The reform of the judicial reorganization and bankruptcy law is approved by the senate and now waits for presidential signature

​On November 25, 2020, the Brazilian Senate approved a revised version of Bill No. 6,229/2005, now

Bill 4.458/2020 (Bill), which amends important provisions of Law No.

11,101/2005 (the
Brazilian Bankruptcy Law) and of Law No.

10,522/2002 (which regulates the Registry of Outstanding Debts of governmental entities – CADIN). The version approved by the Senate substantially maintains the provisions approved by the House of Representatives.

The Bill is now headed for presidential signature. If the President does not veto the Bill or any provision thereof, the law will be published in the Official Gazette and will take effect within 30 days from its publication. In case of veto(es) by the President, it returns to the Congress for revision.
The main changes brought by the Bill to the Brazilian Bankruptcy Law are the following:

• Debtor-In-Possession Financing:

  Despite the lack of a more structured approach to such form of financing in the Brazilian Bankruptcy Law, there are important precedents of DIP financing in Brazil, such as in the judicial reorganization proceedings of OGX, OAS, and Oi. The Bill seeks to remedy this omission by including an entire chapter dedicated to DIP financing, but it does not address some critiques of the current legal framework in Brazil. The Bill provides that the DIP lenders will be senior to substantially all other creditors in the event of liquidation of the debtor, including secured and unsecured creditors, most of the labor creditors and taxes. However, DIP lenders continue to not be senior to creditors holding claims secured by fiduciary liens, which are bankruptcy remote up to the limit of the collateral. In terms of collateral, the Bill expressly provides that DIP financing may be secured by assets of the debtor or of third parties, under any type of guaranty, including fiduciary liens. Although there had been some discussions on the possibility of courts priming on existing collateral, the Bill provides that courts may authorize collateral over encumbered assets, but subordinated to the existing guarantee. 

• Alternative Judicial Reorganization Plan:

  To expand creditors’ rights, the Bill granted them the right to submit a proposal for a judicial reorganization plan. The lack of specific provisions providing creditors with such right in the Brazilian Bankruptcy Law has been largely criticized. Under the Bill, the creditors’ plan can be presented to make up for the debtor’s delay to present a plan (after the stay period has elapsed), or even to replace the debtor’s proposed plan, if such plan is rejected at the creditors’ meeting. In case of rejection of the debtor’s proposed plan, the trustee will put into vote the possibility of 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 the creditors’ meeting can present the alternative plan, which will be subject to the same quorum already established in the Brazilian Bankruptcy Law for its approval.

• Cross-Border Insolvency:

  So far, the Brazilian bankruptcy legislation has not provided a framework to address cross-border insolvency cases, which are increasingly common in Brazil. To fill the gap, the Bill presents an entire chapter dedicated to the theme, essentially incorporating the rules of the UNCITRAL Model Law on Cross-Border Insolvency – widely adopted throughout the world. The innovation intends to create a system for the recognition of foreign proceedings in Brazil, which will (i) bring greater legal certainty for economic activity and domestic and foreign investments; (ii) encourage cooperation and coordination between jurisdictions; and (iii) provide greater protection to the interest of all creditors and other parties involved in cross-border insolvency of a Brazilian debtor.

• Procedural and Substantive Consolidation:

  Despite the omission of the Brazilian Bankruptcy Law, the joint filing for judicial reorganization by two or more companies is commonly applied in Brazil. The Bill, in line with the majority of court precedents, establishes that companies that are part of a group under the same corporate control may file for judicial reorganization in procedural consolidation, and the independence between their assets and liabilities must be preserved. The procedural consolidation avoids multiple proceedings, making them more efficient, and reducing the costs involved.

  In addition to procedural consolidation, the Bill sought to bring greater clarity regarding the requirements to be met to allow substantive consolidation. In this case, the consolidation is not only procedural, and debtors are taken as if they were a single pool of assets, there is just one judicial reorganization plan, creditors are taken as creditors of this pool of assets and vote on such unified judicial reorganization plan at the creditors’ meeting. Under the Bill, the court can exceptionally authorize the substantive consolidation, when the interconnection between the debtors’ assets and/or liabilities is proven. In order to obtain the substantive consolidation, it is necessary that, cumulatively, at least two of the following requirements are met: (i) the existence of cross-guarantees; (ii) control or dependency relationship; (iii) total or partial identity of the corporate structure; and (iv) debtors operate together or act as a group in the market.

