By Antonio Mazzucco, Vitor Antony Ferrari and Ivan Kubala

1 – In a plenary session, the Brazilian Federal Senate approved Bill No. 4,458, which significantly modifies Brazilian bankruptcy legislation. This bill in the Senate derives from Bill No. 6,229 of 2005, which was approved in the Chamber of Deputies on August 26, 2020, in the form of a Substitute to Bill No. 10,220 of 2018, presented by the Executive Branch that year and aimed to insert, in Law No. 11,101 of 2005, several legal rules resulting from fifteen years of jurisprudential experience on the subject and which were the subject of study by a Working Group with the participation of technicians from the Ministry of Economy, the Judiciary and the Legislative Branches, as well as jurists, judges, economists and lawyers specialized in the subject.

2 – PL 4,458/2020 is composed of 7 articles that specifically bring the following changes, additions and revocations, in addition to determining the immediate application (after the vacatio legis) from legislation to ongoing processes:

• – art. 1 amends forty-six articles of Law No. 11,101 of 2005, namely: arts. 6, 10, 14, 16, 22, 24, 35, 36, 39, 48, 49, 50, 51, 52, 54, 56, 58, 59, 60, 61, 63, 66, 67, 69, 73, 75, 83, 84, 86, 99, 104, 131, 141, 142, 143, 145, 156, 158, 159, 161, 163, 164, 168, 189, 191 and 196;
• – art. 2 adds sixty articles to Law No. 11,101 of 2005, namely: arts. 6º-A, 6º-B, 6º-C, 7º-A, 20-A, 20-B, 20-C, 20-D, 45-A, 48-A, 50-A, 51-A, 56-A, 58-A, 60-A, 66-A, 69-A, 69-B, 69-C, 69-D, 69 -E, 69-F, 69-G, 69-H, 69-I, 69-J, 69-K, 69-L, 70-A, 82-A, 114-A, 144-A, 159-A, 167-A, 167-B, 167-C, 167-D, 167-E, 167-F, 167-G, 167-H, 167-I, 167-J, 167-K, 167-L, 167-M, 167-N, 167-O, 167-P, 167-Q, 167-R, 167-S, 167-T, 167-U, 167-V, 167-W, -X, 167-Y, 189-A and 193-A;
• – art. 3 amends three articles of Law No. 10,522 of 2002, namely: arts. 10-A, 10-B and 10-C;
• – art. 4 amends article 11 of Law no. 8,929 of 1994;
• – Article 5 determines the immediate application of the Law to pending processes;
• – art. 6 repeals two articles of Law No. 11,101 of 2005: the sole paragraph of article 86 and article 157; and
• – art. 7 ends vacatio legis 30 (thirty) days after official publication.

By amending and adding a large number of provisions to Law No. 11,101 of 2005 and Law No. 10,522 of 2002, the changes and inclusions proposed by the Project will be covered thematically, according to the understanding expressed by the Project Rapporteur, Senator Rodrigo Pacheco.

3 – Relevant changes:

I. Express authorization of the rural producer to request recovery, judicial or extrajudicial, aiming to grant the necessary assistance in the economic recovery of their business, only having to have regularity in their accounting information

II. The following is maintained: stay period with the rule of the current Law that starts it with the granting of the processing of the judicial recovery, but authorizes the judge to anticipate the effects based on the Code of Civil Procedure (CPC). Thus, the Court may anticipate the effects immediately after the presentation of the petition and regardless of the granting of the processing, under penalty of holding the administrators liable if the legal requirements for filing the RJ are not met. It also allows the 180 (one hundred and eighty) day term provided for in Law No. 11,101, of 2005, to be extended for 2 (two) times, the first at the discretion of the judge and the second at the discretion of the creditors and only when there is a presentation of an alternative plan by them.

