COVID-19 | Restructuring and Insolvency - New Bill amends the current Restructuring and Bankruptcy Law to add emergency and transitional measures to face the effects of COVID-19 on the economy

Restructuring and Insolvency - updated on Apr 08 at 10:30 am

New Bill amends the current Restructuring and Bankruptcy Law to add emergency and transitional measures to face the effects of COVID-19 on the economy

As a consequence of the economic and financial impacts resulting from the COVID-19 crisis in Brazil, Representative Hugo Leal proposed a Bill (PL No. 1,397/2020) before the House of Representatives (Câmara dos Deputados), in order to modify the Law No. 11,101/2005, the current Brazilian Restructuring and Bankruptcy Law (LRF).

Initially, to face the effects of COVID-19 on the economy, Representative Hugo Leal proposed the inclusion of a transitional excerpt to Bill 6,229/2005 (PL 6,229/2005), which aims to permanently change several provisions of the LRF and is already pending on an urgent basis in the House of Representatives. However, considering the disparity between the matters, the proposed excerpt was converted into an independent bill.

The proposal is an attempt to business continuity of companies and other economic agents that have become insolvent or face financial difficulties due to the COVID-19 pandemic, without the need to immediately submit to a judicial or extrajudicial reorganization procedure, in addition to other provisions directed at companies already undergoing judicial reorganization.

These transitional provisions will become effective when the law comes into force and terminate on December 31, 2020, if the Bill is approved.

In a nutshell, the proposal includes the following:

• Insolvency prevention

1. Any person, whether physical or legal, who carries out economic activity in their own name, regardless of prior registration, is considered an economic agent;

2. A sixty-day period for the suspension of collection actions, involving obligations overdue after March 20, 2020, as of the effective date of the law, in which (i) enforcement of guarantees, (ii) bankruptcy decrees, (iii) eviction for non-payment, (iv) unilateral resolution of bilateral contracts and (v) collection of fines for breach of obligations, are all prohibited;

• Preventive negotiation

1. At the end of the sixty-day period for suspension of actions and measures described above, the debtor who proves a reduction equal to or greater than 30% of their billing, compared to the average for the last quarter, may file a voluntary jurisdiction called “preventive negotiation”;

2. When assessing the request, the judge must analyze whether the party is an economic agent and whether there was a 30% reduction in revenues, criteria for granting the request. If so, the court determines the suspension of the actions and, if the party so requests, appoints a Negotiator, whose work will be negotiated and paid for by the debtor;

3. The Negotiator can be any person, individual or legal entity, with recognized professional capacity.

4. After sixty days, the debtor, or the appointed Negotiator, must present a report on the activities carried out, which will determine the closing of the procedure.

5. During the preventive 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;

6. If there is a subsequent request for judicial or extrajudicial reorganization, the period of sixty days of suspension will be deducted from the stay period provided for in the current law;

7.  If the debtor requests an extension of the preventive negotiation term and the requirements for granting judicial reorganization are present, the request will be immediately converted into judicial reorganization;

• Provisional modifications in the current LRF for judicial and extrajudicial reorganization and liquidation procedure

1. The minimum amount for the declaration of bankruptcy for the purposes of Article 94, I, of LRF, is now considered BRL 100,000.00 (one hundred thousand reais), verified on the date of the respective request;

2. Exemption from the prerequisite of not having requested a judicial reorganization in the past 5 years or judicial ratification of the extrajudicial reorganization plan;

3. Prohibition for the creditors to exercise their rights against the co-obligors, guarantors and third-party obligors;

4. Prohibition to declare liquidation of company for failure to comply with the judicial reorganization plan;

5. 50% (fifty percent) of the amount of the receivable will be granted to the debtor, regardless of the nature of the guarantee, and such guarantee must be gradually recovered from the sixth month, counted from the presentation of the new request, reaching a maximum of 36 (thirty-six) months;

6. The obligations provided for in the judicial or extrajudicial reorganization plans already approved, regardless of the resolution of the creditors meeting, will not be due from the debtor for a period of 120 days, in which the declaration of liquidation is prohibited;

7.  The debtors who already have a judicial or extrajudicial reorganization plan ratified by the court will be allowed to present a new plan and may subject credits subsequent to the judicial or extrajudicial recovery request already approved, with the right to a new stay period, subject to another approval by creditors under the terms of the specific procedure;

8. The original credits will be considered for calculating the amount payable and for computing votes in the creditors meeting to discuss and vote amended plan.

• Provisional modification in the current LRF regarding extrajudicial reorganization

1. All credits existing on the filling date are subject to the extrajudicial reorganization procedure, except for tax credits and those that have the guarantees provided for in Article 49, §3 of LRF and Cash Advance on the Credit Contract;

2. The quorum required by Article 163 of the LRF for approval of an extrajudicial reorganization plan that obliges all creditors covered by it, shall be reduced to one half plus one of all credits of each type covered by the extrajudicial reorganization plan;

3. The stay period is applied to the extrajudicial reorganization, exclusively in relation to the types of credit covered by it;

The Bill was presented on April 1, 2020 and is still subject to discussion by the representatives, in the next sessions of the House of Representatives, which may approve, reject or include new terms, and also, shall request the submission to voting of separated items of the Bill. After the approval at the House of Representatives by simple majority, the matter will be submitted to the Brazilian Senate, where it will undergo a similar procedure.

If the Bill is approved without changes in the Senate, it will proceed to presidential sanction, within 15 (fifteen) days. If any modifications are included, the Bill must return 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 effect immediately.

TozziniFreire’s Restructuring and Judicial Reorganization team is available to provide any further details needed regarding the abovementioned and guide you on this and other impacts arising from COVID-19 in judicial reorganization and bankruptcy procedures.