From Crisis to Comeback: Effectiveness of Reorganization and the Challenge of Zombie Firms in Brazil

The Brazilian Bankruptcy Law (Federal Law No. 11,101 of 2005) introduced for the first time a Brazilian reorganization system to assist companies under financial and operational distress avoid bankruptcy.

Ever since, the number of reorganizations filed has grown steadily (Serasa, 2025), a trend that has been reinforced by the 2008 global financial crisis and reproduced worldwide (Evans & Borders, 2014), reaching its peak in Brazil in 2016.

In subsequent years, filings declined, even during the COVID-19 crisis, largely due to regulatory and macroprudential measures implemented by the government and monetary authorities. These initiatives, among other effects, allowed banks to extend corporate debt maturities, delaying the need for companies to seek judicial reorganization (JR).

Graph 1 – Evolution of Judicial Reorganization in Brazil

Source: Serasa, 2025.

However, in 2023, judicial reorganization filings surged by approximately 69% compared to the same period in the previous year. By the final quarter of 2024, the volume of new cases had surpassed the peak recorded in 2016.

Brazilian market has seen several important companies disputing the title of largest reorganization case in the country. The current record-holder is Odebrecht S.A., one of the world’s largest construction firms, which filed for judicial reorganization in 2019 with debts of approximately BRL 80 billion after facing multiple financial setbacks and legal challenges. Other high-profile cases include the telecommunications company Oi S.A. and the retailer Americanas S.A., both publicly traded companies with liabilities exceeding BRL 50 billion.

The Second Wave of Reorganizations

The increase in judicial reorganization filings is not the only cause for concern. Brazil is now experiencing a second wave of reorganizations, in which companies – including both small and medium enterprises and major publicly listed firms like Oi S.A. and Paranapanema S.A. – that have already undergone reorganization are returning to court for a second round of relief, as they remain unable to meet their obligations to creditors.

This trend raises fundamental questions about the effectiveness of judicial reorganization proceedings and the efficiency of Brazil’s legal and regulatory mechanisms, even after the reforms introduced by the Brazilian Bankruptcy Law Reform (Federal Law 14,112 of 2020).

The Risk of Zombie Firms

Article 47 of the Brazilian Bankruptcy Law established what later became known as the principle of business preservation, a fundamental guideline that, by providing incentives for restructuring, aims to safeguard economic activity, uphold the social function of enterprises, and maintain the viability of struggling businesses (Simionato, 2008).

While this principle reinforces the role of judicial reorganization as an alternative to bankruptcy by allowing companies to restructure their debts and regain financial stability, the actual success of firms in achieving economic recovery remains highly uncertain.

According to research from the Insolvency Observatory, most companies that enter judicial reorganization fail to emerge from insolvency within the two-year period established by law (PUC-SP, 2021). In São Paulo, the state with the highest concentration of cases, only 24.4% of companies successfully concluded their reorganization within this timeframe between 2010 and 2020.

Moreover, even among companies that do complete the process, there is no guarantee they return to solvency. This raise concerns that judicial reorganization in Brazil may be fostering the rise of "zombie firms".

The Legal and Economic Impact of Zombie Firms

Originally defined as insolvent firms that avoid restructuring or liquidation (Goto & Wilbur, 2019), zombie companies – businesses that remain in the market despite being economically unviable – persist due to legal and financial loopholes.

This is extremely concerning, as zombie firms exhibit low operational and productive efficiency (Jiang et al., 2017), consuming funds and resources that could be better allocated to healthy organizations (Chen, 2015).

Zombie firms harm customers, suppliers, and investors due to their inability to generate cash flow to meet their obligations, but they also negatively impact on the economy by absorbing resources that could be directed toward other businesses or investments.

The Joint Research Centre (JRC) of the European Union, in the report Fear the Walking Dead? Incidence and Effects of Zombie Firms in Europe, concluded that the presence of zombie companies negatively affects asset growth, employability, and the productivity of healthy companies (JRC, 2018).

The JRC report further argues that the higher the volume of zombie firms, the weaker the growth of healthy organizations, with new companies being even more susceptible to the harmful effects of zombie firms. Alarmingly, the report states that zombie firms are spreading, within similar conclusions been drawn by Peek & Rosengren (2005) in their study on Japan and Adalet McGowan et al. (2017) in their analysis of other European Union countries.

The Need for Enhanced Oversight

The impact of legal regulations on the formation of zombie companies remains uncertain. However, as Simionato (2008) argues it is economic laws that must outline the path to saving viable businesses, while legal frameworks should merely establish power structures and resolve conflicts between creditors and debtors.

In other words, legal statutes alone cannot ensure the recovery of struggling businesses. Instead, economic policies must dictate the conditions for restoring viable firms, while the legal system provides mechanisms for dispute resolution.

To address these challenges, it is not enough to merely assess the factors that determine the successful completion of a judicial reorganization process. Instead, policymakers, researchers, and financial analysts must closely monitor how these cases unfold – not only to identify companies that successfully recover but also to detect potential misuse of reorganization laws as an incubator for zombie firms.

Given the severe economic consequences of zombie companies, further research is crucial to determine how Brazilian law can be improved to prevent reorganization proceedings from becoming a breeding ground for corporate stagnation. Examining this issue through the lens of Brazilian insolvency data remains a critical and underdeveloped area of study.

References

 Adalet McGowan, M., Andrews, D. & Millot, V. (2017). The Walking Dead? Zombie Firms and Productivity Performance in OECD Countries. OECD Economics Department Working Paper, 1372.

Chen, R. (2015). Where is the way out for zombie enterprise?. New Financ., 12, 32-35.

Evans, J. & Borders, A. L. (2014). Strategically surviving bankruptcy during a global financial crisis: the importance of understanding chapter 15. Journal of Business Research, 67(1), 2738-2742.

Goto, Y. & Willbur, S. (2019). Unfinished business: Zombie firms among SME in Japan’s lost decades. Japan and the World Economy, 49. 105-112.

Jiang, X., Li, S. & Song, X. (2017). The mystery of zombie enterprises – “stiff but deathless”. China Journal of Accounting Research, 10(4), 341-357.

Joint Research Centre. (2018). Fear the Walking Dead? Incidence and Effects of Zombie Firms in Europe. Luxembourg: Autor.

Peek, J. & Rosengren, E. (2005). Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan. American Economic Review, 95(4), 1144-66.

Pontifícia Universidade Católica de São Paulo. (2021). Observatório de Insolvência. São Paulo: Autor.

Serasa. (2025). Serasa Experian de Falências e Recuperações. São Paulo: Autor.

Simionato, F. A. M. (2008). Tratado de Direito Falimentar. Rio de Janeiro: Forense.