III. Allows the recovery judge to intervene in favor of the recovering party to maintain the asset, even after the period has been exceeded. stay exclusively on essential goods and capital goods], through judicial cooperation, in the seizure of goods in the context of tax enforcement or reinstatement of possession in leasing or, even, in a search and seizure action on fiduciary property, whenever the assets under seizure are essential to the business of the debtor entrepreneur. And it determines the observance of arbitration agreements, even if the company is in recovery, as well as suspends labor executions against a subsidiary responsible party or a joint and several natural or legal person, during the period of the Stay.[1]

IV. Express prohibition of the distribution of profits and dividends during the period of Judicial Recovery.

V. Includes tax rule that removes the limit on the use of tax losses to determine the basis for calculating income tax and social security contributions on net profit in the event of capital gains arising from the sale of assets in recovery or bankruptcy, unless the purchaser is a company in the same economic group.

VI. Creates a simplified procedure for qualifying and challenging tax credits in bankruptcy, with a view to reducing the time taken to conclude bankruptcy proceedings in Brazil, consisting, in general terms, of reserving credits after their filing until effective recognition, with the exception of the fact that the creditor may only vote in the AGC after the decision on the merits has been handed down by the competent Court.

VII. It allows the closure of the judicial recovery before the approval of the general list of creditors (QGC) and prohibits the inclusion of late creditors, that is, those who missed the original 15-day deadline to qualify their credits, through a statute of limitations rule that prevents the qualification of credits after three years of the bankruptcy sentence.

VIII. Maximum period of 180 days for the sale of the assets of the bankrupt estate and subsequent closure of the bankruptcy. Aims to speed up the bankruptcy procedure.

IX. It allows replacing the in-person AGC with a written term of adhesion or an electronic assembly, held remotely.

X. Includes credits, including fines, interest and charges, from federal public agencies and foundations, among those subject to the legal regime of the transaction, as a consequence of Lava Jato.

XI. It expands the means of judicial recovery, to allow the capitalization of credits, the change of administrators and the complete sale of the company without assumption of debts by the buyer, if the creditors are served with the same conditions as they would have in the event of bankruptcy.

XII. It expands (to the detriment of debtors) the requirements for substantiating the initial request for judicial recovery, with a clear requirement for accounting evidence regarding the economic-financial crisis and the financial means of recovery, inserting 4 paragraphs in art. 48 of the Law.

XIII. Maximized surveillance over the debtor and its administrators to avoid the emptying of assets during recovery, also providing for the removal of the debtor who fails to comply with accounting commitments.

XIV. extends the term to 2 (two) years for payment of labor credits, counting from the approval of the debtor's judicial recovery plan, provided that cumulatively a) guarantees deemed sufficient by the Court are presented, b) approved by creditors in AGC and that c) guarantee the payment of the full amount of labor credits in the manner approved by AGC.

XV. Authorizes (to the detriment of debtors) creditors to present and approve their own plan, even against the debtor's will, with a deadline for the conclusion of the deliberation in a suspended Assembly, in accordance with the rules and specific quorum and, in this case, the creditors take over the management of the debtor company and, for reasons of balance, the debtor's shareholders or quota holders are exonerated from maintaining the guarantees previously granted to the debtor company's creditors.

XVI. Adaptation of the 4 classes of creditors in correction to Law 11.101/2005.

XVII. It broadens the protection of the UPI acquirer in a more comprehensive manner, considering that it will not assume any debt, even if anti-corruption rules so require.

XVIII. The maintenance of the company under judicial recovery after the approval of the Plan will depend solely and exclusively on the understanding of the competent judge, who may at any time terminate the judicial recovery, however limiting it to a period not exceeding 2 years already in existence.

XIX. It expands (to the detriment of the procedure) the requirements for the sale of assets not provided for in the Recovery Plan, adding that creditors may challenge the authorization given by the Judge and decide the matter in a creditors' meeting [i.e., does the judge authorize and the creditors have the power, if so decided by the AGC, to prevent the sale?].

