Bill 4,458/20, approved by the Senate on November 25 of this year, amends laws - 11,101/05, 10,522/02, and 8,929/94, to update the legislation on judicial reorganizations, extrajudicial reorganizations, and bankruptcy of entrepreneurs and business companies. The bill stems from Bill 6,229/05, which was passed in the House of Representatives on August 26.

The signature of the President of Brazil is now expected to take place by December 24 of this year. If the current wording of the bill is maintained, the main points of change in the institutes of the current reorganization and bankruptcy legislation will be those indicated in the table below.

The main changes relate to:

  • legal certainty and super priority in relation to the granting of loans during judicial reorganization;
  • legal certainty and modification of some of the asset sale rules;
  • cross-border bankruptcy and cooperation between domestic and foreign courts in such cases;
  • fresh start;
  • general rules for extrajudicial reorganization, with the possibility of including labor credits and reducing the quorum required for approval of the plan;
  • installment payment of debts with the Federal Government and other tax matters; and
  • judicial reorganization of rural producers.

In the event of doubt, Machado Meyer's debt Restructuring and Bankruptcy and Tax teams are at your disposal.

Partners of the Restructuring team responsible for this newsletter: Renata Oliveira and Renato Maggio.

Partner on the Tax team responsible for this newsletter: Bruna Marrara.

 

Analysis of the main changes
Law No. 11,101/05 before the approval of the Bill Law No. 11,101/05 after the approval of the Bill
Stay period
  • After the petition for judicial reorganization is granted, the stay period begins, an interval of 180 days for suspension of executions and acts of constriction against the debtor by creditors subject to the proceeding, which is intended to give breath to the negotiation of the judicial reorganization plan.
  • This period would be non-extendable under the LRF, but case law has admitted extension, occasionally even more than once, when the vote on the plan does not take place within 180 days for acts not attributable to the debtor. For reference, votes on plans for reorganizations in progress in the State of São Paulo have taken an average of 517 days, according to data from the 2nd Phase of the Bankruptcy Observatory of NEPI-PUC/SP and ABJ.
  • Bankruptcy-exempt creditors and the tax authorities are not affected by the stay period a priori. However, constrictions and foreclosures of essential capital goods are prohibited in such a period. According to the Superior Court of Appeals (STJ), the competent court to decide on the matter is that of the judicial reorganization.
  • There is no legal prohibition on continuing or suspending labor executions for collection of debts subject to judicial reorganization against jointly and severally liable parties.
  • There is no legal provision for a stay period in relation to mediation or extrajudicial reorganization.
 Stay period
  • It expressly provides for the possibility of extending the stay of 180 days, for an equal period and a single time, provided that the failure to vote on the plan is not attributed to the debtor in possession.
  • The stay period may be extended a second time if creditors submit an alternative judicial reorganization plan, in the cases provided for in article 6, paragraph 4-A, and article 56, paragraph 4. (article 6, paragraph 4 and 4-A)
  • The stay period will continue to start from the granting of the processing of the case, but in the event of urgency, in limine relief may be granted for its effects to begin, in whole or in part, as of the filing of the case.
  • The rule regarding the possibility of execution and constriction by the tax authorities and bankruptcy-exempt creditors will continue. There will be an express legal definition of the jurisdiction of the court overseeing the reorganization to deal with the issue of essential capital goods in article 6, paragraphs 7 and 7-A.
  • Labor executions will be suspended in relation to the jointly and severally liable parties until the plan is approved or the judicial reorganization is converted into bankruptcy (article 6, paragraph 10).
  • There will be a legal provision for a stay period in the prior mediation and extrajudicial reorganization (for more details, see item on the subject, below).
Prevention of the court
  • The rule of jurisdiction of the court by prevention did not cover requests for approval of out-of-court reorganization plans previously filed, although case law already recognized this possibility on the basis of an expansive interpretation of the rule.
Prevention of the court
  • The assignment a petition for an extra reorganization plan will also result in preventive jurisdiction of the court for any other bankruptcy, judicial reorganization, or extra reorganization petition concerning the same debtor (article 2, paragraph 8).
Arbitration agreement
  • The LRF is silent on this point, but case law already required companies in crisis to respect arbitration agreements.
 Arbitration agreement
  • The need to respect the arbitration agreement by the debtor in possession or bankrupt party, represented by the judicial trustee, will be established in positive law (article 6, paragraph 9).
Distribution of profits or dividends
  • The LRF does not have provisions on the subject.
 Distribution of profits or dividends
  • Until the approval of the judicial reorganization plan, the debtor will be prohibited from distributing profits or dividends to partners and shareholders (article 6-A).
Verification and registration of credits
  • Such provisions are listed in articles 7 to 20 of the LRF, and there are no express previsions regarding what happens with the registrations and objections in course, in the event of closure of the judicial reorganization.
