2002, Sudarsanam and Lai 2001, Barker III and Duhaime 1997). 
Several studies also consider the suitability of firms for reorganization and also the success of 
reorganization based on past financial ratios. Laitinen (2011) showed that most firms under reorganization 
are not viable. Also, evidence has been provided that financial ratios might not be good discriminators of 
successful and failed reorganizations (Poston et al. 1994, Laitinen 2009). Unsuccessful reorganizations 
can be connected with different financial patterns, as it has been shown that firms go through different 
failure processes (Laitinen 1991, Lukason 2012). Still, at least some financial indicators are very poor in 
case of unsuccessfully reorganized firms (Kärkinen 2010).” 
20 
 
reorganization period4142. Fowler Monteiro and Qaleman, in their empirical research of 
nine publicly traded companies in Brazil, show that, the better the (EBIDTA) of the 
reorganizing corporation, the higher the changes on managements on the period shortly 
before the reorganization filing. This may seem counterintuitive but has a simple 
explanation – the effective commitment of these companies operationally viable but 
financially distressed with an effective turnaround is bigger than the one show by 
operationally inviable companies43. 
All the companies that had its plans rejected did not offer change of management 
as one of the reorganization measures. Most were family owned firms that intended to 
continue being managed within the family. 
Firms that had their plans rejected had all three of the following: mismanagement, 
operational losses, very poor financial statements. Besides, their submitted plans did not 
 
41 Guilherme Fowler A. Monteiro, Silvia Morales Q. Caleman, BANKRUPTCY REORGANIZATION 
PLANS: STRATEGIC COMPONENTS, MANAGEMENT CHANGE, AND FIRM PERFORMANCE, 
They affirm: 
“This may be one relevant mechanism behind the empirical observation that successful turnarounds involve 
the change of managers (Baldiga, 1996; Daily, 1995; Denning, Ferris, & Lawless, 2001; Hofer, 1980; 
Hotchkiss, 1995; O’Neill, 1986). This same fact may be associated to the influence reorganization plans 
have on the performance of the firm. The reasoning is straightforward. A new manager must create an 
interpretation of the firm's past and such interpretation will be expressed in the reorganization plan. The 
higher the ability of the manager in reframing the past and thinking on new strategies, the more complete 
the reorganization plan and, subject to execution, the higher the probability that the firm will recover. 
In the opposite case, when the leaders of the company undergoing bankruptcy reorganization remain in the 
firm, they may better describe the strategic components of the company, which eventually leads to a 
comprehensive reorganization plan; however, there is not a guarantee that they will be able to reinterpret 
the past and visualize new strategic perspectives.” 
42 See also Oreng, Mariana, Saito, Richard e Silva, Vinícius A.B. Bank responses to corporate 
reorganization: evidence from an emerging economy. BAR − Brazilian Administration Review Maringá, 
PR, Brazil, v. 16, n. 1, art. 3, e180053, 2019 http://dx.doi.org/10.1590/1807-7692bar2019180053 
“Even though we had access to only a few balance sheet figures from the companies we covered, we verify 
that the most important issue seems to be mismanagement and not problems with the law itself.” 
43 They affirm: 
“Among the companies with positive EBITDA variation, there is a significant renewal of the board of 
directors during the reorganization bankruptcy process. In company 6, there was the resignation of two 
board members after the company's entry into bankruptcy. In company 3, only one member remained in 
the board after the start of the reorganization bankruptcy process. 
Regarding the group of companies with negative variation in EBITDA, companies 4, 7, 8 and 9 show a rate 
higher than 80% of members remaining on the board of directors. In the case of company 4, all members 
of the board of directors remained in their positions until the change of the firm's shareholding control, 
which caused the replacement of all board members. Only company 3 had members resign before the start 
of the reorganization bankruptcy process. 
The companies with positive EBITDA variation also show greater renewal in the members of its board of 
executive officers. At company 2, the CEO was fired, and at company 5, the chief financial officer resigned 
six months before the request for reorganization bankruptcy. Most of the companies in the group with 
negative EBITDA variation, on the other hand, do not present executive board changes before or after the 
beginning of the bankruptcy reorganization process. 
http://dx.doi.org/10.1590/1807-7692bar2019180053
21 
 
