Bankruptcy Law Reform and COVID-19-related measures for insolvency
In order to deal with the COVID-19 pandemic scenario and to keep the economy stable during the crisis, Brazil has adopted some measures to protect businesses against insolvency and bankruptcy. Whether such measures are pandemic-related or not, they integrate Brazil in a worldwide effort to avoid damages.
In April 2020, the State Courts of Justice of both Sao Paulo and Parana created projects for out-of-court dispute resolution. The first developed a conciliation and mediation project for pre-litigation business disputes and the latter implemented a Judicial Center for Conflict Resolution and Citizenship (CEJUSC) for reorganisation.
The Brazilian National Council of Justice (CNJ) recommended in early August 2020 the creation of CEJUSCs for any business disputes to be settled by ways of negotiation, mediation or conciliation either in out-of-court or court processes. Before that, in March, the CNJ recommended the adoption of measures to mitigate the impact of COVID-19 in reorganisation and bankruptcy processes, e. g. stay period extension in the case the creditor’s meeting needed to be postponed. However, these recommendations are not mandatory.
The provisions of out-of-court mediation and reorganisation are similar to the Chinese instructions for civil cases involving COVID-19 released in May 2020, which has key content on bankruptcy cases.
Irrespective of its transitory character, the Emergency and Transitional Legal Framework for Private Law Relations (RJET), established by Federal Law No. 14,010/2020, did not regard insolvency, but rather some general provisions, e.g., on statute of limitations and contractual issues.
Although there have been no provisional changes to federal insolvency law facing the COVID-19 pandemic so far, on November 25, 2020, the Brazilian Federal Senate approved the Bill of Law (“Bill”) 4,458/2020 which reforms the Brazilian Bankruptcy Law (Federal Law No. 11,105/2005). The Bill had previously been voted by the Chamber of Deputies and now awaits presidential sanction.
The main objectives of the Bill are, inter alia, to support the economic recovery of businesses, to reduce litigation and court proceedings, to reduce the duration of a proceeding and to stimulate out-of-court processes, such as extrajudicial reorganisation and pre-litigation dispute resolution.
The following topics are the major changes in Brazilian bankruptcy law in connection with the current legislation of other jurisdictions:
a) Conciliation and mediation on extrajudicial and judicial reorganisation
According to novel articles to be inserted in bankruptcy law, conciliation and mediation shall be encouraged in any court, including superior courts, both before and after the request for judicial reorganisation. These methods are specially recommended when, among others, (i) the dispute involves partners and shareholders of a business in financial distress or in a current judicial reorganisation proceeding; and (ii) the business in financial distress and its creditors are able to renegotiate the debts, before the filling for judicial reorganisation.
Regarding COVID-19 and public calamity, the Bill encourages conciliation and mediation during the judicial reorganisation proceeding in the cases there are “extraconcursais” credits.
b) Creditors can provide the judicial reorganisation plan
In the case the judicial reorganisation plan submitted to creditors approval is rejected, the judicial administrator puts the proposition to the creditors’ meeting vote. If the creditors do not agree to provide a reorganisation plan or the creditors’ plan is rejected, the judicial reorganisation will be converted into bankruptcy.
c) The adoption of transnational insolvency
The Bill integrates to Brazilian legal framework the possibility of transnational insolvency based on UNCITRAL Model Law on Cross-Border Insolvency, seeking for international cooperation, uniformity of application and respect to good faith.
Among several and detailed provisions, there are sections to regulate the recognition of foreign processes, the cooperation with foreign authorities and representatives and the concurrent processes. The latter is related to the extrajudicial and judicial reorganisation or bankruptcy proceedings to commence after the recognition of a foreign main process.
The Brazilian Prosecutors Office will also intervene in such processes.
e) The possibility to consolidate group estates
The Bill innovates by authorising debtors under common corporate control to request for judicial reorganisation by means of procedural consolidation. Exceptionally, the judge can also authorise substantial consolidation if there is interconnection or confusion of assets or liabilities among the debtors plus at least two other situations. In this case, assets and liabilities are considered to be of a single debtor.
f) The judicial reorganisation of the rural producers
This topic puts an end in a great discussion among state courts in Brazil. The rural producers can request for judicial reorganisation even if their commercial register does not meet the required period of registry. Such period may be proved by using the documents of the activities performed, including, e.g., Digital Cash Book and balance sheet.
g) General novelties: regulation of dip financing (debtor in possession financing); broader cases of bankruptcy declaration; increase number of outstanding tax debt instalments; stay period extension.
Once sanctioned by Brazilian President, the Bill will enter into force in thirty days after publication on the Official Gazette.
“CEJUSC Recuperação Empresarial” é implantado na comarca de Francisco Beltrão. Tribunal de Justiça do Paraná. Disponível em: https://www.tjpr.jus.br/noticias/-/asset_publisher/9jZB/content/id/35253519
COVID-19 and the Current State of Insolvency in China. The University of Melbourne. Disponível em: https://law.unimelb.edu.au/centres/alc/engagement/asian-legal-conversations-covid-19/alc-original-articles/covid-19-and-the-current-state-of-insolvency-in-china
Guiding Opinions of the Supreme People’s Court on Several Issues Concerning the Proper Trial of Civil Cases Involving the New Coronary Pneumonia Epidemic Situation (2). The Supreme People’s Court of the People’s Republic of China. Disponível em: http://www.court.gov.cn/fabu-xiangqing-230181.html
Nova Lei de Falências é aprovada pelo Congresso Nacional. Ministério da Economia. Disponível em: https://www.gov.br/economia/pt-br/assuntos/noticias/2020/novembro/nova-lei-de-falencias-e-aprovada-pelo-congresso-nacional
Provimento CG nº 11/2020. Tribunal de Justiça de São Paulo. Disponível em: https://www.tjsp.jus.br/Download/Portal/Coronavirus/Comunicados/Provimento_CG_N11-2020.pdf
Recomendação Nº 63 de 31/03/2020. Conselho Nacional de Justiça. Disponível em: https://atos.cnj.jus.br/atos/detalhar/3261
Recomendação nº 71 de 05/08/2020. Conselho Nacional de Justiça. Disponível em: https://atos.cnj.jus.br/atos/detalhar/3434
Tabela de principais mudanças do PL nº 4.458/2020. Ministério da Economia. Disponível em: https://www.gov.br/economia/pt-br/assuntos/noticias/2020/novembro/arquivos/TabelaLeide_Falencias.docx.pdf
Retrieved from Advisory Excellence.
Originally published on December 18, 2020.