Member Article

On December 24, 2020, the Brazilian President sanctioned, with some vetoes, an amendment to Law 11,101/2005, which governs judicial reorganizations, pre-packaged reorganizations and bankruptcy liquidations of businessmen and companies. The vetoes can still be overthrown by the Brazilian Congress.

Law 14,112/2020, which contains such provisions, will COME INTO FORCE 30 days after its official publication, on December 24, and the amendments, with exceptions (such as the alternative plan proposed by creditors) shall be immediately applicable to all ongoing proceedings. The main changes are described below.

FARMERS are expressly authorized to file for reorganization, putting an end to ongoing discussions, provided they submit evidence of the exercise of the rural activity during the preceding 2 years. 

DISTRIBUTION OF PROFITS AND DIVIDENDS by the debtor company to its shareholders until the approval of the reorganization plan is no longer allowed. After the plan is approved, the rules provided there in shall prevail. 

There are incentives for MEDIATION AND CONCILIATION prior to or during judicial reorganization proceedings, to resolve disputes between debtors, creditors, shareholders and third parties.

Debtors who are not under reorganization may request to the court a STAY OF PROCEEDINGS for a period of 60 days, to negotiate an agreement with its creditors to avoid a filing.

There are legal criteria for allowing SUBSTANTIVE CONSOLIDATION of debtors who jointly file for reorganization. The court may authorize deemed substantive consolidation of the debtors if, cumulatively, (a) there is entanglement and commingling of assets or liabilities, in such a way that any attempt to unscramble them would result in an excessive amount of time or expenses, and (b) at least two of the following additional requirements are present: cross-guarantees between the group members; same corporate control; identity of shareholders; or operation as if they were a single entity. 

There are new rules on DEBTOR-IN-POSSESSION FINANCING, which can be provided by anyone, including shareholders of the debtor. The DIP loan, authorized by court, shall have priority over other claims if the reorganization is converted into a bankruptcy liquidation, even if the court decision which authorized it is modified or revoked.

Creditors will be allowed to propose an ALTERNATIVE PLAN OF REORGANIZATION, alternative reorganization plan, without the debtor's consent, after expiration of the stay period, which shall not exceed 360 days, or if the debtor's plan is rejected. The alternative plan shall be proposed with the support of creditors holding more than 25% of the total amount affected by the reorganization, or, alternatively, by more than 35% of the claims present at the creditors' meeting in which the plan proposed by the debtor was rejected. The alternative plan (a) cannot impose new obligations to the shareholders of the debtor; (b) cannot provide that the debtor or its shareholders will receive or retain, under the plan, a value that is less than the amount which they would receive or retain if the debtor were liquidated; and (c) shall provide for the release of personal guaranties granted by individuals to guarantee claims held by the creditors who supported the alternative plan or who voted in its favor. 

Payment of LABOR CLAIMS, provided for the plan of reorganization, and which should be made within one year, may be extended in up to 2 years, provided that (a) such extension is approved by the class of labor creditors, (b) labor claims are paid in full and (c) the court is satisfied with the guarantees provided by the debtor.

The SALE OF ASSETS, under a reorganization plan, or approved by the court, cannot be unwound if the debtor has already received the proceeds from such sale.

There is additional flexibility for the sale of BUSINESS UNITS free and clear of liabilities, which can now be carried out by means of a judicial auction or an extrajudicial competitive process, and which can involve rights, assets and even equity participation held by the shareholders of the debtor.

The court shall CONVERT A REORGANIZATION INTO A BANKRUPTCY LIQUIDATION if the debtor fails to pay a tax installment plan, or if the debtor sells a substantial portion of its assets in fraud to the creditors which are not impaired by the reorganization, including the Tax Authority. 

There are new rules on FEDERAL TAX DEBT for companies undergoing judicial reorganization, and which can be paid (a) in up to 120 monthly installments; (b) with a set-off of 30% with tax-deductible losses and the balance in up to 84 installments; (c) by means of renegotiation proposal which may result in a haircut of up to 70% of the total amount due, to be paid in up to 120 months; or (d) according to other available tax installment program.

The PRE-PACKAGED REORGANIZATION PLAN can be filed with the support of holders of 1/3 of claims in each affected class of claims and shall be approved by holders of more than 50% of the claims. The pre-packaged reorganization plan can now impair labor claims, provided that the terms of the plan are negotiated with the relevant labor union. 

In a bankruptcy liquidation, there are rules for a FAST-TRACK AND EFFICIENT SALE OF ASSETS, which shall be concluded within 180 days, by means of a judicial auction or any other mean approved by the court. The sale may only be challenged if there is a firm proposal guaranteed by a 10% deposit.

The bankruptcy liquidation cannot have its EFFECTS EXTENDED to shareholders and managers, although rules on lifting the corporate veil are applicable if there is fraud or abuse.

The debtor is discharged, being allowed a FRESH START, following termination of the bankruptcy liquidation or within 3 years after the commencement of the bankruptcy liquidation, whichever occurs first. 

Brazilian law incorporates the UNCITRAL Model Law on Cross-Border Insolvency, with new rules for international cooperation in insolvency cases. Such rules allow for the recognition of FOREIGN PROCEEDINGS, which includes the possibility of the court granting urgent relief for the protection of local assets and stay of local proceedings against the debtor.