Brazilian electric energy services provider Light SA requested a precautionary measure prohibiting creditors from commencing or moving forward with individual lawsuits, arguing non-technical losses and other tax-related reasons. The filing confirmed expectations which heated up last week indicating that Light had been considering asking for a mediation process to renegotiate its debt. The filing leaves Light as the latest large distressed company this year, after Americanas SA, Oi SA and Cervejaria Petropolis, to seek court oversight to restructure its debt.
Source: Debtwire’s Restructuring Database
Unlike Americanas, Oi and Petropolis, however, Light did not ground its temporary protection requests in the country’s bankruptcy law, but relied on certain provisions set forth both in Federal Law n. 13140/2015 (mediation law) and Federal Law n. 13105/2015 (Code of Civil Procedure). According to the petition, Light intends to initiate a mediation proceeding with its financial creditors in which the involved parties will have an opportunity to reach an agreement to restructure the company’s debt while at the same time ensuring that the utility provider’s customers maintain service uninterrupted.
During the mediation process, Light argues that a precautionary injunction is needed in order to prevent the acceleration of its debt, or other remedies, as a result of lawsuits or collection action. Absent such relief, the company will not be able to honor any of its debts, which might harm the supply of electric energy to millions of consumers in the state of Rio de Janeiro.
The strategy was seemingly adopted as an attempt to skip the restriction of Section 18 of law 12767/2012, which states that the judicial and extrajudicial recovery proceedings provided for in Brazilian bankruptcy law do not apply to concessionaires of public electric energy services, except after the termination of the concession agreement. As Light is financially distressed and has a concession agreement pursuant to which it receives most of its revenues, the main challenge for the utility will be implementing a financial turnaround under court supervision while simultaneously maintaining the validity of its concession agreement.
The temporary suspensive measures provided for in the bankruptcy law are connected to a potential, subsequent filing of either a judicial or an extrajudicial recovery proceeding. In this scenario, requesting this sort of injunction without mentioning bankruptcy law provisions, or collective in-court restructuring proceedings to be eventually commenced, could mitigate the risk of a court’s rejection on the grounds that it would not make sense to provide the company with a protective measure that stems from a proceeding which it is not allowed to request.
Light’s precautionary measure request corresponds, in practice, to a “stay period protection” typically requested in bankruptcy proceedings, with the slight difference that, rather than seeking an order protecting it against the holders of all of its prepetition claims, the company’s request specified that only its financial creditors should be prevented from adopting individual debt collection enforcement measures, which includes Pentagono, Oliveira Trust, Simplific Pavarini, Vortex DTVM, XP Investimentos, Virgo, Citibank, Bank of New York Mellon (the trustee of Light’s USD 600m 4.375% 2026 bonds), Morgan Stanley, Santander, Bradesco, Itau Unibanco, and an asset-backed fund of Light receivables.
There are also differences between the “traditional” injunction requests based on bankruptcy law and the proceeding Light has commenced when it comes to the length of the protection. While Section 20-B, § 1º of the bankruptcy law permits distressed companies to request a provisional remedy suspending all enforcement and collection lawsuits filed against them up to 60 days in advance of a bankruptcy filing, Light requested that the suspension last at least until a ruling on the “main lawsuit,” without specifying which lawsuit that is.
Another controversial circumstance in this case is related to the timing of the mediation proceeding and the moment in which it starts. While the bankruptcy law requires that companies seeking suspensive injunctions must have already commenced a mediation or a conciliation proceeding, Light requested the precautionary measure in advance of any alternative dispute resolution proceeding. Indeed, Light requested a mediation along with its petition, along with the immediate suspension of individual collection rights.
From a strictly legal perspective, the issues pointed out above might ground a conclusion that Light’s requests have a good chance of being dismissed. Regardless of the relevance of alternative dispute resolution proceedings like those set forth in mediation law, there is no legal provision in Brazilian law allowing a company to temporarily default on its financial agreements, other than those provided for in the country’s bankruptcy law, in the context of a collective debt restructuring proceeding. In this case, not even the principle of company preservation set forth in Section 47[1] of the bankruptcy law could “save” the company, as it is also linked to the bankruptcy universe.
On the flip side, the public interest is a very relevant factor to be considered here. If Light ultimately goes into liquidation and the concession is terminated, the Brazilian oversight agency for the energy sector (ANEEL) is responsible for providing the energy services the company currently provides, which may not be the best alternative as this could lead to a decreased level of service quality and increase in costs, ultimately to the detriment of millions of electricity consumers.
Light indicates that its creditors must be prepared to negotiate in a mediation, rather than litigate. Although this is not grounded in any law or precedent, it may prevent irreparable damages for any of the involved parties, especially if an injunction is valid only for the short term.
Endnote:
[1] This principle establishes that judicial reorganization aims to overcome the economic and financial crisis of the debtor in order to preserve the economic activity and the public interest resulting from the recovery, such as the preservation of jobs, tax collection and the circulation of goods, products and services, as well as the interests of creditors.
