Brazil: Legislative Bill on Judicial Reorganization and Bankruptcy was sent to the Brazilian National Congress Business restructuring and judicial reorganization


Business restructuring and judicial reorganization

On May 9th, 2018, the Brazilian President forwarded to the Brazilian National Congress the draft amendment of the Legislative Bill of Brazilian Law No. 11,101 of February 9th, 2005 ("Judicial Reorganization and Bankruptcy Law"), and Brazilian Law No. 10,522 of July 19th, 2002, in order to update the legislation related to judicial reorganization, extrajudicial reorganization and bankruptcy of businessmen and companies.

Based on works made by a group of legal experts, the Legislative Bill was sent at the end of last year by the Finance Minister to Civil Office and, after undergoing amendments, was forwarded to the Brazilian National Congress.

In short, the main changes presented by the Legislative Bill relates to the following:

The establishment of classes of creditors through the judicial reorganization plan: the Legislative Bill provides the cancellation of the four current classes of creditors (labor, collateral, unsecured and holders of credits classified as small businesses and small-sized companies) and possibility of establishment of classes by plan, provided that the creditors of each class have homogeneous interest;

Prohibition of distribution of profits or shareholders’ dividends: the Legislative Bill forbids the legal entity in the process of judicial reorganization (or bankruptcy) from distributing profits or dividends to shareholders and stockholders;

Regulation of abusive vote: for instance, voting will be considered abusive in cases of unlawful advantage for the creditor, if it is carried out with the purpose of harming the debtor or third parties;

Derivatives: the Legislative Bill expressly states that the request for judicial reorganization does not affect guarantees provided on repurchase agreements or derivatives;

Legal term in judicial reorganization: the Judicial Reorganization and Bankruptcy Law provides for the legal term – a suspicious period during which certain transactions may be declared ineffective in the event of collective insolvency proceedings – only in bankruptcy cases. The Legislative Bill provides that the legal term will also be enforced to the judicial reorganization procedure;

An alternative judicial reorganization plan may be submitted: the Legislative Bill provides that the plan voted may not have the agreement of the debtor, provided that (i) accepted by more than 1/3 of the total credits subject to judicial reorganization and (ii) it shall not have new enforcements to the shareholders which were not foreseen in previous agreements and sacrifice more of their capital than it would result from liquidation in bankruptcy. In that case, the debtor's managers will necessarily be removed.

Judicial Reorganization conclusion: the conclusion of the judicial reorganization procedure will occur when the judge homologates the judicial reorganization plan;

Debtor in Possession Financing (DIP): it might be carried out by creditors, partners and companies in the same group as the debtor and must be approved by the creditors. The DIP will be deemed as bankruptcy and will give the lessor absolute priority in the order of receipt in case of bankruptcy (unless provided by related parties).
Procedural and substantial consolidation: the Legislative Bill regulates the hypotheses of procedural consolidation of judicial reorganizations when required by debtors who are part of a group under common corporate control and the hypotheses of substantial consolidation – the latter can happen if the judge recognizes there is commingling of assets or fraud;

Out-of-court reorganization: the Legislative Bill provides the possibility of inclusion of the labor class in out-of-court reorganization and application of the stay period (suspension of 180 days);

Bankruptcy and cross-border judicial reorganization: the Legislative Bill adopts the regime of international cooperation and cross-border insolvency dealt with by the model law of the United Nations Commission on International Trade Law, providing that foreign creditors will receive the same treatment as national creditors. The Legislative Bill also regulates the recognition of foreign proceedings by the Brazilian judge.

The Legislative Bill, which received No. 10,220/2018 at the House of Representatives, was received by the Speaker of the House, Representative Rodrigo Maia (of the Democrats Party – DEM – and from the State of Rio de Janeiro – RJ) on May 18th, 2018. The Legislative Bill will be analyzed together with another Bill (Bill No. 6,229/2015) by a Special Committee, to be created, what should accelerate the analysis in the House.