The amended Brazilian Judicial Reorganization and Bankruptcy Law entered into force, and directly impacts the analysis of credit and the rights of Brazilian and foreign creditors, investors and lenders.
We highlight below 14 points of attention out of the new Federal Law 14.112:
1. Temporary Suspension of Executions Prior to the Request for Judicial Reorganization: the new law allowed companies in distress, which fulfill the requirements to file for judicial reorganization, to obtain urgent protection so that executions against them are suspended for a period of up to 60 days, in order to attempt composition with creditors, through mediation or conciliation in specialized chambers regulated by the courts;
2. Term of Standstill: the law allows the term of initial standstill period of 180 days to be extendable for an equal period, once only, provided that the debtor has not given cause to miss the original term;
3. Creditors’ Judicial Recovery Plan: If, until the end of the standstill period, no decision on the judicial recovery plan proposed by the debtor is reached, creditors will be entitled to submit an alternative judicial recovery plan;
4. Creditors’ Resolutions: the new law provides that creditors’ resolutions at a creditors’ general meeting may be replaced by (i) the binding term signed by as many creditors as satisfy the specific approval quorum, (ii) electronic voting, or (iii) another safe mechanism accepted by the judge;
5. Credit Assignment: a form of transaction widely carried out in JRs, the assignment or the promise of assigning a credit must be immediately communicated to the judicial reorganization court;
6. Farmers: it was allowed that a farmer, whether an individual or a legal entity, can apply for judicial reorganization protection, provided that, at the time of the request, he/she/it regularly carries out the activities for more than 2 years;
7. Credit for the Acquisition of Rural Properties: the new law excludes from the effects of judicial reorganization credit related to the debt constituted in the last 3 years prior to the request for judicial reorganization, which was entered into for the purpose of acquiring rural properties;
8. Liability for Conversion and New Financial Support: there will be no succession or liability for debts of any nature to a third creditor or investor due, respectively, to the mere conversion of debt into equity or granting of new financing to the debtor;
9. Labor Debts: the new law creates the possibility of paying labor credits in up to 2 years, if certain requirements are met;
10. Fraud to Creditors: it is provided that the distribution of profits or dividends to shareholders until the recovery plan is approved constitutes fraud to creditors, subject to penalty;
11. New Funding During Judicial Reorganization: during JR, the judge may, after hearing the Creditors Committee, authorize the contract of financing agreements with the debtor (including DIP Financing), guaranteed by lien over assets and rights of the debtor or third parties to finance activities and expenses for restructuring or preserving the value of assets;
12. Request for Unified JR for Companies of the Same Economic Group: debtors who are part of a group under common corporate control, and provided that they meet certain legal requirements, may request judicial reorganization under procedural consolidation;
13. Labor Credits on Extrajudicial Recovery: the new law established the possibility of subjecting labor credits on extrajudicial recovery, through collective bargaining with the union of the respective professional category;
14. Transnational Insolvency: the new law creates a section on transnational insolvency aiming to (i) regulate the cooperation between judges and authorities of Brazil and foreign jurisdictions, (ii) improvement of legal security for investment and efficient administration of transnational insolvencies, (iii) protection and maximization of the debtor’s assets value, and (iv) promote the reorganization of companies in financial distress.
Some relevant vetoes of the Presidency weakened the new law, such as the one that established that the sale of the Debtor’s units or assets in the market would be “free from any burden and there will be no successor to the debtor in the debtor’s obligations of any nature, including those of an environmental, regulatory, administrative nature, criminal, anti-corruption, tax and labor“.
Overall, most of the amendments to the Judicial Reorganization and Bankruptcy Law improved the status quo of rights of Brazilian and foreign creditors, investors and lenders, although the expectation of the market was that such improvements should have gone even deeper.