On November 25, 2020, the Brazilian Senate approved Bill of Law No 4,458/2020 ("BL 4458"), which amends Law No 11,101/2005 ("BBL"), to update the legislation regarding the judicial reorganization, pre-packaged reorganization and bankruptcy liquidation of businessmen and companies.

BL 4458, which provisions have already been approved by the House of Representatives, will now be sanctioned by the President. The resulting legislation will come into effect within 30 days following its official publication to significantly change the Brazilian insolvency system.  

We prepared the following summary of the main changes to the insolvency system brought by BL 4458 (and which is still subject to presidential veto).

1. BACKGROUND

Since 2016, the Brazilian government has been coordinating efforts to promote a broad reform in the BBL. BL 4458 brings significant changes to the Brazilian insolvency system, with particular reference to the rules on debtor-in-possession financing, tax debt installment program and the possibility of creditors proposing an alternative plan of reorganization, in addition to the inclusion of a new regime of cross-border insolvency. 

In bankruptcy liquidation proceedings, BL 4458 aims to allow a fast-track winding up of the unfeasible businesses and the efficient relocation of assets, in addition to foster entrepreneurship, by allowing a fresh start to businessmen. 

2. NEW RULES IN THE JUDICIAL REORGANIZATION

BL 4458 provides for significant changes in the judicial reorganization proceedings. We summarize below the main changes. 

     2.1. Farmers may file for Reorganization

There is discussion, under the BBL, about the possibility of farmers to file for judicial reorganization. BL 4458 puts an end to such discussion and regulates the form of proof of the exercise of the rural activity during the mentioned period, accepting, in the case of individuals farmers, the presentation of certain accounting documents, income tax form, and financial statements. 

In addition, BL 4458 allows farmers to submit a simplified plan of reorganization if the estimated amount of the debt does not exceed BRL 4,800,000. 

     2.2. Distribution of Profits

BL 4458 does not allow distribution of profits and dividends by the debtor company to its shareholders until the approval of the reorganization plan. After the plan is approved by the creditors, the rules provided there in shall prevail. 

     2.3. Conciliation and mediation

BL 4458 provides incentives for mediation and conciliation prior to or during judicial reorganization proceedings.

Debtors may request to the court a 60-day stay, prior to filing of a judicial reorganization, to negotiate an agreement with its creditors within mediation or conciliation procedures.

     2.4. Alternative Plan proposed by Creditors

Under the BBL, only the debtor may propose a plan, and any modification proposed by creditors shall be approved by the debtor. BL 4458 provides rules which allow, under certain circumstances, for creditors to propose an alternative reorganization plan, without the debtors' consent. 

Pursuant to BL 4458, the debtor has an exclusivity period of 180 days, which can be extended only once for the same period, to propose and obtain approval of a reorganization plan. If this period expires without the plan being submitted to voting, or if the plan is rejected, the creditors may propose an alternative plan within 30 days. 

The alternative plan shall have 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 cannot impose new obligations to the shareholders of the debtor, nor allow them or the debtor to 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. In addition, the alternative plan 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. 

The alternative plan can provide for a debt-for-equity swap, with a change of control of the debtor company, in which case the shareholders shall have a put option of their shares. 

     2.5. Procedural and Substantive Consolidation

BL 4458 provides for the filing of a joint reorganization proceeding by a group of companies (procedural consolidation) and for the pooling of their assets and liabilities for the purposes of voting on the plan (deemed substantive consolidation). 

Debtor which are part of a group under common corporate control can file a joint petition for reorganization.

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

     2.6. Payment of labor Claims

Under the BBL, the plan of reorganization shall provide for payment of labor claims within one year.

     BL 4458 provides that this period can be extended in up to 2 years, as long as such extension is approved by the class of labor creditors, that such labor claims are paid in full, and that the court is satisfied with the guarantees provided by the debtor.

     2.7. Conversion of Reorganization into a Liquidation due to Tax Debt

BL 4458 provides that the court shall convert a judicial 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 proceeding, including the Tax Authority. 

     2.8. New Tax Installment Program

BL 4458 modifies article 10-A of Law No 10,522 of 2002, which allows companies under judicial reorganization to pay federal tax debts in installments. BL 4458 increases the number of installments from 84 to 120 monthly installments.

As one of condition of such debt installment program, the debtor shall revert up to 30% of the amount arising from the sale of assets to pay tax claims.

It will also be possible to renegotiate certain tax debt, which may result in a haircut of up to 70% of the total amount due, to be paid in up to 120 months.

3. NEW RULES ON SALE OF ASSETS

BL 4458 brings a set of new rules for the sale of assets in both judicial reorganizations and bankruptcy liquidations. 

In a judicial reorganization, within 5 days following a court decision authorizing a sale of fixed assets, creditors holding more than 15% of the total amount of affected claims can request a creditors' meeting to decide on such sale (provided that such creditors post a bond to guarantee such sale on the terms proposed by the  debtor). Such sale of fixed assets is free and clear of liabilities. 

The plan can also provide for the sale of assets, business units or even the whole company free and clear of any liabilities, provided that creditors shall be entitled to receive no less than they would be entitled to in a bankruptcy liquidation.

PL 4458 provides additional protection to the acquirer, as the sale is expressly concluded free and clear of all liabilities of the debtor, including those of a tax, labor, criminal, administrative, environmental, or derived from anti-corruption laws.

In a bankruptcy liquidation, BL 4458 provides that the judicial administrator will carry out the sale of assets within 180 days.  

4. DEBTOR-IN-POSSESSION FINANCING

BL 4458 brought new rules on DIP financing. Under the new rules, anyone, including shareholders of the debtor, can offer the DIP loan, which shall be used to finance the activities or the expenses of the debtor, including those related to the restructuring and the preservation of assets. 

The DIP loan shall be considered a post-petition claim and can be secured by any asset, except for current assets of the debtor company. The court may authorize the creation of a security interest over assets already secured (except if such assets are secured by a fiduciary lien), provided that the DIP loan is subordinated to the payment of the claim originally secured by such asset. 

5. NEW RULES ON BANKRUPTCY LIQUIDATIONS

BL 4458 aims to make bankruptcy liquidations more expedite and efficient. Sales of assets are expected to take place within 180 days.

The debtor is discharged following termination of thee bankruptcy liquidation or within 3 years after the commencement of the bankruptcy liquidation, whichever occurs first. 

There are also significant changes in the priority order of bankruptcy liquidation, as follows: (i) the  amounts extended to the debtor as DIP loans are senior to other pre-filing claims; (ii) claims entitled to general and special privilege (including debentures with a floating charge) now rank equal to general unsecured claims; (iii) interest rates due after the declaration of bankruptcy are junior to subordinated claims (including claims held by shareholders). 

6. NEW RULES ON PRE-PACKAGED REORGANIZATIONS

Under BL 4458, a pre-packaged 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 in  each such class (down from 60% provided for the BBL). 

In addition, the pre-packaged reorganization plan, under BL 4458, can impair labor claims, provided that the terms of the plan are negotiated with the relevant labor union. 

7. CROSS-BORDER INSOLVENCY 

BL 4458 introduces cross-border insolvency rules in Brazil, based on the UNCITRAL Model Law on Cross-Border Insolvency, with some significant amendments.