Update of the law on in-court reorganization and bankruptcy after the economic upturn

The result of a long dialogue between various legal practitioners specializing in the matter, the reform, which has been thought out and discussed since long before the current context of economic and financial crisis caused by the Covid-19 pandemic, is quite relevant for the present moment of the country.

The text lays down several relevant changes, including the change in the role of the tax authorities and the possibility that the bankruptcy of the company under in-court reorganization is declared in cases where the debtor company’s obligations concerning taxes, the handling of collection and disposal of assets related to bankruptcy are not being fulfilled. There are also very important issues within the scope of the in-court reorganization procedure, inspired by U.S. law, such as the possibility of presenting an alternative plan by creditors. Other changes worth noting are as follows:

• Possibility of extending the stay period for another 180 days, as long as the debtor has not contributed to the non-compliance with the initial deadline (article 6, paragraph 4). If, at the end of this period, creditors present an alternative reorganization plan, the stay period shall be reinstated (article 6, paragraph 4-A);
• Extension of the deadline for installment payment of debts to the Federal Government, from seven to ten years (art. 10-A, V, Law 10522/2002);
• Expansion of the list of Receiver’s functions (article 22);
• Stimulus to arrangement with creditors before or in the course of the judicial proceeding (articles 20-A et seq and article 22, II, “e” and “g”);
• Introduction of the provision for verification of in-court reorganization applicant’s place of business and fairness of documents (article 51-A), which had already been provided for in case law;
• Possibility of extending the deadline for payment of labor credits (article 54, paragraph 2);
• Definition of objective criteria for the assignment of applications for in-court reorganization of companies belonging to the same economic group (article 69-G et seq.);
• Possibility of the debtor’s access to new financing, upon judicial authorization (article 69-A to 69-F);
• Recognition of the legitimacy of the rural producer to apply for in-court reorganization (article 70-A);
• Recognition of the tax authorities’ legitimacy to declare the bankruptcy of companies under reorganization (article 73, V and VI);
• Provision of specific deadlines and a more agile procedure for bankruptcy, which reduces the time needed for the debtor to start a new business activity – “fresh start” (article 75, III and article 158, V);
• Change in the order of classification of credits acquired before company reorganization (article 83) and of the list of credits acquired after company reorganization (article 84);
• Greater emphasis on out-of-court reorganization and changes in related procedures, including the inclusion of labor credits (article 161);
• Regulation of the transnational company reorganization process (article 167-A et seq.).

These are all measures that will certainly have a significant impact on the proceedings that may be filed under Law 14112/2020. It is not yet known in a concrete way how market players will behave, nor if the lawmaker’s intention to introduce certain measures will be reflected in practice.

There is a lot of debate about the role that the tax authorities will have in these processes from now on. A post-company reorganization creditor with little or no relationship with the reorganization process is today a key player in the success of the procedure.

Although it has not yet been possible to note practical impact of all these changes, it is certain that the success of their implementation will have a direct impact on the country’s economic and financial upturn, significantly worsened by the Covid-19 pandemic. If properly applied, Law 14112/2020 will be of paramount importance for nurturing the economy and maintaining business activity and jobs.

In view of the relevance of the implemented updates, Deloitte developed a brochure (in Portuguese) containing in-depth information about the changes and inclusions of the law in a comparative table, with emphasis on the most discussed themes during the in-court reorganization and bankruptcy processes. Aiming to be a tool to support the studies and debates that will emerge from this new legal framework for the restructuring of companies in Brazil, the material available on the Deloitte website also has an alphabetical-referenced index.

Ana Beatriz Martucci Nogueira Moroni is a partner of Deloitte’s Financial Advisory area and leader of the Corporate Restructuring practice