Congress overturns vetoed provisions of Brazilian Bankruptcy Law reform
The main overturned provisions relate to the non-succession of debtor obligations in asset sales, along with tax issues
On March 17, 2021, the Brazilian Congress reviewed the provisions vetoed by the President when signing Law 14,112/2020, which modifies Law 11,101/2005 (Brazilian Bankruptcy Law), among others. Twelve of the fourteen presidential vetoes were overturned, while two were maintained.
The vetoed provisions involve questions such as buyer protection in asset sales, guarantees concerning Rural Producer Certificates (CPR) and their non-subjection to judicial restructuring, as well as tax impacts arising from asset sales and debt restructuring, and the suspension of labor enforcement proceedings.
Vetoes overturned by Congress
The main overturned vetoes relate to important matters in the bills approved by the Brazilian Congress, set to become part of the Brazilian Bankruptcy Law. These include:
Non-succession in the sale of assets
The non-succession of debtor obligations and liabilities by the acquirer in the acquisition of assets of companies in judicial reorganization is now expressly set forth with the rejection of the vetoes to the Brazilian Bankruptcy Law’s Article 60, sole paragraph, and Article 66, paragraph 3. This non-succession is irrespective of the nature of such liabilities, including those of environmental, regulatory, administrative, criminal, anti-corruption, tax and labor nature. Thus, there is greater legal certainty for transactions carried out in this context.
Taxes on capital gain resulting from asset sales and revenue recognized with the restructuring of debts
The overturning of the vetoes to Brazilian Bankruptcy Law Articles 6-B and 50, item II, determine that the portion of net income resulting from capital gains arising from asset sales by companies in judicial reorganization will not be subject to the limit of 30% of tax losses. These losses can be used to offset taxable income when determining Corporate Income Tax (IRPJ) and Social Contribution Tax on Profits (CSLL) without the 30% limitation.
Exclusion of income obtained from debt restructuring from the PIS and COFINS tax base
The inclusion of Article 50-A, item I, in the Brazilian Bankruptcy Law will enable companies under judicial reorganization to exclude income obtained from the restructuring of debts from the tax base of the Contributions to the Social Integration Program and the Public Servants’ Fund (PIS/PASEP) and the Contribution to Social Security Financing (COFINS).
Vetoes maintained by Congress
As for the provisions which remained vetoed, the most relevant one provides for the suspension of labor enforcement proceedings against jointly or subsidiarily liable third parties until the reorganization plan is either validated by the court or the judicial reorganization is converted into liquidation (paragraph 10 of Article 6 of the Brazilian Bankruptcy Law).
Congress also maintained a veto giving the Ministry of Agriculture, Livestock and Supply the competence to define acts of God or force majeure. This prevents the repossession of assets subject to guarantees linked to the Rural Producer Certificate (CPR) stemming from physical settlements (sole paragraph of Article 11 of Law 8,929/1994).
For more information on this subject, contact Mattos Filho’s Restructuring and Insolvency practice.