TelexFree owner Carlos Costa announced on July 19th that the company filed for Bankruptcy Protection in Espírito Santo, Brazil. This move followed a critical injunction that halted new investor recruitment and payments to existing affiliates.

Djacir Falcão, a TelexFree lawyer, stated on July 10th that continued prohibition from signing new investors would leave the company unable to pay its older ones. He explained that if the Acre injunction, issued in June, continued for a few more days, bankruptcy would become unavoidable.

The company stated in a Facebook notice and Costa's video that the bankruptcy filing aims to "protect its affiliates." The primary motivation for the filing appears to be a strategy to present an alternative business model to the courts. TelexFree has failed to convince judges in Brazil to lift the Acre injunction, which crippled its operations.

Brazilian Law 11,101, enacted February 9, 2005, regulates bankruptcy and business reorganization in the country. Chapter three of this law explains that reorganization helps debtors overcome economic-financial crises. Its purpose is to preserve worker employment and creditor interests, promoting company preservation and stimulating economic activity.

The 2005 law ended the prior "bankruptcy" instrument in Brazil. It allows an indebted company to present its own proposal to creditors. The legislation sets a six-month deadline for negotiations between parties, mediated by a court-appointed trustee. If creditors and debtors cannot agree on a recovery plan, the company is declared bankrupt.

Carlos Costa previously proposed a modified TelexFree compensation plan. This plan stripped out all components except for a matrix structure. Costa claimed that by placing all affiliates into this matrix and shuffling their money, the company could prove its sustainability and independence from new investor funds.

It is unclear whether this specific matrix model was formally submitted to a court. TelexFree has lost every appeal filed since Costa made his proclamation about the new structure. The company likely hopes that bankruptcy protection will permit a re-submission of this matrix-based business model for court approval.