XX. Regulates the dip finance, which may help a debtor in deep crisis, but whose company is viable, to obtain last-minute credits, preventing him from declaring bankruptcy. However, it does not authorize the sharing of guarantees, rendering the measure ineffective since it prevents the judge from creating subordinate guarantees on assets already encumbered by fiduciary alienation or fiduciary assignment.

XXI. Regulates Procedural and Substantial Consolidation, which in the case of procedural consolidation is summarized in the union of RJ proceedings or bankruptcies of companies of the same economic group, maintaining the individualized vote for each debtor. Substantial consolidation, on the other hand, is summarized in the consolidation of liabilities and assets of debtors that are part of the same economic group, after at least 2 of the following requirements are verified: a) existence of cross-guarantees; b) relationship of control or dependence; c) total or partial identity of the corporate structure; and d) joint activity in the market between the applicants.

XXII. Expands the list to authorize the Judge to declare the debtor bankrupt due to failure to pay tax credits in installments. The debtor will also be declared bankrupt if, upon sale of his company in the context of judicial recovery, the so-called “substantial liquidation” occurs, a case of bankruptcy disguised as judicial recovery with the intention of defrauding creditors and which occurs when no economic activity capable of generating revenue is preserved in the company under recovery, leaving such analysis at the discretion of the court. Finally, it authorizes the Tax Authorities to request the conversion of the judicial recovery process into a bankruptcy process, if the debtor gives unjustified cause for the termination of an installment agreement or transaction signed or not during the course of the Judicial Recovery.

XXIII. Changes the order of payment of creditors, with preference given to credits derived from dip finance offered in judicial recovery, refunds, bankrupt estate charges, labor credits limited to 150 minimum wages, credits with real guarantees, tax credits, unsecured credits, subordinated credits and interest credits against the bankrupt, extinguishing privileged credits. The procedure was apparently already applied in practice, without bringing any novelties or benefits to those involved in the recovery procedure.

XXIV. Creation and dissemination of the national registry of bankrupts, with the maintenance of data and information on companies, partners and administrators in a public and free database of all bankrupt debtors or those undergoing judicial recovery.

XXV. Creates cross-border insolvency, along the lines of the Uncitral Model Law and calls it transnational insolvency, for mutual collaboration in national and international processes.

XXVI. Changes in tax rules related to the treatment prescribed for entrepreneurs or business corporations under judicial recovery.

XXVII. Amends the extrajudicial recovery to reduce from 60% (sixty percent) to 50% (fifty percent) the necessary consent of creditors in order to grant comprehensive effects to all other creditors, even those who do not consent. Allows the debtor to file a request for extrajudicial recovery with the support of only 1/3 (one third) of the creditors, while awaiting the consent of more creditors, in order to reach 50% (fifty percent) of the total number of creditors. We emphasize that thetay period has already been applied to creditors subject to the effects of Extrajudicial Recovery, while the same situation remains for those not subject, with no suspension or limitation of rights of action.

XXVIII. It establishes in the procedure the possibility of conciliation and mediation procedures in the recovery and bankruptcy process, with the creation of a mechanism for suspending executions against the debtor, for a period of 60 (sixty) days, in order to encourage its settlement with creditors, this period to be deducted from the stay period, if the composition is frustrated.

XXIX. Removes (to the detriment of the debtor) from the list of credits subject to judicial recovery those credits and/or guarantees linked to Rural Product Certificates for physical settlement.

These are the relevant points highlighted by the project's Rapporteur, and other points will be brought up in a complete and complementary study to PL 4,458/20, which will be submitted for presidential sanction.

[1] “Art. 6º The declaration of bankruptcy or the approval of the processing of judicial recovery

implies:

I – suspension of the statute of limitations;

II – suspension of executions filed against the debtor, including those of the joint and several partner’s private creditors, relating to credits or obligations subject to judicial recovery or bankruptcy;

III – prohibition of any form of retention, seizure, attachment, sequestration, search and seizure and judicial or extrajudicial constraint on the debtor's assets, arising from judicial or extrajudicial lawsuits whose credits or obligations are subject to judicial recovery or bankruptcy.