Reform of the Brazilian Judicial Reorganization and Bankruptcy Law is approved
Bill brings relevant changes to the current law, but still needs to be approved by Senate
On August 26, 2020, the House of Representatives approved a new substitute version of a bill of law, which amends significant provisions of the Brazilian Judicial Reorganization and Bankruptcy Law currently in force (Law No. 11,101/2005) and a Brazilian federal law that provides for the Brazilian Registry of Defaulted Credits (“CADIN”).
In line with the original wording of the current law, the bill maintains the preservation of the company as its guiding principle, with particular emphasis on improving the judicial and out-of-court reorganization mechanisms. The bill also incorporates in law some court interpretations that were already adopted in insolvency proceedings but until now have only been discussed in precedents due to lack of legislation.
Concerning bankruptcy proceedings, which are applicable in case the company’s rehabilitation is not possible, the bill intends to expedite the liquidation of assets, in order to allow for a faster reintegration of the bankrupt entrepreneur into the market (the so-called fresh start).
The following provisions stand out among the several changes brought by the proposed bill:
Despite the relative omission of the current law, we have seen some important cases that involved DIP financing transactions in Brazil, such as with OGX, OAS, and Oi. Under the bill, the company will be able to obtain loans secured by its own or third-parties’ assets and rights, with the goal of financing or preserving its activities and assets. Such loans shall be approved by the bankruptcy court, after the creditors’ committee is heard, and can be guaranteed by third parties or by security interests over fixed assets of the debtor. The bill, therefore, intends to give greater room for the debtor to obtain finance and, thus, to make its restructuring possible through new capital. However, it does place the judicial consent as a condition for the DIP finance. The new legal provisions will hopefully encourage the use of DIP financing in Brazil.
Mediation is a dispute settlement mechanism that is growing in Brazil, governed by specific legislation (Law No. 13,140/2015). Mediation has increasingly been adopted in judicial reorganization proceedings. In order to stimulate the use of mediation in insolvency proceedings, the bill has devoted an entire section to it, establishing that such procedure can be used during the judicial reorganization, out-of-court reorganization, and bankruptcy proceedings, in order to address, among others, disputes involving the public administration, shareholders, and first priority claims. The bill prevents the use of mediation to discuss the ranking of claims subject to the proceeding, preserving the jurisdiction of the bankruptcy court to decide on the matter.
Alternative judicial reorganization plan
In order to strengthen creditors’ rights, the new bill has improved their power to participate in the reorganization proceedings. Subject to certain requirements, creditors may submit a proposal for a judicial reorganization plan as an alternative to the plan presented by the debtor, whether as a consequence of the debtor’s delay (after the stay period) or to replace the debtor’s plan rejected at the general creditors’ meeting. In the latter situation, the judicial trustee will put to a vote, during the general creditors’ meeting that where the plan was rejected, the possibility of the presentation of an alternative plan within 30 days. If approved, creditors representing more than 25% of the claims subject to the judicial reorganization or 35% of the claims attending to the general creditors’ meeting can present an alternative plan, which will be voted pursuant to the quorum requirements already provided for under current bankruptcy law.
The Brazilian bankruptcy law had not provided a framework to address cross-border insolvency cases, which are increasingly common in Brazil. In order to fill the gap, the bill includes an entire chapter devoted to it, essentially incorporating into the national law the UNCITRAL Model Law on Cross-Border Insolvency – adopted in many other jurisdictions. The new provisions are intended to create a framework for the recognition of foreign proceedings in Brazil, which will increase legal certainty for economic activity and foreign investment, encourage cooperation and coordination among jurisdictions; and will afford greater protection to the interest of all creditors and parties involved, including the debtor.
Procedural and substantive consolidation in the law
Despite the current lack of legislation, joint requests of multiple plaintiffs requesting judicial reorganization are commonly accepted in Brazil. The bill, in line with the majority interpretation of courts, provides that companies that are part of a group under common control are entitled to jointly request judicial reorganization under procedural consolidation, but their assets and liabilities must remain segregated. The procedural consolidation avoids the need for multiple proceedings and achieves a more efficient procedure, simplifying procedural administration and reducing the costs involved without affecting the segregation of companies.
