Brazilian reorganization law finds a way during the pandemic
In Brazil, a new law came into effect on January 23, 2021 that improved the law on restructuring and bankruptcy of courts. The amendments are known as Federal Law No. 14.112 / 2020 and amend Federal Law No. 11.101 / 2005. Federal Law No. 11.101 / 2005 introduced the Recuperacão Judicial (RJ) procedure, which promotes the restructuring of insolvent companies under judicial supervision shall be. The introduction of RJ in 2005 was the last major bankruptcy in Brazil up to this year.
Chapter 11 is a source of inspiration for RJ. However, Brazilian courts and interested parties have still faced uncertainties and inefficiencies in implementing RJ for the past 16 years.
From the creditors ‘point of view, RJ did not give them the ability to wipe out equity or propose a plan even if the debtors’ proposal was not feasible. The only real creditors seemed to be trying to force liquidation. In addition, inadequate guidelines in RJ for content consolidation led to unpredictability in credit decisions, the ability to vote on plans and the protection of company-specific claims.
RJ presented challenges to borrowers who lacked funding options to fund their reorganization efforts or the ability to freely and clearly sell assets to generate cash. The debtors were also unable to file for bankruptcy in any other jurisdiction and have it recognized in Brazil.
The COVID-19 pandemic has revived dormant legislation to improve the RJ as the Brazilian government considered measures to alleviate the disease’s serious public health and economic impact. The amendments to Federal Law No. 14.112 / 2020 were legally signed on Christmas Eve 2020 (with some vetoes from the President). The new law seeks to clear up previous ambiguities and has the potential to improve outcomes for both creditors and debtors. The changes to the RJ statute include:
(1) Authorization of creditors to submit a restructuring plan,
(2) Regulation of procedural and content-related consolidation,
(3) enable debtors to obtain debtor finance in their possession;
(4) permission to sell assets freely and clearly, and
(5) Recognition of foreign bankruptcy proceedings involving Brazilian debtors.
Under the RJ Act 2005, only debtors had the opportunity to propose a restructuring plan and they were not bound by a fixed deadline for submitting such a plan. Debtors also had the option to indefinitely suspend the formal creditors’ meeting, which votes on the approval of plans. The RJ Act of 2021 requires debtors to file a plan within 180 days, subject to an extension of just 180 days. Debtors cannot suspend the creditors’ meeting for more than 90 days.
The new law allows creditors to propose plans if certain conditions are met. If the debtors plan is rejected at the creditors’ meeting and a majority of the creditors present support the concept of submitting a creditors plan, the creditors have 30 days to submit one. If such a plan has sufficient creditors ‘support, it will be put to a vote at a new creditors’ meeting. The law also gives creditors the option to attend meetings remotely by electronic means. However, the right to file a plan does not make creditors all-powerful, as shareholders cannot be forced to capitalize or stay on the company if their stocks are diluted and individual guarantors have to be released.
The consolidation of debtors and their assets and liabilities is now regulated by the RJ Statute. For administrative reasons, debtors can receive procedural consolidation so that members of the same group of companies can proceed in a joint case. A court can also prescribe a consolidation of the content of assets and liabilities, but the court must determine that the combination and commingling did not take place on an ad hoc basis, but in accordance with legal standards.
The 2021 updates may allow additional liquidity for business operations in the RJ process. Debtors now have the right to apply for financing owned by the debtor in ways that may be more attractive to lenders. Such loans are only subordinate to certain administrative costs, work requests that arose only three months before liquidation, and holders of security interests. However, mortgages are not available without the consent of the older parties. Anyone, including shareholders and early creditors, can be approved by the court to grant follow-up loans. If loan disbursements have been made, the lender retains priority even if the appeal approval is revoked.
The new law allows the free and clear sale of assets. One way that debtors can accomplish this is to sell shares in new companies, known as “isolated business units”, in which assets of any kind can be deposited, including the going concern business. In such sales, creditors who would otherwise not be affected by the RJ procedure must be entitled to payment on terms no worse than in the event of liquidation. However, a presidential veto resulted in an important limitation on these sales that affects the debtor’s ability to generate revenue quickly: unlike sales under Section 363 of the Bankruptcy Act, RJ sales may only be made if they are in conjunction with a confirmed plan that could add months to the process.
Following the 2021 revisions to the RJ Act, bankruptcy proceedings in other countries can now be recognized by Brazilian courts, allowing assets in Brazil to be protected from creditors without the company having to go through RJ. The changes contain the provisions for cross-border cooperation of the UNCITRAL model law. Debtors can now do the equivalent of a Chapter 15 in Brazil while pursuing Chapter 11 in the United States (if a venue is available) for their general reorganization.
The timing of these changes is propitious given the harsh impact of the pandemic on Brazil. Over a quarter of a million people have died in Brazil and we understand the Brazilian people. Enlightened and science-based government action can improve health and economic outcomes. We hope that the revised RJ will allow Brazilian companies and their investors to find a way out in these difficult circumstances.