Judicial reorganization is no longer the exclusive domain of creditors: it has also become a field of opportunity for investors and financiers who know how to structure the acquisition and financing of assets safely.
Injecting funds into a distressed company or acquiring one of its assets can mean an attractive return and a productive asset – provided the legal structure is designed to protect the party stepping in.
The transaction’s margin of safety, however, begins before signing: correct pricing depends on due diligence covering both the asset (credit and collateral documentation, procedural stage and regularity, judicial deposits, and hidden liabilities) and the counterparty, including reputational risks and indications of fraud that could taint the deal.
We highlight 3 key points that creditors, investors and financiers should observe in transactions involving assets in judicial reorganization:
1. DIP Financing. Payment Priority and Protection of the New Money: Financing extended to companies in reorganization (Articles 69-A to 69-F of the LREF) grants the financier privileged treatment: the credit is extra-concursal (outside the reorganization) and, in a possible bankruptcy, enjoys payment priority. The law preserves that priority over amounts already disbursed, even if the decision authorizing the transaction is later reversed. In practice, the funding usually comes paired with reinforced security over non-essential assets and with operational and financial covenants, which shield the new money and bring monitoring of the debtor closer.
2. Credit Bid. Converting the Credit into Acquisition of the Asset: An existing creditor – particularly the holder of in rem security – may resort to the credit bid, using its own credit as a means of payment at the judicial auction, offsetting it against the price. The logic differs from injecting new money: here, no liquidity is injected to obtain priority; rather, the credit already held is converted into ownership of the asset. It is a powerful instrument, but subject to restrictions and dependent on judicial authorization.
3. UPI. Acquisition Free of Successor Liability Through a Competitive Process: A further draw of acquiring assets in reorganization is taking them free of encumbrances and free of successor liability for the debtor’s obligations – including tax and labor obligations – an effect that flows from structuring the asset as an Isolated Productive Unit (Unidade Produtiva Isolada, or UPI), sold subject to judicial authorization (Articles 60, 66 and 142 of the LREF). The sale typically takes place through a competitive process that admits a stalking horse – the anchor bidder who submits a firm proposal and sets the price floor. A sale as a UPI does not automatically extinguish third-party in rem security (such as a mortgage or pledge) burdening the asset: its release depends on the express consent of the secured creditor (Article 50, §1, of the LREF), and the proceeds are customarily directed to satisfy that creditor.
In a context of rising judicial reorganization filings, transactions involving the assets of distressed companies can be safe and profitable, provided each stage, from financing to acquisition, is conducted with legal guidance, under judicial supervision, and with due protection of collateral.
