On 23 January 2021, Law No. 14,112/2020 came into force, bringing forth substantial amendments to the Restructuring and Insolvency Act (Law No. 11,101/2005).

Last month, the Brazilian Congress voted to override 12 out of the 14 presidential vetoes (which had been much criticized by the legal community), and these 12 new provisions were published on 30 March, thus coming into force.

The number of restructuring and insolvency proceedings has significantly raised in Brazil since 2014[1], but their outcome has normally been disappointing: according to the Insolvency Observatory of the Catholic University of São Paulo (PUC-SP), approximately only 18% of judicial restructuring proceedings were fully successful and led to payment of all restructured credits and to the recovery of debtor’s business activities[2].

Law No. 14,112/2020 came to change this scenario and was highly expected by the legal community. In part it makes into Law, now in clear terms, what had been decided in Court precedents and was the opinion of the legal community developed in the past 15 years, while other provisions deal with issues that were not sufficiently regulated and generated much dispute (as cross-border cases and when a creditor’s vote can be disregarded by the Court on grounds of abuse). In either case, the reform promotes greater legal security to parties involved in restructuring and insolvency proceedings, and is expected to improve its efficiency.

Please find below a summary on some of the main amendments promoted by the reform:

• rules on cross-border insolvency were added, following the familiar guidelines of the UNICITRAL Model Law on Cross-Border Insolvency, adopted by over 50 jurisdictions. The Act was silent about transnational cases and this created discussions and disputes, especially in restructurings of Brazilian groups with foreign subsidiaries, such as Oi, OSX, and Constellation (former QGOG);
• mediation is to be encouraged by the Court and the judicial trustee;
• it is now clear that insolvency or restructuring proceedings do not affect arbitration clauses nor the jurisdiction of arbitral tribunals, which was common ground for most, but was still an issue under disputes in some cases;
• the rule on exemption of liability to buyers of debtor’s assets is now broader and clearer, with express reference to, under certain circumstances, exemption of environmental, regulatory, administrative, criminal, anticorruption, tax and labour liabilities (further to civil/commercial). This is one of the points that were vetoed by the President, but were now overridden by Congress;
• the duties and powers of the judicial trustee were strengthened;
• the use of modern and dynamic means of communication is encouraged, with the express possibility of online General Creditors’ Meeting (which some Courts had permitted in a few cases during the pandemic) and the obligation of the trustee to maintain an updated webpage containing material data on the case;
• rules on multi-party restructurings involving companies of a same business group were added (the procedural consolidation and substantive consolidation[3]), which can reduce the lengthy discussions that were common in group restructurings;
• creditors can now submit an alternative restructuring plan under certain circumstances;
• it is now clear when and for how long the ‘stay period’ can be extended (only twice, each for up to 180 days, one by court order and the other by resolution of the Creditors); and
• there is now a rule that says when a creditor’s vote at a General Creditors’ Meeting can be disregarded by the Court on grounds of abuse of rights (only when “manifestly exercised to obtain illicit advantage to himself or a third party”). This will likely restrict the interference of the Courts, which, in a number of cases, held that a creditor had abused its rights when voting against a judicial restructuring plan in situations that do fill within these limits.

The provisions of Law No. 14,112/2020 will be immediately applied to pending proceedings, with a few exceptions  listed under Article 5.

For further information, please contact Olympio Carvalho (olympio.carvalho@castrobarros.com.br), Carlos Ximenes (carlos.ximenes@castrobarros.com.br) and Anna Carolina Abrantes (anna.abrantes@castrobarros.com.br).

[1] WAISBERG, Ivo. SACRAMONE, Marcelo Barbosa. NUNES, Marcelo Guedes. CÔRREA, Fernando. Recuperação Judicial no Estado de São Paulo – 2ª Fase do Observatório de Insolvência. Available at: <https://abj.org.br/wp-content/uploads/2019/04/Recuperacao_Judicial_no_Estado_de_Sao_Pa.pdf>

[2] ALVARENGA, Darlan. Pedidos de recuperação judicial e falência crescem no país e atingem mais as pequenas empresas. G1, Economia, 19/05/2020. Available at <https://g1.globo.com/economia/noticia/2020/05/19/pedidos-de-recuperacao-judicial-e-falencia-crescem-no-pais-e-atingem-mais-as-pequenas-empresas.ghtml>

[3] In the second case (substantive consolidation), all debtors will be treated, in practice, in the judicial proceeding as if they were a single company: there will be a single restructuring plan, equally applicable to all creditors, jointly voted by all creditors of all debtor claimants. The substantive consolidation will apply in a restrictive scenarios than the procedural consolidation, which is only a joint restructuring proceeding filed by more than one company of the same group, in which creditors of each claimant vote separately the respective restructuring plan(s) (which can be the same or not for each debtor claimant). In the latter case, it is possible that a plan for one debtor is rejected (and it is therefore declared bankrupt), while the restructuring plan of another debtor is approved by creditors.