The Bill 1,397/2020 and Brazilian preventive measures to insolvency

Cescon Barrieu Informa — May 22, 2020

The Brazilian House of Representatives, on May 21st, 2020, has approved the Bill 1,397/2020 which establishes transitory provisions for foreclosures, credit and collateral enforcement proceedings, among other measures related to in-court and out-of-court reorganizations, bringing an “insolvency prevention system”.

The provisions are applicable to any “economic agent”, such as: private legal entities, individual businessman, the rural producer and the self-employed professional under regular activity.

The main provisions set forth in the Bill are:
i) Stay of any credit enforcement proceeding which involves discussions related to obligations due after March 20th, 2020 and lawsuits filed for revising contractual provisions;
ii) Stay of penalties under contractual provisions and fines applicable for non-payment of tax obligations;
iii) Prohibition of in-court or out-of-court enforcement proceedings of collateral and credits secured by in rem guarantees, fiduciary liens (including escrow accounts, etc..), personal or corporate guarantees; as well as any bankruptcy liquidation decree; and the unilateral termination of contracts, including the acceleration of credits, except for the acceleration of credits arising from repurchase agreements and derivatives.

The new transitory rules will firstly last as a legal suspension of obligations for thirty (30) days from the enactment of the Bill, and further ninety (90) days in case a “preventive negotiation” petition is filed.

Loan agreements may be executed during the transitory period regardless court authorization and the resulting credit will be excluded in case of a supervening judicial reorganization, out-of-court reorganization or bankruptcy of the company.

The legal requirement for economic agents to file for preventive negotiation, is the evidence of an income reduction of at least thirty percent (30%), compared to the average numbers of the last equal quarter, certified by a professional accountant.

Besides the mentioned aspects, the Bill 1,397 also provides transitory changes in the current Brazilian Bankruptcy law (Law 11,101/2005). The main transitory rules are:

i) The reduction of the minimum quorum for approval of an out-of-court reorganization plan, from more than sixty percent (60%) to fifty percent (50%) plus one of each “species” of credit subject to the plan. The out-of-court reorganization plan may include the same nature of credits as of the judicial reorganization proceeding, but labor creditors and same applicable exceptions are exempted. Debtor may also file for court confirmation of an out-of-court reorganization plan with over one-third (1/3) of all adherent creditors but obtaining the remaining consent up to the required quorum during the proceeding in 90 (ninety days) from the filing.
ii) All obligations provided by judicial or out-of-court reorganization plans already confirmed by the courts in Brazil will not be due within one hundred and twenty (120) days from enactment of the law, regardless of new deliberations in general creditors meeting;
iii) Debtors may submit a new reorganization plan proposal to creditors, regardless the prior confirmation of the original plan by the court and despite general legal provisions that prevent a new request. New stay of enforcement proceedings is provided up to hundred-twenty (120) days. The post-petition credits will be subject to the new plan, except for the loans granted with authorization of the judicial reorganization court (DIP Financings);
iv) The causes of bankruptcy decree by default on provisions set forth in the judicial reorganization plan remain suspended;
v) The special judicial reorganization plan for small companies shall provide sixty (60) sixty months for repayment of its credits; and,
vi) During the period of effectiveness of the law, it is suspended the administrative acts of cassation, revocation, refusal of inscription, registration, of a taxpayer number, regardless of any species or type, before any government entity under discussion in the judicial reorganization proceeding.

The transitory provisions will come into effects at the date of the publishing of the enactment on official gazette newspaper and will be effective up to December 31st, 2020.

The Bill still shall be submitted to the Senate for deliberation and voting and then to subsequent Presidential approval and may bring significant effects to the credit treatment scenario and insolvency proceedings in Brazil.

Alexandre Barreto | Gabriel Seijo | Fábio Rosas | Marcos Prado | Luciano Souza | José Luis Rosa | Esther Slud | Cinthia Lamare