 Verification and registration of credits
  • There will be an express rule as to the possibility of closing the judicial reorganization even if the General List of Creditors has not been approved. With this, late registrations and objections will be reassigned to the judicial reorganization court as autonomous actions through the common procedure, and late registrations will have the competent credit reserve (article 10, paragraphs 7 to 9).
  • There will be specific treatment for registration of tax debts in the bankruptcy (article 7-A).
  • In the event of bankruptcy, there will be a three-year lapse period, counted from the decree of bankruptcy, for registrations and requests for a credit reserve (article 10, paragraph 10).
  • Apportionment in bankruptcy may occur even if the General List of Creditors is not formed, provided that the class of creditors to be satisfied has already had all the judicial objections filed within the term provided for in article 8, except for the reserve of the disputed credits due to the delayed registration of credits distributed until then and not yet judged (article 16).
Assignment of credits
  • Practice possible, but not regulated in the LRF. In bankruptcy, the assignment of labor debts denatures their characteristics, and the credits becomes unsecured.
 Assignment of credits
  • Promise of assignment or assignment must be immediately reported to the court overseeing the reorganization (article 39, paragraph 7).
  • In bankruptcy, any assignment of a credit will maintain the classification and characteristics of the credit (article 83, paragraph 5).
Conciliation and mediation
  • The LRF does not govern the practice of conciliation and mediation prior or incidental to a judicial reorganization proceeding. In practice, mediation has already been adopted in some judicial reorganizations, especially with a view to speeding up the procedures related to ancillary proceedings for verification of credits.
 Conciliation and mediation
  • Conciliation and mediation should be encouraged before and during judicial reorganization, at any level of appeal (article 20-A).
  • It will be possible to obtain urgent relief for the suspension of executions against the debtor for a period of up to 60 days prior to the filing of the judicial reorganization, for an attempt to reach a settlement with its creditors in a mediation or conciliation proceeding already instituted before the Judicial Center for Settlement of Conflicts and Citizenship. In the event of a subsequent request for judicial or extrajudicial reorganization, the time limit will be deducted from the stay period provided for in article 6 of the LRF (article 20-B, paragraphs 1 and 3).
  • Conciliation and mediation on the legal nature and classification of credits, as well as on voting criteria at the General Meeting of Creditors (GMC) will be prohibited (article 20-B, paragraph 2).
  • Settlements reached through conciliation or mediation must be approved by the competent court (article 20-C).
  • If judicial or extrajudicial reorganization is requested within 360 days as of the settlement signed in the conciliation or pre-trial mediation, the rights and guarantees of the creditors will be reconstituted on the terms originally contracted, with the exception of acts validly performed within the scope of the proceeding (article 20-C, sole paragraph).
Role of the judicial trustee
  • Although it is currently common practice, there is no legal provision obliging judicial trustees to maintain a website with information on the proceedings in which they serve.
  • The judicial trustee is not obliged to certify the veracity of the information provided by the debtor, nor to supervise the negotiations held between debtors and creditors.
  • There is no provision for alternative methods of deliberations by creditors (e.g., by means of an consent form or electronic voting) and, therefore, there is no legal obligation for the judicial trustee to supervise such acts.
  • Obligation to sell the assets of the bankrupt estate has no time limit. The judicial trustee will request that the judge sell in advance perishable goods, which are deteriorable or subject to considerable devaluation or to risky or costly conservation. In addition, there is no express obligation for the judicial trustee to collect in bankruptcy the amounts of deposits in proceedings to which the bankrupt is a party, although it is currently understood that this is an implicit obligation.
  • There is no provision for cooperation mechanisms for transnational bankruptcy proceedings.
Role of the judicial trustee
  • The judicial trustee will encourage mediation, conciliation, and other alternative methods of dispute resolution.
  • The judicial trustee will maintain an e-mail address with updated information on bankruptcy and judicial reorganization proceedings, with the main filings in the proceedings and monthly activity reports, and on the judicial reorganization plan, as well as for receipt of registrations and disagreements in the administrative sphere, unless a court decision to the contrary is entered.
  • The scope of the judicial trustee's duties under the judicial reorganization process will be broadened, notably (i) to inspect the veracity and conformity of the information provided by the debtor for purposes of preparing the monthly activity report; (ii) to inspect the negotiations between debtors and creditors, ensuring that the parties do not adopt dilatory or prejudicial arrangements; (iii) to inspect, by means of issuance of an opinion regarding their good standing, the decisions of the GMC by means of a consent form, electronic voting, or some other suitable mechanism (article 39, paragraph 5); (iv) to submit for a vote at the GMC that rejects the judicial reorganization plan proposed by the debtor the granting of a 30-day period for presentation of the judicial reorganization plan by the creditors (article 56, paragraph 4); (v) to submit within 48 hours a report of the creditors' responses regarding the holding of a General Meeting to resolve on the sale of assets, requesting its call.
