Buying distressed assets in Brazil

Distressed assets are impaired assets, in most cases from companies facing severe financial crises, bankrupt estates, or those on the verge of bankruptcy. Distressed assets are acquired at low prices in times of economic difficulty and sold in boom times. There are several types of assets that make up this class, but the most common are those obtained through the direct injection of funds into the company, such as through the acquisition of corporate shares, or through the purchase of assets of the legal entity.

Furthermore, a very common form of distressed asset in Brazil is the purchase of credits from individuals, companies, or even government agencies, resulting in their assignment to the acquirer, who may profit from the possible payment.

Generally speaking, a company is considered to be "insolvent" when it is unable to meet its obligations to its creditors, either because the debts exceed the debtor's assets or for reasons of poor asset management. In Brazil, technically, the term "insolvent" referred only to companies with declared bankruptcy or individuals with judicial recognition of civil insolvency. Currently, the term has been interpreted more broadly, encompassing both bankrupt companies and those undergoing judicial reorganization or restructuring proceedings.

Outside the scope of reorganization and bankruptcy proceedings, as distressed assets involve credits that have not been paid due to the debtor's difficulties, there is a considerable risk that default will continue, and that creditors will come after the buyer.

In Brazil, the buyer of distressed assets may be liable for all of the seller's debts, not only debts directly related to the assets acquired, unless the acquisition takes place under reorganization or bankruptcy proceedings.

Thus, in general, the acquirer must pay attention to the reason that led to the sale of those assets, since the seller's attempt to merely empty the assets, failing to meet its responsibilities, may cause the company to be liquidated, leading to bankruptcy and possible liability for the acquirer.

Thus, the buyer should seek to know the history of the company, the reasons for the sale of the asset and how its financial health is, and should be suspicious if he cannot access the general information of the legal entity. These actions may protect the buyer from a possible fraud attempt by the seller and, consequently, eventual liability for the encumbrances that accompanied the asset.

To avoid risks, the buyer should seek to know the history of the company, the reasons for selling the asset, and how its financial health is. To avoid bying liable for the seller’s debts, buyer should confirm that the seller remains with enough assets to respond to existing debts.

The best way to avoid risks from the asset aquisition is to make sure that the entire procedure is presented and approved by the judge in charge of the judicial reorganization or bankruptcy, or by the creditor’s meeting, or even through a public auction proceeding, depending on the case.

Furthermore, in judicial reorganization, the buyer can try to reach agreements with the creditors and debtors themselves, making sure that this fact is portrayed in the reorganization plan, specifying exactly how the sale of the assets will occur and that it is in benefit of the creditors.

When the acquisition occurs within the insolvency process, observing all legal requirements and necessary precautions, the buyer is not responsible for any debts of the seller, of any nature. The price paid covers the debts, and the buyer does not assume any responsibility for previous debts.

For out-of-court reorganization cases, the judge's authorization is not necessary, and the negotiators can agree on the value and transfer of the assets in the best way they recognize.

In cases where the petition for judicial reorganization has already been distributed, it is necessary for the purchase to be approved either by the judge or by the creditors, depending on the case.

Finally, in cases of bankruptcy, Brazilian law also foresees the need for prior approval by the judge for the sale to take place.

In conclusion, the sale of financial assets of companies under judicial reorganization or bankruptcy presents clear rules in Brazilian legislation with the purpose of recovering the company in crisis and satisfying creditors. The risks of these procedures vary according to the object of sale, and the buyer must pay attention to the forms provided by law and try as much as possible to get to know the company during the negotiations.