Bankruptcy Law & COVID-19-Related Measures for Insolvency

Insolvency is the state of being unable to pay the debts, by a person or company, at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

In order to deal with the COVID-19 pandemic scenario and to keep the economy stable during the crisis, Brazil has adopted some measures to protect businesses against insolvency and bankruptcy. Whether such measures are pandemic-related or not, they integrate Brazil in a worldwide effort to avoid damages.

In April 2020, the State Courts of Justice of both Sao Paulo and Parana created projects for out-of-court dispute resolution. The first developed a conciliation and mediation project for pre-litigation business disputes and the latter implemented a Judicial Centre for Conflict Resolution and Citizenship for reorganisation.

The Brazilian National Council of Justice recommended in early August 2020 the creation of CEJUSCs for any business disputes to be settled by ways of negotiation, mediation or conciliation either in out-of-court or court processes. Before that, in March, the CNJ recommended the adoption of measures to mitigate the impact of COVID-19 in reorganisation and bankruptcy processes, e. g. stay period extension in the case the creditor’s meeting needed to be postponed.  However, these recommendations are not mandatory.

The provisions of out-of-court mediation and reorganisation are similar to the Chinese instructions for civil cases involving COVID-19 released in May 2020, which has key content on bankruptcy cases.

Irrespective of its transitory character, the Emergency and Transitional Legal Framework for Private Law Relations, established by Federal Law No. 14,010/2020, did not regard insolvency, but rather some general provisions, e.g., on statute of limitations and contractual issues.

Although there have been no provisional changes to federal insolvency law facing the COVID-19 pandemic so far, on November 25, 2020, the Brazilian Federal Senate approved the Bill of Law 4,458/2020 which reforms the Brazilian Bankruptcy Law. The Bill had previously been voted by the Chamber of Deputies and now awaits presidential sanction.

The main objectives of the Bill are, inter alia, to support the economic recovery of businesses, to reduce litigation and court proceedings, to reduce the duration of a proceeding and to stimulate out-of-court processes, such as extrajudicial reorganisation and pre-litigation dispute resolution.

The following topics are the major changes in Brazilian bankruptcy law in connection with the current legislation of other jurisdictions:

a) Conciliation and mediation on extrajudicial and judicial reorganisation

According to novel articles to be inserted in bankruptcy law, conciliation and mediation shall be encouraged in any court, including superior courts, both before and after the request for judicial reorganisation. These methods are specially recommended when, among others, the dispute involves partners and shareholders of a business in financial distress or in a current judicial reorganisation proceeding; and the business in financial distress and its creditors are able to renegotiate the debts, before the filling for judicial reorganisation.

Regarding COVID-19 and public calamity, the Bill encourages conciliation and mediation during the judicial reorganisation proceeding in the cases there are “extraconcursais” credits.

b) Creditors can provide the judicial reorganisation plan

In the case the judicial reorganisation plan submitted to creditors approval is rejected, the judicial administrator puts the proposition to the creditors’ meeting vote. If the creditors do not agree to provide a reorganisation plan or the creditors’ plan is rejected, the judicial reorganisation will be converted into bankruptcy.

c) The adoption of transnational insolvency

The Bill integrates to Brazilian legal framework the possibility of transnational insolvency based on UNCITRAL Model Law on Cross-Border Insolvency, seeking for international cooperation, uniformity of application and respect to good faith.

Among several and detailed provisions, there are sections to regulate the recognition of foreign processes, the cooperation with foreign authorities and representatives and the concurrent processes. The latter is related to the extrajudicial and judicial reorganisation or bankruptcy proceedings to commence after the recognition of a foreign main process.

The Brazilian Prosecutors Office will also intervene in such processes.

e) The possibility to consolidate group estates

The Bill innovates by authorising debtors under common corporate control to request for judicial reorganisation by means of procedural consolidation. Exceptionally, the judge can also authorise substantial consolidation if there is interconnection or confusion of assets or liabilities among the debtors plus at least two other situations. In this case, assets and liabilities are considered to be of a single debtor.

f) The judicial reorganisation of the rural producers

This topic puts an end in a great discussion among state courts in Brazil. The rural producers can request for judicial reorganisation even if their commercial register does not meet the required period of registry. Such period may be proved by using the documents of the activities performed, including, e.g., Digital Cash Book and balance sheet.

g) General novelties: regulation of dip financing; broader cases of bankruptcy declaration

Once sanctioned by Brazilian President, the Bill will enter into force in thirty days after publication on the Official Gazette.