Brazilian President signs Bankruptcy Law

​On December 24, 2020, President Jair Bolsonaro signed Bill No. 4,458/2020 with some vetoes. The new law amends relevant provisions of Law No. 11,101 of February 9, 2005 (the Brazilian Bankruptcy Law); Law No. 10,522 of June 19, 2002 (which regulates the Registry of Outstanding Debts of Governmental Entities – CADIN); and Law No. 8,929 of August 22, 1994 (which instituted the Rural Product Bond – CPR in Brazil).

The bill will take effect on January 23 of this year as Law No. 14,112/2021, but the provisions that were vetoed remain ineffective and unenforceable until further analysis by the Brazilian Congress, which should take place within 30 days from the receipt of the vetoes. The Congress will decide to either maintain or overrule the vetoes, and if overruled these provisions will also become part of the Brazilian Bankruptcy Law definitively.

The vetoed sections regard issues such as the protection of buyers of assets from debtors in judicial reorganization; unenforceability of the judicial reorganization law to credits and guarantees arising from CPRs; tax effects arising from the sale of assets and/or renegotiation of debts; as well as the suspension of labor enforcement proceedings.

The most relevant vetoes are described below:

• 
  Non-succession in the sale of assets

Bill No. 4,458/2020 brought new wording to the sole paragraph of article 60 of the Brazilian Bankruptcy Law, which provides for the sale of assets of the debtor as isolated production units and establishes that the acquirer of such assets shall not succeed the debtor’s obligations, as well as to paragraph 3 of article 66, which provides for the sale or encumbrance of assets after the judicial reorganization request.

The vetoed provisions, following court precedents and in line with the prevailing opinion of jurists, set forth that the acquirer does not succeed the debtor’s obligations of any nature in the event of an asset sale in the context of a judicial reorganization proceeding, expressly mentioning those of environmental, regulatory, administrative, criminal, anti-corruption, tax, and labor natures.

In his justification, the President only mentioned reasons for vetoing the environmental succession (arguing that the responsibility for repairing any environmental damage would follow the asset) and obligations arising from the Brazilian anti-corruption law (arguing that the non-succession would violate fundamental rights related to honesty, integrity and good public administration, in addition to causing losses to the public treasury and in actions against corruption). The veto does not address obligations of other natures.

Although the Presidency vetoed the aforementioned paragraphs, the original (and current) wording of the sole paragraph of article 60 of the Brazilian Bankruptcy Law was maintained, which according to jurists and precedents was already sufficient to protect the buyer from the succession of debtor’s obligations of any nature.

• Taxes on capital gains resulting from judicial sale and revenue recognized with the renegotiation of debts

In view of the Ministry of Economy’s opinion, the President vetoed Article 6-B of the Brazilian Bankruptcy Law. The provision stated that the portion of net income resulting from capital gains arising from the judicial sale of assets would not be subject to the limit of 30% of tax losses that can be used to offset taxable income in the determination of Corporate Income Tax (IRPJ) and Social Contribution Tax on Profits (CSLL).

Item II of Article 50-A of the Brazilian Bankruptcy Law has also been vetoed, which also allowed for the use of tax losses without the 30% limit to offset the income earned from the renegotiation of debts under judicial reorganization.

• 
  Exclusion of income obtained from the renegotiation of debts from the PIS and COFINS tax base

Item I of Article 50-A of the Brazilian Bankruptcy Law has been vetoed as well. This item would allow companies under judicial reorganization to exclude the income obtained from the renegotiation 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.

The Presidency concluded that such tax measures result in the waiver of income without the equivalent cancellation of another mandatory expense and without estimating its financial impact, in violation of

Article 113 of the Temporary Constitutional Provisions Act (ADCT) and

Article 14 of the Brazilian Fiscal Responsibility Law.

• 
  Suspension of labor enforcement proceedings

Paragraph 10 of Article 6 of the Brazilian Bankruptcy Law has also been vetoed. The provision sets forth a 180-day suspension of labor enforcement proceedings against a third party that is subsidiary or jointly liable with a debtor that files for judicial reorganization until the validation of the reorganization plan by the court or conversion from reorganization to bankruptcy. It was concluded that the provision goes against public interest and could cause legal uncertainty since it diverges from the normative system that gives privileged treatment to labor claims.

Click here to access a summary of the main changes introduced to the Brazilian Bankruptcy Law by Law 14,112/2020.

For further information, contact Mattos Filho’s Restructuring and Insolvency practice.