have convincing and effective turnaround measures. It is just rational and reasonable that 
creditors that could get something out of liquidation voted for it44. 
Could judges have known in advance that these firms whose plans were rejected 
by prevalent creditor votes were very likely to fail on their reorganization attempts? They 
could if they were aware of the literature and research on why reorganization fail or 
succeed, the sort of knowledge judges are not expected nor required to have. This is no 
excuse for the failed activism, rather another reason why judges should have respected 
statute and deferred the decision to those more suited to do it – the creditors. The fact that 
statute clearly specifies that it is exclusively a creditor’s decision is also a strong argument 
against the failed activism45. 
There is no evidence in the cases analyzed that viable plans were rejected because 
egotistic behavior and interest of prevalent creditors. Hypothetically, this could be the 
case, but there is absolutely no evidence of that on any decision disregarding votes. The 
feasibility of the plan was never a subject of analysis by the decision that disregarded the 
votes. Judges disregarded the votes of lienholder creditors (and of a few unsecured 
creditors as well) based exclusively on the vague concepts we have mentioned and that a 
relevant number of unsecured creditors voted for approval (the rational thing for them to 
do!). 
At best, disregarding votes was a shot in the dark. Judges had absolutely no 
information – and probably didn´t try to acquire it – allowing them to assess or conclude 
that confirmation of the plan was socially46 better than the one adopted by the assembly 
(rejecting the plan). Judges had absolutely no idea whether the plan was feasible or not, 
if companies were operationally viable (had positive earnings) or could become 
operationally viable. Judges had no possibility (and probably not even interest) to apply 
 
44 Again, confirmation of bad plans by unsecured creditors makes sense, as present residual value of assets 
in case of liquidation will be negative for their class. 
45 It is important to bear in mind that Brazil’s bankruptcy act is less complex than the U.S bankruptcy Code, 
at least for the issue under consideration. There are no requirements concerning firm valuation, which seems 
to be a hot topic in U.S bankruptcy (see Ayotte and Morrison, 2018). By law, distressed companies 
reorganize if their creditors agree to it (confirm the plan) and liquidate if they reject the plan. Simple as 
that. While this seems to put a lot of powerinto creditor’s hands, the fact – as seen by the analyzed cases – 
is that plans, even those poorly conceived, are likely to be approved by creditors. 
46 By socially I mean the net result of all costs and benefits incurred by creditors and other stakeholders. If 
decision A (to allow for reorganization) would mean a lesser net result (such as a negative result) than 
decision B (to order liquidation), then decision B would be socially preferable. 
22 
 
a test like the ‘economic viability’ proposed by Allan Schwarz47 to determine when firms 
should be liquidated and when they should reorganize: 
 
 “such a {insolvent} firm may be experiencing economic distress, financial 
distress or both. A firm that is experiencing economic distress cannot earn 
revenues sufficient to cover its costs, exclusive of financing costs. A firm in 
financial distress would have positive earnings were it not required to service 
its debt. Since the amount that firms borrow is sunk when insolvency occurs, a 
firm’s debt is irrelevant to the question whether the firm should be continued or 
not. It then follows that economically distressed firms should be liquidated 
because these firms have negative economic value. Firms that are only 
financially distressed, however, should be continued as economic entities, with 
their debts canceled or rescheduled.” 
 
 It can be argued that under the bankruptcy Act rules such analysis is not formally 
required. Debtor does not need to demonstrate that the operation generates positive 
earnings, being only momentously financially distressed. However, plan should 
demonstrate that if current operation is not generating positive earnings, it will be 
reinvented and reorganized to start generating earnings within a certain time frame. Based 
on that information, creditors should vote for confirmation of a plan presented by a viable 
company and for rejection of a non-viable plan. 
Creditors are better suited than judges to execute such judgements, even if they 
haven´t in practice being doing it. I have mentioned in a previous work48 that the current 
structure leads to the approval of weak plans, as unsecured creditors are most likely to 
vote for confirmation, considering the value they see in liquidation is zero49, a finding 
that is confirmed by Oreng, Saito and Silva’s recent work50. As undesirable as this is, this 
current reality works against judicial activism, not in favor of it, because it shows that bad 
 