  • The scope of the judicial trustee's duties within the scope of the bankruptcy proceedings will be broadened, namely: (i) the obligation to submit within 60 days of its appointment a detailed plan for realization of the assets; (ii) proceed with sale of all assets of the bankrupt estate within a maximum period of 180 days, as of the date of the filing of the notice of filing of the notice of collection, under penalty of dismissal, except for justified impossibility, recognized by a court decision; (iii) in the event of insufficiency of the assets for the expenses of the proceedings, procure sale of the attached assets within a maximum period of 30 days, for personal property, and 60 days, for real property, if the creditors do not request continuation of the bankruptcy; (iv) to collect the amounts of the deposits made in administrative or judicial proceedings in which the bankrupt appears as a party, arising from attachments, freezes, seizures, auctions, judicial sales, and other events of judicial constriction, with the exception of the deposits of federal taxes.
  • There will be provision for actions in the scope of transnational bankruptcy proceedings, notably (i) authorization to appear in foreign judicial proceedings in the capacity of representative of the Brazilian judicial proceedings, in the event of bankruptcy; and (ii) obligation of cooperation and communication with the foreign authority and with the foreign representatives.
GMC
  • In person is the rule provided for in the LRF, but because of the covid-19 pandemic, virtual GMCs were admitted by the case law, including with the issuance of Recommendation No. 63 by the National Judicial Review Board (CNJ) in this regard.
 GMC
  • It may be virtual and may also be replaced, with the same effect, by a consent signed by creditors who meet the specific approval quorum or other mechanism deemed sufficiently secure by the judge (article 39, paragraph 4).
  • • In addition to the duties provided for in the LRF, it may resolve on the approval of financing and disposal of assets or rights of the debtor's non-current assets, not provided for in the judicial reorganization plan (article 35, items g and h).
Abusive vote
  • There is no specific provision in the LRF, but there are decisions in which so-called abusive votes from significant creditors were disregarded whose contrary votes would prevent the achievement of the plan's quorum for approval.
 Abusive vote
  • Legal provision that the vote will be exercised by the creditor in the interest and in accordance with its judgment of advisability and declared null and void for abusiveness only when manifestly exercised to obtain an illicit advantage for itself or others (article 39, paragraph 6).
Judicial reorganization of a rural producer
  • The LRF does not regulate the possibility for individual rural producers to request judicial reorganization. There is a divergence in the case law regarding whether the registration of rural producers is a declaratory or constitutive in nature and, therefore, whether the period of activity prior to registration must be taken into account in order to fulfill the requirement of at least two years of activity provided for in the head paragraph of article 48 of the LRF and whether or not the debts taken on prior to registration are subject to the judicial reorganization.
 Judicial reorganization of a rural producer
  • It will be defined that rural producers acting as individuals will be able to request judicial reorganization. The special plan for rural producers may not involve debts of more than R$ 4.8 million (article 70-A).
  • Proof of the two-year period of activity established in the head paragraph of article 48 will be admitted through the Tax Accounting Book (ECF), or legal obligation to keep accounting records that may replace it (in the case of rural activity exercised by a legal entity), the Rural Producer Digital Cash Book (LCDPR), or legal obligation of accounting records that may replace it, the Income Tax Return, and balance sheet (in the case of rural activity exercised by an individual) (article 48, paragraphs 2 and 3).
  • The debts or guarantees linked to Rural Product Notes (CPR) with physical liquidation will not be subject to judicial reorganization, in the event of partial or full acceleration, or even representative of the exchange transaction for inputs (barter), the creditor being entitled to the restitution of such assets that are in the possession of the issuer of the note or any third party, except for reasons of unforeseeable circumstances or force majeure that can be proven to prevent the partial or total fulfillment of the delivery of the product (article 11, paragraph 1).
  • Only credits arising exclusively from rural activities, even if not past due, will be subject to judicial reorganization (article 49, paragraph 6).
  • Appeals controlled and covered under articles 14 and 21 of Law No. 4,829/65 (article 49, paragraph 7) will not be subject to the effects of judicial reorganization. However, if they have been renegotiated, such credits will be subject to the effects of the plan (article 49, paragraph 8).
  • Credits relating to debts incurred in the last three years prior the request for judicial reorganization, as well as the respective guarantees, will not be subject to judicial reorganization (article 49, paragraph 9).
Means of judicial reorganization
  • The conversion of debt into capital (only the increase in share capital) is not expressly provided for, but is a means of reorganization used.
  • There is no provision for full sale of the debtor.
 Means of judicial reorganization
  • The conversion of debt into capital will now be included in the list of article 50 of the LRF and there will be no risk of succession or liability for debts to third parties.
