Giulia Keese Montanhesi
Lawyer at Marcos Martins Advogados
In a virtual Extraordinary Deliberative Session on May 21, 2020, the Chamber of Deputies approved Bill no. 1.397/ 2020, authored by Deputy Hugo Leal (PSD-RJ). The Bill seeks to institute emergency measures to prevent the economic and financial crisis of economic agents, particularly affecting business contracts and ongoing judicial recoveries, as well as the infrastructure and capital market sectors.
If approved, the bill would have a transitory nature and its effects would be linked to the state of public calamity resulting from Covid-19, bringing significant changes to the legal regime of judicial and extrajudicial recovery, obligations, contracts and the institute of bankruptcy.
Presented on April 1, 2020, the bill is being processed on an urgent basis and is now awaiting consideration by the Federal Senate.
As for its scope, it is important to note that the proposal’s directives are aimed at “Economic Agents”, broadly considered to be “any legal entity governed by private law”, even if it is not an entrepreneur, such as simple companies, associations, foundations, political parties, religious institutions, law firms, as well as “individual entrepreneurs, rural producers and self-employed professionals”, who find themselves in debt.
Note, however, that its provisions do not apply to obligations arising from cooperative acts and the Insolvency Prevention System (regulated in Chapter II) does not cover the agent who is the final consumer of a product or service.
Below, we will deal with the most important points of the substitute text (wording already approved and signed by the Rapporteur Mr. Isnaldo Bulhões Jr. – MDB-AL), which now goes to the Senate for deliberation.
Legal suspension of time limits
The first measure instituted is the legal suspension of certain deadlines and obligations that have been affected by the Pandemic, to encourage negotiation and self-composition in contractual, obligatory and recovery matters.
In its article 3 and following, the Bill aims to suspend, for 30 days , legal actions of an executive nature that involve discussion or fulfillment of obligations (due after the date of 20/03/2020), as well as the filing of revision actions, unilateral termination of bilateral contracts, judicial or extrajudicial excision of real, fiduciary, fidejussory guarantees, co-obligations, bankruptcy decrees and collection of fines resulting from late payment.
For parliamentarians, the measures allow debtors to seek out-of-court, consensual and direct renegotiation of obligations and debts with their creditors, with the aim of deflating the Judiciary during the period of economic retraction experienced in the Pandemic (Explanatory Memorandum of the Bill).
The infrastructure sector and the financial market, however, have their reservations, especially with regard to the impact of these measures on the derivatives markets and other financial contracts, due to the possible restriction of Brazilian companies’ access to international derivatives markets and the financing of infrastructure projects by foreign capital.
Without detracting from the bill’s many benefits, we believe that by failing to make exceptions or give derivatives contracts their own discipline in the list in article 3 (especially item II, §1), the legal suspension makes it difficult for them to be implemented, since these contracts, by nature, are based on early maturity clauses (a default causes all operations to mature) and guarantees.
Based on reasonableness, we would have more advantage in this economic downturn – and also on the international stage – by valuing and protecting credit operations, excepting certain financial obligations and guarantee contracts from legal suspension.
Preventive negotiation:
In addition to the suspension, the Bill establishes a new voluntary jurisdiction procedure, which aims to protect debtors from creditors’ executions and claims: preventive negotiation.
Preventive negotiation (Article 6 et seq. of the Bill) is a second mechanism for extending deadlines, which is more restricted in its use and is designed for cases in which legal suspension is not sufficiently advantageous. This procedure will be conducted by the Judiciary and is conditional on the debtor demonstrating concrete initiatives to reach a consensual agreement with its creditors.
Within 60 days of the end of the aforementioned legal suspension, the debtor can raise and propose preventive negotiation to obtain a further 90 days’ suspension of their obligations, subject to a series of requirements and conditions.
As long as the debtor provides factual evidence of the impact of the pandemic on its business activities and effective efforts to negotiate debts with its creditors, the judge will order a new extension, which, added to the legal suspension, can reach a maximum of 180 days.
The request must be distributed to the competent court for processing the execution or business reorganization and will also interrupt judicial enforcement measures against the applicant.
However, it should be noted that not every economic agent can request this procedure. Preventive negotiation will only be allowed for debtors who can prove a reduction of 30% (thirty percent) or more in their turnover, compared to the average for the last corresponding quarter of activity in the previous financial year.
Changes to the Extrajudicial and Judicial Recovery Procedures
In addition to the extensions of obligatory and contractual deadlines, the proposal presents temporary but significant changes in the area of reorganization and bankruptcy.
In its final part, it proposes changes to the law that regulates the judicial and extrajudicial recovery and bankruptcy of companies (Law 11.101/05) and its acceptability has proved controversial in legal circles.
Let’s take a look at some of the changes:
i. The quorum required to approve an out-of-court reorganization plan will be reduced to half plus one of the claims of each type (51%) covered by the out-of-court reorganization plan;
ii. The obligations set out in the judicial or extrajudicial reorganization plans already approved, regardless of the decision of the general meeting of creditors, will not be enforceable against the debtor for a period of 120 (one hundred and twenty) days;
iii. The submission of a new judicial or extrajudicial reorganization plan is now authorized, whether or not the original plan has been ratified in court;
iv. The reorganization plan added may subject claims subsequent to the previous request for judicial or extrajudicial reorganization;
v. Alteration of the minimum limit for the decree of bankruptcy to R$ 100,000.00 (one hundred thousand reais), on the date of the bankruptcy petition;
vi. Debtors who have been granted judicial reorganization for less than five (5) years and who have had their out-of-court reorganization plan approved for less than two (2) years may apply for out-of-court or judicial reorganization; and
vii. Modifications to the special judicial reorganization plan for micro and small companies, such as:
- (a) the installment payment of debts in up to 60 (sixty) equal and successive monthly installments, with the possibility of a discount or discount;
- (b) payment of the first installment within a maximum of 360 (three hundred and sixty) days, counting from the distribution of the petition for judicial reorganization or its amendment;
- (c) the presentation of objections by the majority of creditors will no longer result in the decree of bankruptcy, but rather the termination of the proceedings without judgment on the merits.
The changes were also the subject of questions, with emphasis on Article 12, which deals with the presentation of a new plan of creditors’ representatives, with the inclusion of claims subsequent to the original plan.
The content of this item – if enacted without further clarification as to how the creditor whose claim was included after the original plan will be treated – could cause damage to the process, such as the dilution of creditors and greater discredit to the judicial reorganization process.
From a general perspective, the provisions greatly affect the discretion of the parties (debtor and creditors) in the design of the reorganization plan, and consequently reduce the very private autonomy of these entities in business reorganization matters. Thus, although any proposal to give companies a breathing space and protect their survival in times of pandemic is valid and recognized, state interference in this case must be received with reservations and a great deal of caution by creditors and the recovering companies themselves.
In this context, companies should continue to be aware of the risks of their defaulted obligations and future business practices, as the emergency and transitional changes promoted by the Bill regarding the application of the deadlines for enforcing obligations and in the Judicial Recovery and Bankruptcy Law do not represent any kind of excuse due to the Covid-19 pandemic, but only give even greater reason to prioritize business planning.
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