Oi’s Possible Chapter 11 Strategy Raises Legal Questions Over Dual Insolvency Proceedings

Legal uncertainty surrounds Oi SA’s potential chapter 11 filing as its Brazilian recuperação judicial, or RJ, proceeding remains ongoing. Sources told Octus that a chapter 11 filing could test the limits of cross-border coordination, as there is no precedent for a debtor undergoing both proceedings simultaneously.

Sources close to the company said Oi is considering chapter 11, among other strategic options, and has begun restructuring discussions with Brazilian regulators and key creditors. On June 11, the company and its legal counsel presented the strategy to the RJ court and appellate court, both of whom expressed support for exploring a cross-border solution to address liabilities excluded from restructuring under Brazilian law, according to sources.

In preparation for a possible chapter 11 filing, Oi filed a motion on July 7 in the U.S. Bankruptcy Court for the Southern District of New York, requesting termination of recognition of the company’s pending chapter 15 cases.

Although the chapter 15 court recognized the current RJ plan, the debtors say the chapter 15 proceeding must be dismissed before a chapter 11 filing, because Bankruptcy Code section 1528 would otherwise limit the scope of the restructuring to property in the United States.

According to Oi, a chapter 11 may be necessary to achieve a holistic restructuring due to liquidity constraints, substantial liabilities that are not eligible for restructuring under Brazilian law and a statutory bar on filing a new RJ proceeding.

Brazilian insolvency law prohibits debtors from filing a new RJ for five years after confirmation of a prior plan. Oi’s current plan was confirmed on May 28, 2024, precluding a new filing until at least May 2029.

To address this constraint, Oi requested an amendment to its RJ plan and disclosed that it lacks the liquidity to meet short-term obligations or to pay approximately 17.2 billion Brazilian reais ($3.14 billion) in liabilities excluded from the RJ. The court-appointed judicial administrators, a court observer and the Rio de Janeiro public prosecutor’s office have all issued opinions confirming the company’s constrained liquidity position.

Regardless, failure to comply with the current plan could result in court-ordered liquidation, or falência, which the company has described as a “value-destructive” outcome for unsecured creditors.

Given these limitations and the legal bar on filing a new RJ, Oi has few domestic options, sources said. One step the company has already taken is the recent RJ filing for two key subsidiaries, Serede Serviços de Rede SA, or Serede, and Brasil Telecom Call Center SA, or Tahto, which were not included in the original RJ.

Legal Framework

Legal experts in Brazil noted that while parallel restructurings for different group entities are common, having the same debtor subject to both an RJ and a chapter 11 proceeding would be a first for Brazil.

Several Brazilian companies have had RJ proceedings recognized in the United States, including OEC, Unigel, Light, Americanas and InterCement. Others, such as airlines GOL, LATAM and Azul, pursued restructurings exclusively in the United States.

In Oi’s case, even if it proceeds with chapter 11, the effectiveness of the parallel process may depend on creditor support, cross-border coordination and the ability to align outcomes across jurisdictions, sources said. With support from the RJ court and no viable domestic alternative, legal observers noted that the strategy, while novel, may be permissible under Brazilian insolvency law.

The 2020 amendment to Brazil’s insolvency law does not explicitly prohibit a debtor from initiating a concurrent insolvency proceeding abroad, with its chapter VI-A assuming the existence of such proceedings.

According to sources, if Oi files for chapter 11, the Brazilian RJ court would likely receive a request for recognition from the chapter 11 representative, a step governed by article 167-H of Brazil’s insolvency law. The judge would then determine the debtors’ center of main interests, or COMI.

Because the majority of Oi’s assets and operations are based in Brazil, the RJ court would likely treat the Brazilian case as the main proceeding under the United Nations Commission on International Trade, or UNCITRAL, Model Law standards and recognize the chapter 11 case as a foreign non-main proceeding, sources said.

However, the recognition of a non-main proceeding does not trigger an automatic stay in Brazil. The existing RJ stay would remain in force and be governed by Brazilian law, while additional relief for the non-main proceeding would be subject to court discretion under article 167-N of the insolvency law.

Under that article, the RJ judge may, but is not required to, grant relief to assist the chapter 11 proceeding, provided it does not conflict with the RJ. The law requires the Brazilian court to cooperate with the U.S. court “to the maximum extent possible,” but article 167-S of the insolvency law emphasizes that such cooperation must serve the objectives of the main RJ proceeding.

As a result, the RJ and its confirmed plan would remain the primary proceeding governing Oi and its assets in Brazil, while the chapter 11 case would serve as an ancillary process, sources explained.