  • The same rule of absence of liability and succession will be express for officers and directors who replace former officers and directors as a means of reorganization and for creditors who make contributions of funds (article 50, paragraph 3).
  • The creditors' alternative plan may also provide for the capitalization of credits, including foreign exchange of control, allowing the debtor's partner the right to withdraw (article 56, paragraph 7).
  • Full sale of the debtor: it will become a means of reorganization provided for in the list of article 50 of the LRF and can be used when the situation of the creditors who are not subject to the proceedings and who are not members is at least the same as it would be in a bankruptcy. In this scenario, the rule of absence of succession of the isolated productive unit (UPI) will be applied.
Prior finding
  • There is no legal provision for prior finding.
  • In practice, some judges order the holding of a prior finding before the granting of judicial reorganization, in line with Recommendation No. 57 of the National Judicial Review Board (CNJ).
Prior finding
  • The prior finding will be provided for in the LRF, allowing the judge to carry it out when he deems it necessary (article 51-A).
  • The expert appointed by the judge will have no more than five days to submit a report issuing findings on the actual operating conditions of the debtor and the good order of the documentation submitted with the complaint (article 51-A, paragraph 2).
  • Dismissal of the processing of the judicial reorganization based on an analysis of the debtor's economic feasibility will be prohibited (article 51-A, paragraph 5).
  • If the preliminary finding detects strong evidence of fraudulent use of the judicial reorganization, the judge may reject the application, without prejudice to the issuance of an official letter to the Public Prosecutor's Office to take any criminal action that may be appropriate (article 51-A, paragraph 6).
  • If the prior finding shows that the debtor's principal place of business is not within the court's jurisdiction, the judge should order the case to be referred urgently to the competent court (article 51-A, paragraph 7).
Alternative plan proposed by the creditors
  • There is no provision in this regard. Only the debtor may propose a plan for judicial reorganization, and any proposal for change made by creditors must have the debtor's express agreement. Rejection of the plan without meeting the requirements for a cram down entails conversion of the judicial reorganization into bankruptcy.
 Alternative plan proposed by the creditors
  • Creditors may submit an alternative plan if the debtor, after the extension of the stay period, is unable to put a plan to a vote or if, after the rejection of the plan at the GMC, the creditors vote for the granting of a 30-day period to do so, in which case the alternative plan must be voted on within 90 days of the GMC that decided on the submission of the plan.
  • The alternative plan should have a specific quorum of support from creditors representing, alternatively, more than 25% of the total credits subject to judicial reorganization or more than 35% of the credits of the creditors present at the GMC that decided to submit an alternative plan (article 56, paragraph 6, III); there may be no new obligations not provided for by law or in prior agreements with the debtor's partners; there will be a provision for exemption from personal guarantees provided by individuals with respect to credits held by creditors who supported/voted in favor of the alternative plan, which may not impose greater sacrifice on the debtor and its partners than that which would result from liquidation in bankruptcy (article 56, paragraphs 4 to 9).
  • The plan proposed by the creditors may provide for the capitalization of the credits, including the consequent change in the control of the debtor, allowing the exercise of the right of withdrawal by the debtor's partner (article 56, paragraph 7).
Labor credits
  • They must be discharged within up to one year, and five minimum wages per employee of the strictly wage credits due in the three months preceding the credit must be paid within 30 days.
 Labor credits
  • The five minimum wages rule mentioned above will be maintained and the remainder may be paid within up to two years, provided that the plan, at the discretion of the judge: (i) provides sufficient guarantees; (ii) has been approved in class I; and (iii) guarantees payment of all labor credits (article 54, paragraphs 1 and 2).
Sale of assets
  • UPI: there is no legal definition of what is an isolated productive unit (UPI). The no-succession rule exemplifies only tax and labor obligations and, following the example of IA 2237160-80.2019.8.26.0000 of the TJSP, most of the judgments hold that the sale must be made by some form of competition per article 142 of LRF to guarantee the absence of succession (there is, however, already a precedent of the STJ allowing another type of sale of a UPI within a judicial reorganization, provided it is authorized by a special quorum and indicating that the rule of absence of succession should prevail: REsp 1.689.187-RJ).
  • Assets: if there is no provision in the plan, the sale and encumbrance of assets require the judge's authorization, after hearing the creditors' committee (if any), and the judge must analyze the evident usefulness of the transaction.
  • Rule of succession: the general rules of succession of the acquirer in the sale of assets apply in reorganization proceedings not carried out in the form of a UPI.
  • Means of competition: auction, tender, and closed bid.
  • Price: discussions regarding inadequate price are not uncommon.
  • Summons: summons of the Public Prosecutor's Office is mandatory.
  • Third party in good faith: no express provision in the LRF protecting their interests.
