Vitor José Ferreira do Couto
Lawyer at Marcos Martins Advogados
The long-awaited Law 14.112/2020 expressly provided for a series of institutes that were already being used in practice, which aim to provide greater support and facilitate the recovery of companies that are going through a financial crisis, especially those that are in judicial reorganization.
The main focus of the amendment to Law 11.101/2005 is the preservation of companies with the maintenance of business activities for the country, as set out in article 47:
“Art. 47: The purpose of judicial reorganization is to make it possible to overcome the debtor’s economic and financial crisis, in order to allow the maintenance of the source of production, the employment of workers and the interests of creditors, thus promoting the preservation of the company, its social function and the stimulation of economic activity.”
In this context, we have the figure of dip financing, which is of great value to many companies facing times of financial instability and unable to maintain their cash flow, but whose activity is extremely important for generating jobs, circulating goods and assets in their market niche and collecting taxes.
The concept of dip financing is nothing more than new financing to be sought by the company under reorgan ization and subsequently granted by interested investors, to be carried out after the start of the judicial reorganization process, as well as after the approval and execution of the reorganization plan.
As for the purpose of this institute, it seeks to provide more strength to the company’s cash flow so that, in addition to succeeding in its judicial reorganization process, it can run its business as smoothly as possible, making it possible to make payments on time to suppliers, employees, taxes due, among other day-to-day expenses of the specific activity it carries out.
It is important to point out that dip financing is not entirely new in Brazil, since the doctrine has been encouraging it for years and the courts have been allowing it in some specific cases, but without the necessary legal certainty due to the lack of legal provision for the adoption of dip financing.
This scenario made it difficult to apply, as it led the courts to create some unnecessary requirements, which put some investors off and sometimes ended up making it completely unfeasible.
With the advent of Law 14.112/2020, however, it is hoped that this type of credit will have greater legal certainty, a reduction in the approval period and priority for new financing, in order to spread the practice in the market.
It should be noted that the legislator, following the logic of protecting the investor, gave dip financing an extrajudicial nature, i.e. the credit that is the object of the financing is not subject to the effects of judicial reorganization. In addition, the law gave the investor priority in receiving the credit that is the subject of the dip financing in the event of the judicial reorganization being converted into bankruptcy, including the investor having priority among the creditors with claims classified as off-balance sheet, and also the impossibility of changing the nature of the credit that is the result of the dip financing.
In this vein, in order to increase security for investors, article 84 of Law 11.101/2005 was amended in order to place these financing claims in second preference to extra-payment claims. Before the amendment brought in by Law 14.112/2020, the claims related to dip financing were only provided for in the last item of article 84 of Law 11.101/2005 in the order of preference of extra-payment claims.
Despite the fact that the guarantee has been given in the event that the company benefiting from the dip financing goes bankrupt, this is something that, strictly speaking, the investor does not want, since its main aim is to try to help maintain the operation of the benefited company and, consequently, make its full recovery possible.
Taking all of this into account, dip financing will serve, more than ever, to boost the activities of companies undergoing judicial reorganization, acting as an essential factor to strengthen cash flow and enable them to recover in a more solid and feasible way. In fact, through the modernization and positivization of dip financing, investments in companies undergoing judicial reorganization only tend to increase and this is extremely important for the national economy.
Marcos Martins Advogados is aware of this issue and is prepared to provide qualified legal advice to its clients.