• Stay Period and Essential Assets:

  The Brazilian Bankruptcy Law provides for the suspension of all lawsuits and enforcement proceedings brought against the debtor for a period of 180 days from the date that the court authorizes the processing of the judicial reorganization (such period is known as the stay period). Despite the legal determination regarding the non-extension of the 180-day period, in reality, such period has been generally extended until the creditors’ meeting set to vote for the plan. For that reason, the Bill established that the suspensions will last for 180 days, exceptionally extendable for the same period 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, as described above.
  Also, the Bill includes a provision that the suspension does not apply to claims guaranteed by a fiduciary lien, tax enforcement proceedings, and other specific situations. In order to protect the debtor, the Bill allows the court to suspend all acts of enforcement over essential assets during the stay period. However, the Bill does not bring the definition of what can be considered “essential assets”, which, in accordance to the Superior Court of Justice, are those assets used in the company’s production process, are in its possession, and which utilization does not cause the extinction of the guarantee.

• Sale of Assets:

  One of the main initiatives brought by the Brazilian Bankruptcy Law was the possibility of an acquirer to purchase assets of the debtor without becoming liable for the debtor’s liabilities in a clean sale transaction. However, according to the prevailing view, such transaction would have to be conducted through one of the three mechanisms outlined in the law (live auction, closed envelopes, and hybrid auction combining these two modalities), all of them overseen by the court and subject to competitive bidding and not always welcoming investors to spend considerable time and money in structuring a transaction. The Bill extends the clean sale protection to transactions made in competitive processes organized by a specialized agent or any other modality, provided it is approved by the bankruptcy court. The Bill also clarifies that the acquirer will not succeed the debtor’s liabilities of any nature, including, but not limited to, environmental, regulatory, administrative, criminal, anti-corruption, tax, and labor nature, reinstating the concept of “clean sale” and putting an end to disputes on whether the clean sale mechanism was limited to liabilities of a certain nature.

  The Bill brings novelties to the sale of noncurrent assets, which according to the current Brazilian Bankruptcy Law cannot be sold by the debtor without the court’s order. According to the Bill, after judicial authorization, creditors representing 15% of the claims subject to judicial reorganization may still dispute the transaction, submitting it for a vote by creditors at a creditors’ meeting. To this end, creditors must provide a security in an amount corresponding to the total amount of the sale and bear the costs for calling the meeting.

  Finally, the Bill brought the possibility of the direct sale of the debtor itself, provided that creditors that are not subject to the judicial reorganization are given, at least, the same conditions that they would have been entitled in a liquidation scenario. In this case, the sale will be considered, for all purposes, as a clean sale and, therefore, without succession to the acquirer of the debtor’s liabilities.

• Repurchase Transactions and Derivatives:

  The Bill expressly protects the early termination events and set-off provisions for derivatives in judicial reorganization proceedings. The Brazilian Bankruptcy Law lacks specific provisions on this matter and precedents were still unclear about whether such provisions were enforceable against companies in judicial reorganization. The Bill tries to clarify this issue and expressly provides that financial institutions are entitled to enforce such early termination events and set-off provisions if the debtor files for judicial reorganization.

• Out-of-court Reorganization:

  The Bill reduced the 60% quorum to 50% for the debtor to request the Court approval of the out-of-court reorganization plan (similar to the US pre-package). In addition, the debtor may submit the ratification request with the consent of only 1/3 of the creditors, undertaking to reach 50% within 90 days of the filing. Finally, the Bill faced a controversial issue in case-law and extended to out-of-court reorganization proceedings the protection of the stay period. 

• Rural Producers:

  As a general rule, individuals cannot file for judicial reorganization. However, individual rural producers are an exception, provided that they have been exercising rural activity for at least 2 years. In order to prove the performance of rural activity, the Brazilian Civil Code provides that the rural producer must have been registered in the registry of commerce for 2 years. However, several individual rural producers have been filing for judicial reorganization without meeting the registration requirements. Instead, such individuals have presented tax and accounting records that arguably prove their activities for two years, which have been generally accepted by courts. In this sense, the Bill sought to settle this issue and provides that individual rural producers may prove the 2-year activity by other means other than the registration in the registry of commerce.

• Mediation:

  Mediation is a dispute settlement mechanism that is growing in Brazil. It is governed by specific legislation (Law No. 13,140/2015), which has been applied gradually in judicial reorganization proceedings. The Bill dedicated an entire section to mediation, establishing that such procedure can be used during the judicial reorganization, out-of-court reorganization, and liquidation proceedings, including conflicts involving the Public Administration, shareholders, and out-of-court claims. The text prohibits the mediation for the classification of claims subject to the proceeding and maintains the bankruptcy courts’ jurisdiction over this matter.

• Preventive Negotiation:

  The Bill encourages debtors to try to negotiate their debts directly with creditors without having to file for judicial reorganization. According to the Bill, such debtors will have the prerogative to request the suspension of all lawsuits and enforcement proceedings filed against them for 60 days, counted as from the day that the request is granted. This suspension has the same spirit of the stay period, which is to allow the debtor to reorganize with out-of-court and direct negotiations with the creditors, while enforcement proceedings are suspended.

Mattos Filho’s specialists of the Restructuring and Insolvency practice will continue to monitor the matter and remains available for any clarifications.