 Sale of assets
  • UPI: there will be legal definition (goods, rights and assets, tangible or intangible, such as corporate interest), the examples of absence of succession will cover all types of obligations (including environmental obligations and those under the Anti-Corruption Law) and the obligation to follow one of the competition modalities of article 142 of the LRF will continue (articles 60 and 60-A).
  • Assets: if there is no provision in the plan, sale and encumbrance of non-current assets (this is the novelty) will require the authorization of the judge, after hearing the creditors' committee, if any (the requirement of evident utility will cease to exist). Creditors with a joint credit in excess of 15% of the total amount of the liabilities, if they provide a bond and provided that they present justified reasons, may request a GMC to resolve on the matter, and the judicial trustee will explain the matter to the judge, convening a GMC, if the requirements are met. All this should be done quickly, in accordance with the legal deadlines and in the least costly manner, with the objecting creditors bearing the associated costs.
  • Rule of succession: provided that the disposal is carried out in the manner set forth in article 141, paragraph 1, and in article 142 of the LRF, the object of the disposal must be free of any encumbrance and there will be no succession of the acquirer in the debtor's obligations.
  • Means of competition: article 142 of the LRF will provide for an electronic auction, a competitive process organized by a specialized agent of unblemished reputation and any other modality approved under the law.
  • Price: there can no longer be any discussion of a negligible or inadequate price. A third party contesting the sale must make or present a firm offer from a third party and a guarantee 10% of the value of the offer. Raising an undue objection on any point will be an act that undermines the dignity of justice.
  • Summons: a summons of the Public Prosecutor's Office and the tax authorities will be mandatory.
  • Third party in good faith: the sale of assets or guarantee granted by the debtor to a bona fide purchaser or lender, provided that it is carried out by express judicial authorization or provided for in an approved judicial or extrajudicial reorganization plan, may not be annulled or rendered ineffective after the consummation of the legal transaction with the receipt of the corresponding funds by the debtor.
Partner or supporting creditor
  • Doctrinal and jurisprudential creation based on the spirit of article 67 of the LRF, which allows, based on the provisions in the plan and with justifications, that a certain creditor, named partner, or supporter, has privileged treatment in judicial reorganization in relation to other creditors of the same class.
 Partner or supporting creditor
  • Article 67, sole paragraph, will permit differentiated treatment of credits subject to judicial reorganization for suppliers of goods or services that continue to provide them normally after the application for judicial reorganization, provided that such goods or services are necessary for the maintenance of the activities and that the differentiated treatment is appropriate and reasonable as regards the future business relationship.
DIP financing
  • The treatment provided for in article 67 of the LRF is insufficient and does not provide the necessary super priority. Thus, the vast majority of cases of financing that have existed in Brazil have always relied on guarantees, especially those of a fiduciary nature, and contractual arrangements for obtaining super-priority.
  • There is also no express provision in the LRF protecting third parties in good faith.
  • There is no provision in the LRF authorizing the creation of a subordinated guarantee on assets of the debtor without the consent of the holder of the original guarantee.
  • Experience shows that DIP financing cases ended up involving much litigation.
 DIP financing
  • Superpriority will be provided for by law (article 84).
  • Article 69-B will provide that a change in the level of appeal against the decision authorizing the engagement may not alter the bankruptcy-exempt nature or the guarantees given by the debtor to the lender in good faith, if disbursement has been made.
  • Article 69-C will authorize the establishment of a subordinated guarantee on one or more of the debtor's assets in favor of the lender of a debtor under judicial reorganization, waiving the consent of the holder of the original guarantee, with the proviso that the subordinated guarantee, in any event, will be limited to any excess resulting from the disposal of the asset subject to the original guarantee and that such provision will not apply to any type of fiduciary sale or fiduciary assignment.
  • Article 69-E will provide that financing may be provided by any person, including family members, partners, and members of the debtor’s group.
  • Article 69-D will provide that, in the event of conversation of the reorganization into bankruptcy, the financing agreement will be considered automatically terminated and the guarantees provided and preferences will be preserved up to the limit of the amounts actually delivered to the debtor before the date of the judgment that converted the judicial reorganization into bankruptcy.
Procedural and substantive consolidation
  • Not regulated in the LRF.
  • Procedural consolidation is allowed on the basis of the rules for joint litigation in the Code of Civil Procedure (CPC), which apply where not incompatible with bankruptcy procedure, pursuant to article 189 of the LRF.
  • Substantive consolidation has divergent case law regarding the requirements, the competence of the decision on the subject, criteria, and quorums applicable to voting.
 Procedural and substantive consolidation
  • The LRF will have a provision stipulating the competent court, the requirements, the necessary documentation, and the form of voting in case of procedural consolidation (article 69-G).