47 Alan Schwarz. The law and economics approach to corporate bankruptcy. Doutrinas essenciais: Direito 
empresarial. Volume VI, p. 26-27 
48 Silva Neto, Orlando, An Analysis of Reorganizing Bankruptcies in Brazil: Assessing and Understanding 
Failure or Success. (May 17, 2017). Available at 
SSRN: https://ssrn.com/abstract=3095529 or http://dx.doi.org/10.2139/ssrn.3095529 
49 This is due to the fact that reorganization requests come from when debt is overwhelming and is usually 
several times higher than the value of assets or even that of the firm as a going concern. 
50 They affirm: “In contrast, when plans were approved but there was no conflict, junior banks were so out 
of the money (10.87) that a conflict did not seem justifiable, as their expectation of recovery was minimal. 
In these cases, companies were significantly more leveraged. Nevertheless, the reorganization was 
approved, possibly because senior creditors were only slightly out of the money and had some expectation 
of credit recovery. The approval of such reorganizations may be an indication of inefficiency in the 
reorganization process, as these highly leveraged companies are less likely to recover from financial 
distress. Unfortunately, we do not have financial statement figures to offer additional analysis on this 
topic.” 
https://ssrn.com/abstract=3095529
https://dx.doi.org/10.2139/ssrn.3095529
23 
 
plans are approved. Only horrible, really unconvincing plans are rejected. Judicial 
confirmation of lousy plans presented by mismanaged companies with ongoing 
operational losses could only produce the negative effects I have demonstrated. 
 
 Conclusion. 
 
Court’s disregard of rules has not shown to be efficient. Under a belief of 
‘preserving the corporation’ (supposedly against lienholders’ and secured creditors’ 
egoistical or predatory behavior), judges allow non-viable corporations to continue doing 
business on a pathological manner. The supervisory mechanisms contained in Brazilian 
Law are not efficient to prevent opportunistic behavior by management and control. 
Maintaining afloat a pathological operation may benefit company officers and controlling 
shareholders, but hurts creditors, competition and the market in general. 
The current structure of the bankruptcy rules will likely lead to confirmation of 
bad plans, with only the really flawed reorganization plans being rejected. 
I analyzed docket documents, including trustees’ reports, minutes of creditors’ 
meeting and other financial documents of companies that went into reorganization, had 
their plan rejected by creditors but obtained confirmation due to judge´s decision 
disregarding creditors’ vote. The sample was obtained by selecting court records found 
using ‘keyword’ search out of Courts’ electronic database. 
My findings are that the corporations that had its plan confirmed by judicial 
decision with disregard to lienholder creditors’ opposing vote have mostly been 
liquidated at a later date, with higher debt and less assets, resulting in a credit recovery 
rate much lower than if immediate (after plan refusal) liquidation had taken place. In the 
meantime their reorganization attempts have been marked by (several) breaches of plan 
payments and several of them by criminal conducts. Activist court´s good intentions led 
to higher social losses than immediate liquidation, what was foreseeable. 
 
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Appendix 1 
 
São Paulo State Appeals Court 
 
Year 
appeal was 
judged 
Appeal number Court/Reporter Comment 
2019 22565307920188260000 SPAC, Azuma Nishi 
 21817308020188260000 SPAC, Araldo Telles Dissenting opinion by R. Negrão 
 22348455020178260000 SPAC, Araldo Telles 
 20242438120178260000 
20242048420178260000 
20236582920178260000 
SPAC, Francisco 
Loureiro 
The three appeals refer to the same 
reorganization decision 
https://doi.org/10.5465/ambpp.2016.13746abstract
http://dx.doi.org/10.1590/1807-7692bar2019180053
https://ssrn.com/abstract=3095529
https://dx.doi.org/10.2139/ssrn.3095529
https://abj.org.br/wp-content/uploads/2019/04/Recuperacao_Judicial_no_Estado_de_Sao_Pa.pdf
https://abj.org.br/wp-content/uploads/2019/04/Recuperacao_Judicial_no_Estado_de_Sao_Pa.pdf
http://repository/
26 
 