In addition to procedural consolidation, the bill sought to bring greater clarity regarding the requirements of the substantive consolidation. In this case, the consolidation is not only procedural, but the debtors are considered as if they were a single unified legal entity for the presentation of a judicial reorganization plan, list of creditors, and voting at the general creditors’ meeting. Pursuant to the bill, the judge can, as an exception, authorize the substantive consolidation, regardless of a general creditors’ meeting, when the interconnection and confusion between the debtors’ assets or liabilities are proven. In addition, at least two of the requirements established by law must be fulfilled: (i) the existence of cross guarantees; (ii) control or dependency relationship; (iii) total or partial identity of the corporate structure; and (iv) action as a group in the market by the debtors.
Stay period and essentiality of assets
The current law provides for the suspension of all lawsuits and enforcement actions brought against the debtor for a non-extendable period of 180 days, as from the admission of the judicial reorganization case or the ruling of bankruptcy liquidation. Despite the legal determination regarding the non-extension of the term, what was seen in practice with the support of consolidated precedents was the extension of the stay period until the general creditors’ meeting. For that reason, the bill provides that the suspensions will last for 180 days, extendable for the same period exceptionally and one time only as long as the delay cannot be attributed to the debtor. In case the 180-day period ends without the approval of the judicial reorganization plan, the bill grants to creditors the possibility of presenting an alternative plan.
Also, the bill included a provision clarifying that the suspension does not apply to claims guaranteed by a fiduciary lien, originated from lease-purchase agreements of foreign currencies advance contracts and tax enforcement. However, in order to protect the debtor, the bill allows the court to suspend foreclosure of assets which are essential for the activities of the company during the stay period. Although the bill does not include a definition of what are “essential assets”, the Superior Court of Justice has ruled that essential assets are those used in the company’s production process and are in its possession and which utilization does not render the guarantee worthless.
In order to attempt to settle the inconsistencies concerning the registration of rural producers in registries of commerce, the bill provided that the rural activity by a legal entity can be regularly proven through the tax accounting bookkeeping (“ECF”), or through accounting records that may replace the ECF, which have been delivered on time for a minimum period of 2 years required by law. The bill provides that only credits that are correctly recorded in the books can be subject to judicial reorganization. Despite having provided for alternative means to prove the rural activity, the bill is not clear whether the business owner’s main activity must be rural or not to request a judicial reorganization relief.
Sale of assets
The bill significantly improved the provisions on the sale of assets of companies in economic and financial crisis. According to the bill’s wording, the sale of assets may occur in the modalities of (i) electronic, face-to-face, or hybrid auction; (ii) organized competitive process promoted by a specialized agent; and (iii) any other modality, provided it is approved by the bankruptcy court. Despite the fact that the current bankruptcy law already provided that the acquirer of the assets in a competitive process would not succeed the debtor, the nature of the obligations that would be exempt from succession was not entirely clear. The bill increased legal certainty by expressly establishing that the winning bidder will not succeed obligations of any nature, including without limitation the environmental, regulatory, administrative, criminal, anti-corruption, tax, and labor obligations. In this sense, the bill implemented the interpretation that the competitive process insulates the acquirer from the succession of obligations of the seller.
The bill will also amend the rules applicable to the sale of the debtor’s assets or rights, which are fixed assets before any sale is provided for in the judicial reorganization plan. In addition to providing for the need for judicial authorization to the sale of fixed assets, creditors representing 15% of the claims subject to judicial reorganization may still oppose the transaction, requesting a vote by creditors at a general creditors’ meeting. To this end, creditors must provide a security bond in an amount corresponding to the total value of the sale and must bear the costs of calling the meeting.
Finally, the bill brought the possibility of a full sale of the whole debtor company, provided that the out of court claim holders receive treatment at least similar to what they would have in a bankruptcy scenario. In this case, the sale will be considered, for all purposes, as a sale of an “isolated production unit” and, therefore, free of succession.
Repurchase transactions and derivatives
The bill included a provision upholding contractual provisions in repurchase and derivative transactions, providing for the acceleration of maturity and netting, resulting from a request for judicial reorganization, approval of its admissibility, or approval of a judicial reorganization plan.
The bill reduced the quorum so that the debtor could request the ratification of an out-of-court reorganization plan. In the proposed provision, the quorum was reduced to more than half of each type of credit impaired by that plan. In addition, the debtor may submit the ratification request with the consent of only 1/3 of the creditors, undertaking to reach the simple majority quorum within 90 days of the filing. Finally, the bill proposes to resolve the controversy in the precedents and provided that out-of-court reorganization proceedings would also benefit from a stay period, suspending actions, and enforcements filed against the debtor. Such suspension will be limited to claims impaired by the proceeding.
The practice of Restructuring and Insolvency of Mattos Filho will continue to monitor the matter and remains available for any clarifications.