  • The decision on the substantial consolidation may, exceptionally, be made by the judge and the requirements for its acceptance will be the finding of interconnection and confusion between assets or liabilities of debtors belonging to the same economic group, such that it is not possible to identify their ownership without excessive expenditure of time or resources, through the finding of at least two of the following events (i) existence of cross guarantees; (ii) relationship of control or dependency; (iii) identity of the corporate structure; and (iv) joint action in the market, which has generated criticism of the bill (article 69-J).
  • In case of substantive consolidation, there will be immediate extinguishment of fiduciary guarantees and credits held by one debtor against the other (article 69-K).
  • There will be a rule providing that secured guarantees will not be prejudiced in substantive consolidation, except with the approval of the holder (article 69-K).
Possibility for the tax authorities to file for bankruptcy of the debtor
  • Although article 97, IV, of the LRF provide that any creditor may file for bankruptcy of the entrepreneur and of the business company, the currently settled understanding of the STJ is to the effect that the Public Treasury does not have standing to file for bankruptcy for companies and/or businessmen.
  • However, in an extended judgment held in August of 2020, the 1st Chamber of Business Law of the Court of Appeals of the State of São Paulo (TJSP), by majority vote, upheld the appeal so as to (i) annul the decision that had rejected the application and extinguished the proceeding without a resolution of the merits, on the grounds that the National Treasury had no procedural interest; and (ii) order the regular continuation of the petition for bankruptcy filed by the Federal Government, represented by the Attorney’s Office for the Federal Revenue Service, against a company engaged in the trade and distribution of food products.
  • The TJSP emphasized that, in the case at hand, the petition for bankruptcy was not based on article 94, subsection I of the LRF (whose more restrictive understanding should prevail) but on article 94, subsection II, since the Federal Revenue Service, although it filed for a tax foreclosure, has not located sufficient assets of the debtor to satisfy the debt. Having exhausted the means to satisfy its credit, it would not be possible to withdraw from the public body the possibility of filing for bankruptcy of the debtor.
 Possibility for the tax authorities to file for bankruptcy of the debtor
  • The tax authorities may petition for judicial reorganization of the debtor in bankruptcy if (i) there is nonperformance of the installment payments of the debts provided for in article 68 of the LRF or the transaction provided for in article 10-C of Law No. 10,522/2020; or (ii) when the debtor's assets are identified as being depleted, resulting in substantial liquidation of the company, to the detriment of creditors not subject to the judicial reorganization, as is the case of the Public Treasury.
  • Depletion will be considered substantial when assets, rights, or future cash flow projections are not reserved sufficient to maintain economic activity for the purpose of fulfilling its obligations.
  • It will be excepted expressly that, in the event that bankruptcy is decreed by the substantial depletion of the company, the disposals made will be preserved and considered effective, so as not to harm a bona fide third party purchaser. The proceeds of such disposals, on the other hand, should be blocked, with the consequent return to the debtor of the amounts already distributed to any creditors, which will now be available to the court.
Closing of the judicial reorganization
  • There is two years of judicial supervision. In view of this, it is not possible to close it. When there is a grace period of more than two years, some judges extend the judicial supervision period. An attempt has already been made to close supervision early, but this was not allowed.
 Closing of the judicial reorganization
  • Supervision will be for a maximum of two years, and judicial reorganization may be terminated prior to that, regardless of the grace period and the closure of the registrations and consolidation of the general list of creditors (article 61).
Fresh start
  • The LRF does not concern itself with this. Bankruptcy in Brazil is time-consuming and highly contentious. The requirements for closure of the bankruptcy and extinguishment of the bankrupt's obligations are lengthy.
 Fresh start
  • The changes seek to create a rapid bankruptcy process, with rapid sale of assets (and even the possibility of donating assets without interested parties) and reducing questions on this point, including placing responsibility and a burden on objectors (article 143).
  • The fresh start will be established in positive law as a principle to be sought in bankruptcy (article 75).
  • There will also be the possibility of termination of the bankrupt's obligations in shorter periods and under less onerous conditions (article 158).
Extension of the effects of the bankruptcy
  • There is no legal provision, but case law admits and confuses extension of the effects of bankruptcy with piercing the corporate veil.
 Extension of the effects of the bankruptcy
  • Extension of the effects of bankruptcy will be expressly prohibited for limited liability companies. Piercing of the corporate veil must respect the precepts of the Code of Civil Procedure and the Civil Code (article 82-A).
List of creditors in bankruptcy
  • The list of creditors is provided for in articles 83 and 84 of the LRF.
 List of creditors in bankruptcy
  • The order of classification will remain the same, but the list will be simplified, with the elimination of the class with privilege (article 83).
  • In relation to subordinated creditors, it will be clarified that partners without an employment relationship will hold this classification only in relation to credits taken on without observing strictly fair conditions and market practices (article 83, VIII, “b”).
