COVID-19 | Restructuring and Insolvency

Restructuring and Insolvency - updated on Mar 27 at 12:20 pm

Transitional provisions included in the bill amending the Restructuring and Bankruptcy Law due to the impacts of COVID-19

In view of the economic and financial impacts resulting from the COVID-19 crisis in the country, Hugo Leal, member of Brazil's House of Representatives, proposed the inclusion of a new excerpt to Bill No. 6,229/2005 (PL No. 6,229/2005), which is already under analysis on urgent basis by the House of Representatives (Câmara dos Deputados). The proposal aims at modifying Law No. 11,101/2005, the Business Restructuring and Bankruptcy Law (LRF).

The proposal, presented in the form of transitional rules (articles 188-A to 188-L of PL No. 6,299/2005), is an attempt to assure the business continuity of companies that become insolvent or that face financial difficulties as a result of the COVID-19 pandemic, without the need to immediately submit such companies to a judicial or extrajudicial restructuring proceeding.

The proposed regime would be transitional, valid for only 360 (three hundred and sixty) days after the publication of the text.

In a nutshell, the proposal includes the following:

1. The creation of a voluntary jurisdiction proceeding called collective negotiation in the following terms:

1. The collective negotiation request may be presented by any individual or legal entity who exercises or has the object of exercising proprietary economic activity, regardless of registration or the entrepreneurial nature of such activity;
2. Will be entitled to the collective negotiation the debtor who demonstrates a reduction equal to or greater than 30% of their revenues, compared to the average of the last corresponding quarter of activity in the previous year, as confirmed by an accounting professional;
3. Bilateral contracts will not be terminated due to the collective negotiation request and any contractual provision to the contrary will be considered void;
4. Once the request is filed, the judge will order, within a maximum period of 5 (five) days, the suspension of the enforcement of the obligations of any nature against the applicant and their co-obligors for a non-extendable period of 90 (ninety) days, as of the publication of the decision in the Electronic Official Gazette (Diário de Justiça Eletrônico – DJe). During this period, the enforcement of collateral or personal guarantees, as well as the eviction due to default, will be prohibited;
5. In the same decision, the judge will appoint a negotiator, suggested by the debtor, to conduct the debtor’s negotiation with the creditor;
6. The negotiator's work will be paid for directly by the debtor;
7. The negotiations will be held during the maximum and non-extendable period of 90 (ninety) days;
8. The participation of creditors in the negotiation sessions will be optional. It is for the debtor to inform the creditors, through any suitable and effective means, on the beginning of the negotiations;
9. The agreements resulting from the negotiations are legally enforceable and will only bind creditors who agree with their terms, not affecting the rights of other creditors;
10. The competent judge to analyze the collective negotiation request will be the one responsible for the region where the debtor’s main establishment, or the branch, in case of a company with headquarters’ established abroad, is located;
11. During the collective negotiation period, the debtor may enter, regardless of judicial authorization, into financing agreements with any financing agent, including with its creditors, shareholders or affiliates, to support restructuring and assets preservation costs;
12. The credit arising from the financing mentioned in item (xi) will not be subject to the effects of extrajudicial or judicial restructuring. In the event of liquidation, the credit will not be part of the estate, even in cases where the debtor is a micro or small business and the financing was obtained from partners or companies belonging to the same economic group or from a person who has a family relationship up to the fourth degree with the debtor.

2. Measures relating to new requests for judicial reorganization:

1. Exemption from the prerequisite of not having requested a judicial reorganization in the past 5 years;
2. Suspension, during the 360 days period, of the following provisions of PL No. 6,229/2005:

1. Prohibition for the creditors to exercise their rights against the co-obligors, guarantors and third-party obligors;
2. Submission of all credits to the proceeding, even those with fiduciary transfer, and export foreign exchange contracts;
3. Prohibition to declare liquidation of company for failure to comply with the judicial reorganization plan;
4. Possibility of judicial reorganization for companies that operate of any nature or aeronautical infrastructure;
5. Submission to the proceeding of credits resulting from the leasing of aircrafts;
6. Suspension of property rights over such assets in case of liquidation.

3. Transitional Measures relating to ongoing judicial reorganization procedures:

1. Suspension of the obligation to comply with the judicial reorganization plan for 90 days, counted as from the publication of the law;
2. Possibility of presenting a new judicial reorganization plan within 90 days, counted as from the publication of the law. The proposal allows for the inclusion of credits generated after the filing of the petition for judicial reorganization, which will be subject to creditor’s approval;
3. The presentation of a new judicial reorganization plan allows the right to request a stay period of 180 days;
4. Fifty percent of the amount of the receivables will be granted to the debtor, regardless of the nature of the guarantee. Such guarantee must be gradually recovered from the sixth month on, counted from the presentation of the new application, up to a maximum of thirty-six months.

4. Transitional Measures relating to ongoing and new judicial reorganization:

1. A debtor with an extrajudicial reorganization plan already approved in court may present, if applicable, a new judicial reorganization plan, within 90 days from the publication of the Law, and may subject credits generated after the filing of the request for extrajudicial reorganization, in which case they must be approved again, under the terms of the law;
2. The presentation of the new plan, grants the right to a 180-day suspension period;
3. The quorum for approval of the extrajudicial reorganization plan in now equivalent to half plus one of the credits that are subject to extrajudicial reorganization;
4. The amended extrajudicial reorganization plans will be considered approved if they are not challenged by more than one half of the creditors subject to the extrajudicial reorganization.

5. Measures relating to liquidation proceedings:

1. The minimum limit for liquidation decree due to untimely payment is now raised from 40 minimum wages to R$ 100,000.00.

The amendments to the PL No. 6,229/2005 will now be submitted to discussion of the members of the House of Representatives in the coming sessions, as the bill is being conducted on an urgency basis, when said Representatives will approve or reject its terms and, also, shall request the submission to voting of separated items of the bill. After approval at the House of Representatives by simple majority, the matter will be submitted to the Brazilian Senate, also on urgent basis.

If approved without changes in Senate, the PL No. 6,229/2005 will follow for presidential sanction, within fifteen (15) days. In case there are modifications, the bill returns to the House of Representatives, which will vote on the changes presented by the Senate, and only then it is submitted to presidential sanction. After presidential sanction of the bill, the new law will come into force immediately.