 20057776820198260000 SPAC, Fortes Barbosa Appeal report refers to potential 
abusive vote but overrules lower 
court decision to confirm plan 
based on a different reason. 
2018 2120128252017826 SPAC, Alexandre 
Marcondes 
The abuse of vote was rejected, but 
liquidation was not ordered 
 22219015020168260000 SPAC, Vote by non-secured creditor 
holding majority of credits not 
considered abusive 
 20730908020188260000 SPAC, Cesar 
CIampolini 
Vote by non secured majority 
considered abusive because 
evidence that they had required 
money ‘on the side’ 
2017 20821591020168260000 SPAC, Claudio Godoy Vote by a number of lienholder 
creditors 
2016 
2015 
2014 
2013 0308398-
77.2011.826.0000 
SPAC, ?????? Abuse of vote by creditor was 
alleged, but denied by Appeals 
Court 
2012 
2011 
2010 02827592820098260000 SPAC, Romeu 
Ricupero 
Claim of abusive vote by 
unsecured creditors 
2009 90245161920098260000 SPAC, Romeu 
Ricupero 
 
 03429252620098260000 SPAC, Romeu 
Ricupero 
 
 
 
 
Rio de Janeiro State Court of Appeals 
 
Year 
appeal was 
judged 
Appeal number Court/Reporter Comment 
2019 0041255-
69.2019.8.19.0000 
RJAC, Eduardo 
Gusmão Alves de Brito 
Neto. 
The abuse of vote was rejected, but 
liquidation was not ordered 
2018 0052546372017819000 RJAC, Heleno Ribeiro 
Pereira Nunes 
 
2017 00602114120168190000 RJAC, Guaraci de 
Campos Vianna 
Abuse of vote, sole creditor in 
class 
2011 0037321-
84.2011.8.19.0000 
RJAC, Milton 
Fernandes de Souza 
 
 
 
Minas Gerais State Court of Appeals 
 
Year 
appeal was 
judged 
Appeal number Court/Reporter Comment 
2016 09896102920148130000 MGAC, Sandra Fonseca Reject allegation of abusive 
vote 
2015 08106808620148130000 MGAC, Marcelo 
Rodrigues 
Appeal by lienholder creditor 
that did not participate in the 
assembly. 
 
27 
 
Rio Grande do Sul Appeals Court 
 
Year 
appeal was 
judged 
Appeal number Court/Reporter Comment 
2019 70081591422 RSAC, Jorge Pereira 
Gailhard. 
 
2017 70074642323 RSAC, Lusmary Fatima 
Turelly da Silva 
Claim of abusive vote by 2 
unsecured creditors out of 12 
present in assembly, 
representing 86% of the credits 
in the class; bankruptcy 
trustee’s opinion for feasibility 
of plan; dissenting vote by 
Gailhard. 
 
Paraná State Court of Appeals 
 
Year 
appeal was 
judged 
Appeal number Court/Reporter Comment 
2019 0049645-
46.2018.8.16.000 
PRAC, Marcelo Gobbo 
Dalla Dea 
The abuse of vote was rejected. 
2018 1738913-8 PRAC, Rui Bacelar Filho Abuse of vote, because it 
assumed reorganization to be 
viable, as company had active 
contracts. 
2016 1532949-0 PRAC, Tito Campos de 
Paula 
Abuse of vote was rejected, 10 
creditor in the unsecured 
creditors class rejected the 
plan. 
2015 1293930-7 PRAC, Espedito Rui 
Amaral 
Abuse of vote was rejected, but 
liquidation was not ordered 
 
Santa Catarina State Court of Appeals 
 
Year 
appeal was 
judged 
Appeal number Court/Reporter Comment 
2019 4030391.13.2018.8.24.0090 SCAC, Abuse of vote was rejected, but 
liquidation was not ordered 
2016 01509141420158240000 SCAC, Abuse rejected, plan rejection 
by unsecured creditors. 
2015 2015.045438-8 SCAC, Ronaldo Moritz 
Martins 
Abuse of vote by lienholder 
creditor representing 71% of 
credits in the class 
 
 
Appendix 2 – 
 
 Case number Court Aftermath Comment 
2017 20821591020168260000