Rapid closure of bankruptcy in the event of absence of assets
  • There is no express provision in the LRF.
 Rapid closure of bankruptcy in the event of absence of assets
  • If there are no assets to be collected, or even if they are not sufficient to pay the expenses of the proceeding, the judicial trustee will immediately report this fact to the judge, who, after hearing the representative of the Public Prosecutor's Office, will schedule, via call notice, a ten-day period for interested parties to request what is rightfully due. If the creditors choose to proceed, they will bear the costs of the judicial trustee. Otherwise, the bankruptcy will be terminated after the sale of existing assets within a maximum period of 30 days for personal property and 60 days for real estate.
Sale of assets in bankruptcy
  • There is no maximum term for the judicial trustee to carry out sale of assets in bankruptcy.
  • Discussions regarding inadequate price are common.
  • There is no provision for donation/return of unsold assets to the debtor.
 Sale of assets in bankruptcy
  • There will be a maximum period of 180 days for the judicial trustee to proceed with the sale of all the assets of the bankrupt estate. It will be counted from the date of the filing of the notice of collection, under penalty of dismissal, except for reasoned impossibility, recognized by a judicial decision.
  • The sale will not require consolidation of the general list of creditors.
  • The sale will not be subject to application of the inadequate and negligent price concept. A third party contesting the sale must make or present a firm offer from a third party and a guarantee 10% of the value of the offer. Raising an undue objection on a point will be an act that undermines the dignity of Justice.
  • In the event of failure to sell the assets, and if there is no concrete proposal from the creditors to assume them, they may be considered as having no market value and sent for donation or returned to the debtor, if there is no interest in donation.
  • Pursuant to a resolution passed under article 42, creditors may obtain the assets sold in bankruptcy or acquire them through the formation of a company, fund, or other investment vehicle, with the participation, if necessary, of the debtor's current shareholders or third parties, or through the conversion of debt into capital.
Extinguishment of the obligations of the debtor
  • Requirements for the extinguishment of the obligations of the debtor laid down in article 158 of the LRF: (i) payment of more than 50% of the unsecured credits; (ii) lapse of the period of five years from the closing of the bankruptcy; or (iii) in the event of conviction for a bankruptcy crime, a period of ten years from the closing of the bankruptcy.
 Extinguishment of the obligations of the debtor
  • Amendments were inserted to speed up the extinguishment of the debtor's obligations and to allow a fresh start, which will occur in the following events: (i) payment of more than 25% of the unsecured credits; (ii) expiration of three years, as of the decree of bankruptcy, except for the use of assets previously seized, which will be sent for liquidation to satisfy registered creditors or creditors with a request for reserve; (iii) closing of the bankruptcy pursuant to article 114-A (absence of assets of the debtor) or article 156.
Extrajudicial reorganization
  • The debtor, provided that 3/5 of the class(es)/subclass(es) of creditors covered by the extra reorganization plan have joined, may request in court approval of the plan, which will be mandatory for all creditors of that (those) class(es)/subclass(es) after approval.
  • The debtor is free to indicate the class(es)/subclass(es) involved, and may not cover labor creditors, bankruptcy-exempt creditors, and the tax authorities.
  • The LRF does not provide for a stay period for extra reorganization, but in some cases and in relation to the creditors covered by extra reorganization there are judgements that grant such a suspension pending ratification of the judicial reorganization plan approved by 3/5 of the creditors covered.
  • There is no protection of absence of succession of the purchaser of the debtor's UPIs in extrajudicial reorganization.
 Extrajudicial reorganization
  • The quorum for participating will no longer be 3/5 but 50%. The process may begin with the signature of 1/3 of the class(es)/subclass(es) involved, and the reorganization may obtain the 50% needed in the course of the proceeding within 90 days. If such additional adherence is not obtained, the debtor may apply for judicial reorganization.
  • The labor class may participate in the proceeding, provided that there is collective negotiation with the labor union of the respective professional category.
  • There will be legal provision for the possibility of a stay period to reach the class(es)/subclass(es) involved as of the request.
  • There will still be no provision for the absence of succession of the purchaser of a UPI in the obligations and debts of the debtor in possession.
Transnational Bankruptcy
  • Issue not regulated by the LRF.
  • In the case of foreign companies that are part of the same economic group as Brazilian companies requesting reorganization in Brazil and whose center of main interest is Brazil, as in the case of offshore vehicles used to raise funds, there is case law allowing such companies to be applicants submitting the request for judicial reorganization.
 Transnational Bankruptcy
  • Transnational bankruptcy rules will be introduced in Brazil, along the lines of the Uncitral Model Law.
