On November 25, the Federal Senate approved a bill to reform the Bankruptcy and Reorganization Law, which is awaiting approval by President Jair Bolsonaro. The text brings many advances over the current wording, which dates back to 2005. The reforms were so far-reaching that the community has come to refer to it as the New Reorganization and Bankruptcy Law, even though it is not actually a new law or a new system, given the large number of changes to the existing law.
A first point of innovation brought about by the reform is that of adjusting the procedure to make it more agile and less subject to suspensions and loopings. A law is never an isolated fact; it is part of a legal system and interacts with it. For this reason, the form of the procedure in the original wording of the Law ended up resulting in a lengthy process that was detrimental both to companies overcoming the crisis and to the recovery of assets by the collectivity of creditors.
Agility in the procedure was sought not only by changing the deadlines within the rite, but also by expanding the possibilities for negotiation; or with greater agility for the return of the bankrupt entrepreneur to the market, emphasizing entrepreneurship as an economic value. In this way, the economy will be favored, since the process will potentially be faster and will aim to keep economic activity moving in what is viable and rational.
Originally, a business recovery process was designed to last approximately three to six months, until the Recovery Plan was approved. However, in practice, due to the Brazilian Judicial and Procedural System, there are many cases of recoveries that exceed this period. And in the vast majority of these cases, there was also a long suspension of actions and other initiatives by creditors to try to recover their credit.
The new law, in an attempt to correct these distortions with regard to the suspension of the term, states that under no circumstances will the non-extendable term of 180 (one hundred and eighty) days from the granting of the reorganization be exceeded, exceptionally extendable through no fault of the reorganized company. However, through the General Power of Caution, the Judiciary is not immediately prevented from extending the suspension beyond the period set out in the new rule.
A positive aspect of the new law is that Brazil finally seems to be breaking out of its legal isolation, increasing the guarantees for companies with transnational businesses, which are now governed in accordance with the UNCITRAL Model Law. Back in 2005, when the original wording was approved, the omission of the issue of cross-border insolvency was widely criticized. A correction has now been made, making the country more attractive to companies doing business beyond Brazil’s borders.
One of the most eagerly awaited and celebrated innovations, which had also been neglected in the original wording, concerns DIP Financing, a special form of financing for companies undergoing judicial reorganization. Its purpose is to encourage the granting of credit so that the company under reorganization can maintain its operations. With the changes, the payment of this financing becomes a priority if the reorganized company becomes insolvent and goes bankrupt, making it possible to make the offer of credit more attractive in a distressed situation.
Another positive aspect is the recognition and encouragement of Mediation and Arbitration mechanisms. From now on, mediation between the reorganized company and its creditors is encouraged at any stage of the procedure, which reduces the pressure on the judge’s decision, seeking a form of composition that is more consistent with the logic of the market, since creditor and debtor will be able to seek more economically rational forms of negotiation for both parties than would eventually be the case with a court ruling with a mere application of the legal rule devoid of business feeling .
The treatment of the recuperating companies’ tax debts has also been reformed. With regard to the “discount” level, the maximum percentage for large companies was increased. The deadline for special tax installments for companies in reorganization was also extended from a maximum of seven years to a maximum of ten years. Although it has been extended in favor of the reorganized company, it is not possible to say whether this extension will be sufficient, since the installment plan does not exclude the payment of the reorganized company’s current taxes and needs to be in line with the cash flow projected in the reorganization plan.
The consensus among legal experts on the tax treatment of the company undergoing reorganization – if there is a firm consensus – is that the deadlines and discounts provided for will make sense when tax collection also undergoes reform, making tax collection agile and contemporary, doing away with the nefarious practice of suspending tax payments at the slightest sign of a company’s crisis. Thus, with the approval of the reform of the Bankruptcy and Reorganization Law, it is imperative that tax reform be carried out, making the legal system more cohesive and less subject to endogenous failures.
One aspect much celebrated by the legal community is the discipline of the so-called fresh start – which could be translated as a new beginning, which, in a way, dissociates the person of the entrepreneur from the insolvent company, privileging entrepreneurship, understanding that that company, understood as an organized economic activity on the factors of production, has become unviable and has gone bankrupt.
In short, the new law has made significant progress, seeking conditions that are more in line with the problems and mishaps that arose from the original wording, but at the same time it missed the opportunity to promote other reforms that the legal community had been calling for. It’s up to us to keep fighting for continuous reforms, understanding that companies and the market are dynamic realities and that constant monitoring and improvement of their rules is favorable to society as a whole.
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