After roughly three months of legislative processing and on the day following the announcement made by Minister of the Economy Paulo Guedes, the Brazilian Senate passed yesterday afternoon (November 25) the Bill of Law 4,458 (“Bill”), which partially reforms the Brazilian Bankruptcy Law (Federal Law 11,101/2005 – “BBL”).
The wording of the Bill is substantially the same as that which the Brazilian House of Representatives had previously approved, with a few modifications. It now awaits sanctioning by the Brazilian President. Once the Bill is sanctioned, it will enter in force within 30 days of its publication in the Official Gazette.
Among other aspects, we highlight the following modifications:
- Creditors Plan. The Bill provides the possibility, subject to certain conditions, of creditors presenting and putting to a vote an alternative reorganization plan in the case that the stay period has elapsed or creditors reject the plan presented by the debtor. The creditors’ plan may include, among other provisions, the conversion of debt into equity, with dissident shareholders being guaranteed withdrawal rights.
- DIP Financing. The BBL will have specific rules and provisions related to financing to debtors undergoing a judicial reorganization proceeding, including (i) priority over other bankruptcy-remote claims in case of liquidation; (ii) no modifications to the guarantees and bankruptcy-remote nature of the credit in the case that the decision granting the financing is reversed or modified; (iii) authorization for the creation of subordinated guarantees regardless of the original guarantee holder’s consent (except for fiduciary liens and fiduciary assignments); and (iv) possibility of the DIP Financing being granted by any party, including creditors or the debtors’ related parties.
- Sale of Assets and Successor Liability. The Bill clarifies the extension of the existing protection against successor liability in the sale of isolated business units in insolvency proceedings. According to the Bill, the lack of successor liability shall apply to any and all liabilities, including, but not limited to, environmental, regulatory, administrative, anticorruption, tax and labor liabilities. The same protection applies to the sale of any noncurrent assets of the debtor, provided that certain requirements are met. Finally, the Bill provides for the possibility of the sale of the entire business and conversion of debt into equity, to which the non-successor liability rule will also apply.
- Cross-Border Insolvency. The Bill has incorporated, with some modifications, the UNCITRAL Model Law on Cross Border Insolvency, to the extent that the BBL will now contain specific rules on international cooperation regarding insolvency matters and provisions governing the recognition of foreign insolvency proceedings in Brazil.
- Procedural and Substantive Consolidation. Such issue, which has been subject to intense discussion in Brazilian courts, will now be expressly governed by the BBL. Debtors of the same corporate group may file for judicial reorganization under procedural consolidation (i.e. by means of one jointly administered proceeding, but with preservation of the corporate independence of each debtor). Substantive consolidation (i.e. consolidation of assets and liabilities of all debtors) will require a court decision that finds proof of interconnection and commingling of assets pursuant to the requirements provided for in the Bill.
- Procedural Aspects. The Bill modifies several procedural aspects of judicial reorganization and liquidation, among them the promotion of mediation and conciliation procedures, exemption of the general meeting of creditors upon presentation of proper adhesions to the reorganization plan, as well as limitations on objections and challenges to the sale of assets in insolvency proceedings.
- Extrajudicial Reorganization (Prepackaged Plans). Extrajudicial Reorganization has undergone to significant modifications that seek to encourage its use by debtors and creditors. We highlight: the reduction of the required majorities for plan approval; and the possibility of inclusion of labor-related claims, provided that collective bargaining negotiation with the union of the corresponding professional category is carried out.
- Tax Aspects. The Bill modifies certain tax legislation to create specific categories of tax refinancing programs for debtors undergoing a judicial reorganization proceeding, as well as mitigates the tax impacts on capital gains arising from the sale of assets and on gains obtained through the cancellantion or reduction of debt resulting from the reorganization plan.
Despite the controversy over certain topics, the approval of the Bill represents an important step in the modernization of insolvency proceedings in Brazil, notably in view of the legitimate concern to provide incentives for investors to deploy capital in distressed companies and, therefore, fulfill the policy goals of the BBL.
Demarest’s Bankruptcy and Insolvency team is available to provide further information or clarification on this and other related matters.