  • The principles for governing transnational bankruptcy, such as cooperation between judges and maximization of assets, will be established, and institutes (e.g. what is considered foreign proceedings, main proceedings, foreign non-main proceedings and others) will be conceptualized.
  • The following are the cases in which the provisions relating to transnational bankruptcy may be applied: (i) a foreign authority needing assistance in Brazil for foreign proceedings; (ii) assistance related to proceedings governed by the LRF filed in a foreign country; (iii) foreign proceedings and proceedings governed by the LRF relating to the same debtor underway simultaneously; and (iv) creditors or interested parties with an interest in requesting or participating in proceedings governed by the LRF.
  • The jurisdiction of the place of the debtor's main establishment in Brazil will be established for recognition of a foreign proceeding and for cooperation with foreign authorities.
  • There will be express authorization for the debtor and the judicial trustee to act in other countries, regardless of judicial decision, provided that the provision is admitted in the country where the foreign proceeding is being processed.
  • With respect to access to the Brazilian jurisdiction, the provisions will clarify that (i) the foreign representative will be entitled to submit filings directly with the Brazilian judge; and (ii) foreign creditors will have the same rights as granted to domestic creditors.
  • The documents to support the application for recognition of foreign proceedings and the effects of such recognition will be indicated.
  • Rules for the coordination of competing cases will be provided for.
Application of the Code of Civil Procedure
  • The suppletory application of the Code of Civil Procedure is provided for in the LRF. However, as the new CPC establishes the counting of time limits in business days and restricts when interlocutory appeals may be filed, debates have arisen regarding application of the new rules to bankruptcy proceedings.
 Application of the Code of Civil Procedure
  • It will be expressly provided that all time limits provided for in the LRF will be counted in calendar days and that the applicable appeal against the decisions rendered in the course of the proceedings will be the interlocutory appeal, unless otherwise provided for in the LRF.
  • The LRF will also give priority to bankruptcy proceedings, except for habeas corpus and the priorities established in special laws.
Matched transactions and derivatives
  • Without treatment in the LRF and in practice, early maturity and offsetting have been allowed.
 Matched transactions and derivatives
  • The possibility of early maturity and offsetting will be provided for by law, and any remaining credit will be subject to judicial reorganization, unless there is a fiduciary guarantee.
Tax issues
  • When judicial reorganization is granted, the applicant must submit a clearance CND (article 57). However, since the law that provides for tax installments was slow to be enacted and, when it was, it received criticism, the case law has been softening this requirement.
  • The regulated tax issue is the absence of succession of the purchaser of an UPI in the judicial sale approved in the plan, provided that such purchaser is not (i) a partner of the bankrupt company or a company controlled by the debtor; (ii) a relative, in a straight or collateral line up to the fourth (4th) degree, by blood or by marriage, of the debtor or a partner of the bankrupt company; or (iii) identified as an agent of the debtor with the purpose of defrauding the succession.
 Tax issues
  • The requirement of article 57 will continue.
  • Tax treatment applicable to capital gains on the judicial sale of UPIs: the portion of net income resulting from capital gains on the judicial sale of UPIs may be fully offset against tax losses from priors years, without the limitation of 30%. To this end, the divestiture should take place between independent parties. Also, Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) due on capital gains may be paid in installments.
  • Tax treatment of the effects of reducing the value of debts in the event of renegotiation (haircut): Even if the debts are not subject to the judicial reorganization plan, the effects of reduction thereof have the following tax treatment, regardless of the accounting effects and provided that the renegotiation of debts occurs between unrelated parties:
  • Revenue will not be taxed by PIS and Cofins;
  • The gain may be fully offset against tax losses from prior years, without the limitation of 30%.
  • Deductibility of expenses: expenses corresponding to the obligation assumed in the plan will be considered deductible from the calculation basis for the IRPJ and the CSLL.
  • Acts of constriction of assets in the scope of tax foreclosures: despite the discretionary power of the tax foreclosure court to order acts of constriction of assets, the reorganization court has the power to order the substitution of such acts that fall on capital assets essential for the maintenance of the business activity, to be exercised through judicial cooperation.
  • Payment of tax debts:once the judicial reorganization proceeding has been granted, federal tax debts may be settled on a consolidated basis within 120 months. Payments will be calculated in such a way that those due in the first years are lower than those due in subsequent years. As for debts managed by the Brazilian Federal Revenue Service, up to 30% of the consolidated debt may be settled using tax loss credits and the remainder may be paid in 84 installments. The value of the installments will also be lower in the first years of payment.
  • Other modalities of installment payment are also available, under the terms of Law No. 10,522/2002, as amended.
  • Settlement: once the processing of the judicial reorganization has been granted, the taxpayer may submit a proposed settlement to the National Treasury Attorney's Office. The conditions of the settlement must include payment within 120 months, reductions of up to 70% in the amount of the debt, among other things.