Brazilian House of Representatives approves Bill 1.397/2020, which includes emergency relief measures that modify Brazilian Bankruptcy Law

The House of Representatives approved last week Bill 1,397/2020 (“Bill”), which modifies the Brazilian Bankruptcy Law, including emergency relief measures in response to the COVID-19 pandemic. At this moment, the Bill is waiting for the Federal Senate’s approval.

The purpose of the Bill is to provide a framework for debtors affected by the pandemic to continue their activities without needing to file for judicial reorganization or prepackaged reorganization and to provide further flexibility to companies that opt to file for judicial reorganization or prepackaged reorganization, or that are currently facing such insolvency proceedings.

What is proposedThe Bill creates a provisional regime that will remain in force from the date the Bill is signed into legislation until December 31, 2020. Once the Bill is in force, all ongoing enforcement proceedings filed against the debtor arising from obligations maturing on or that matured after March 2020 will be suspended for 30 days (“Legal Suspension”).

During this period, debtors will be protected by a prohibition on actions such as judicial rulings of liquidation, unilateral termination of contracts, collection of late payment fines (contractual and tax), enforcement of any type of security liens, including fiduciary guarantees, mortgages and pledges, and enforcement of personal and corporate guarantees. The suspension will not apply to obligations incurred or renegotiated after March 20, 2020, or for salary obligations. Also, the suspension will not affect or suspend the exercise of early maturity and clearing rights in the context of repurchase agreements and derivatives transactions.

For the period of 60 days following the Legal Suspension, the debtor that proves that its revenues have decreased at least 30% due to the COVID-19 crisis, upon presenting a document certified by an accounting professional, is entitled to file for a newly created voluntary remedy called “Preventive Negotiation”, during which the prohibition on action mentioned above will be maintained for an additional 90-days period.

It is important to mention that the list of debtors entitled to file for Preventive Negotiation has been expanded, adding to the enterprise and business owner categories, the rural producer and the self-employed professional. However, the list for those entitled to request judicial reorganization and prepackaged reorganization remains unchanged, benefiting only the enterprise and the business owner that observe the criteria already established in the Brazilian Bankruptcy Law.

During the 90 days non-extendable period of the Preventive Negotiation, the debtor must try to reach a settlement agreement with its creditors in order to avoid insolvency. However, creditors’ participation in this proceeding is optional.

In case a settlement with its creditors is not reached and the debtor files for judicial reorganization or prepackaged reorganization within the 360 days following the execution of the agreement in the Legal Suspension and/or in the Preventive Negotiation, the creditors’ rights and guarantees will be restored under the terms of the original obligations and credit instruments. In other words, the individual settlement agreements reached during the Legal Suspension and/or the Preventive Negotiation will be disregarded and the parties will return to the status quo ante. The provision to restore the debtor’s obligations and the creditors’ rights prior to the settlement agreement aims to stimulate extrajudicial negotiation, which brings more speed to the procedure and legal safety to creditors.

In case of a filing for judicial or prepackaged reorganization, the period of legal protection granted during the Legal Suspension and/or the Preventive Negotiation will be deducted from the 180-day stay period that ensures the suspension of lawsuits and enforcement actions against the debtor.

Waiver of certain requirements
The Bill also waives certain requirements provided for in the Brazilian Bankruptcy Law for companies that may need to use insolvency procedures during the period in which it is in force, such as:

• the debtor can file for a judicial reorganization proceeding, even if they have not regularly performed their activities for more than two years, have already filed for a liquidation proceeding or have filed for a judicial reorganization proceeding in less than 5 years from the prior filing;
• the debtor can file for a prepackaged reorganization proceeding even if a judicial reorganization request is pending or if they have obtained a judicial or prepackaged reorganization proceeding in less than 2 years;
• the minimum amount to declare bankruptcy is now considered BRL 100,000.00;
• the quorum for the approval of the prepackaged reorganization plan will be reduced to half plus one of all credits; and
• the stay period will be applicable to the credits subject to the prepackaged reorganization proceedings.

In addition, all obligations provided under judicial or prepackaged reorganization plans will be suspended for 120 days, and the debtor may, during this period, submit a new plan for voting, which will bind all claims that have materialized after the filing of the proceeding up to that date, except for the debtor-in-possession financing carried out with the express consent of the court of the judicial reorganization proceeding.

Finally, it is worth mentioning that, despite being approved by the House of Representatives, the Bill is still subject to the approval by the Federal Senate and, subsequently, a Presidential signing statement.