By Daniel Carnio Costa (Danial Carnio Advogados & Pontifícia Universidade Católica de São Paulo)
Introduction
The globalization of economic relations, intensified from the 1960s onwards, has fostered exponential growth in international trade and the internationalization of production chains. Companies began to operate in an integrated manner across multiple countries, holding assets, operations, and creditors in different jurisdictions. This phenomenon brought significant economic benefits, but also complex legal challenges, particularly in the field of insolvency law.
With the increase in cases involving corporate groups with global presence, it became evident that legal systems handling bankruptcy and reorganization strictly under the principle of territoriality were inefficient. This approach—rooted in the notion that each State exercises exclusive sovereignty over assets and persons within its territory—led to fragmentation, legal uncertainty, and coordination difficulties in cross‑border insolvencies.
In this context, international scholarship began discussing alternatives to the territorial model, with particular attention to the theory of universalism, which advocates for a unitary treatment of cross‑border insolvency under the leadership of a main jurisdiction. The evolution of this debate culminated in the development of the mitigated universalism theory, which seeks to balance centralization with respect for local specificities. This approach was embodied in the UNCITRAL Model Law on Cross‑Border Insolvency (1997), which has inspired legislative reforms in several countries, including Brazil—particularly with the introduction of Chapter VI‑A of Law No. 11.101/2005.
Within this framework, the public policy exception emerges as a key balancing mechanism between State sovereignty and international cooperation. Its correct interpretation is essential to reconcile sovereignty with the growing demand for effective cross‑border cooperation in insolvency proceedings.
Concept and Function of the Public Policy Exception
The purpose of the public policy exception is to protect the fundamental values of the national legal order. In Brazil, it is grounded in Article 17 of the Law of Introduction to the Rules of Brazilian Law (LINDB) and reaffirmed by Law No. 11.101/2005, particularly after the reform introduced by Law No. 14.112/2020, which created Chapter VI‑A on the recognition of foreign insolvency proceedings.
Traditionally, this clause was interpreted rigidly as a safeguard against any external element that might jeopardize national sovereignty or the fundamental principles of domestic law. However, the evolution of case law and doctrine points to the need for a more functional and pragmatic interpretation.
The Public Policy Exception in Cross‑Border Insolvency
In the field of cross‑border insolvency, the public policy exception operates as a limit to the recognition of foreign decisions. Article 167‑A, §1 of Law No. 11.101/2005 expressly provides that a Brazilian court may deny recognition of a foreign proceeding if such recognition is manifestly contrary to public policy.
There is consensus among specialized scholars that public policy, in this context, should be construed narrowly and applied only in exceptional cases, avoiding its use as an automatic or discretionary barrier. The objective is to prevent a form of “judicial nationalism” that undermines international cooperation and compromises the efficiency of cross‑border jurisdiction.
This is the meaning of the expression used by Brazilian legislation, in accordance with the standard established by the UNCITRAL Model Law, which includes the term “manifestly contrary to public policy.” It is not any mere inconsistency with domestic law that may justify the application of the public policy exception; only violations that strike at the very heart of the national legal system may warrant its invocation.
It is noteworthy that even in jurisdictions where the word “manifestly” has not been expressly adopted—such as in Singapore—the judiciary tends to apply this exception in a restrictive manner, in deference to the purpose and spirit of the UNCITRAL Model Law on Cross‑Border Insolvency.
Elements for a Functional Interpretation of Public Policy
A functional interpretation of the public policy exception should be guided by three core premises:
a) Preservation of the enterprise as an interpretive vector: Under Article 47 of Law No. 11.101/2005, the purpose of judicial reorganization is to enable the debtor to overcome its financial distress and maintain its productive activities. This principle should guide the acceptance of foreign measures that contribute to the preservation of the corporate group, even if they diverge from formal aspects of national law.
b) Good faith and legal certainty as evaluative parameters: Recognition of foreign proceedings must be conditioned on the absence of fraud or abuse. Any solution that meets minimum standards of procedural fairness and equitable treatment among creditors should be deemed compatible with Brazilian public policy.
c) Mutual trust between jurisdictions: The cooperative model adopted by Law No. 11.101/2005 requires strengthening mutual trust between jurisdictions, based on reciprocal recognition of judicial decisions and the legitimacy of foreign insolvency proceedings.
Application of the Public Policy Exception in Brazilian Case Law
Although there is not yet extensive national case law on the precise parameters for applying the public policy exception, dozens of requests for recognition of foreign decisions have already been granted by Brazilian courts. As an example, one of the earliest cases involved the Norwegian company PROSAFE, which filed for reorganization in Singapore and sought recognition in Brazil to protect its vessels from Brazilian creditors. The decision was recognized, and the protective measures were effectively implemented in Brazil. Although the ruling did not deeply analyze the public policy exception, it was grounded on the understanding that such exception should be invoked only in cases of serious violations of fundamental procedural principles or public morality, and not merely due to differences in regulatory models.
Challenges and Perspectives for the Recognition of Foreign Proceedings
Despite legislative and jurisprudential advances, challenges remain for the effective implementation of the cooperative insolvency model. Among them: (i) the absence of clear regulatory guidance on recognition criteria; (ii) resistance by legal practitioners to applying foreign legal instruments; and (iii) the need for technical capacity building of the Judiciary to handle the complexity of cross‑border reorganizations.
In this scenario, adopting a functional interpretation of the public policy exception is essential for Brazil to consolidate itself as a jurisdiction aligned with UNCITRAL principles and international best practices.
Final Considerations
The public policy exception, while necessary as a mechanism to protect the essential core of the Brazilian legal system, should not be used as a pretext to obstruct the recognition of foreign insolvency proceedings that respect the principles of good faith, cooperation, and preservation of the enterprise. Developing a functional, pragmatic, and globally attuned interpretive approach is the appropriate path to strengthen Brazil’s role in the international insolvency landscape.
The recent experience with complex cases involving large corporate groups with assets and creditors in multiple jurisdictions offers valuable opportunities to build a more open, predictable, and principled legal practice—one that aligns with the foundational values of the Rule of Law and a dynamic market economy.
(*) This article is an English and adapted version of an article previously published in Portuguese. The original article can be found here.
