Brazilian President Michel Temer announced in an official speech that, on 9 May, the Government sent to the National Congress a reorganization law reform bill, describing it as “a very modern text, which has been examined and re-examined by proficient national jurists and restructuring specialists that worked with the Government to shape this bill”.
This was the first major update on the statutory reform process since the end of 2017, when the former Brazilian Finance Minister Henrique Meirelles said that a preliminary draft bill for a reform of the law would be sent to the Congress soon. The Debtwire legal analyst team examined this new bill, comparing it with the preliminary text prepared by the working group, and below highlights some of the key modifications made by the Government – including cross-border insolvencies and classification of extraconcursal claims.
CLICK HERE for the Debtwire legal analyst team’s primer on the Brazilian restructuring system.
Background – most of the working group’s reform suggestions accepted
As anticipated by the former Brazilian Finance Minister Henrique Meirelles during a TMA conference last November, most of the working group’s suggestions were accepted and preserved in the bill, including the adoption of clear rules for procedural and substantive consolidations; the statement that creditor classes will be established by the company in the reorganization plan, rather than pre-established in the law; revisions to the role of the Judicial Manager and the proceedings related to the creditor meetings; and also provisions regarding abusive votes, among others.
On the other hand, the proposed end to extraconcursal claims – considered by the working group members as one of the most important amendment suggestions – was removed from the bill sent to the Congress, as also predicted by Meirelles. At the time, the minister warned that such an impactful change could cause stress on the credit markets, as banks would become less likely to grant financial loans to companies under financial crises. Likewise, the proposed equity cramdown proceeding – described by the working group member Cassio Cavalli during an interview granted to Debtwire last year – has also been taken out of the bill sent by the Government to the Congress last week.
Finally, some important working group suggestions were maintained, but with modifications. In addition to the three alterations explicitly mentioned by the current Finance Minister Eduardo Guardia, the government seemingly made some edits to the proposed rules regarding cross-border insolvencies and extraconcursal claim classification, as described below.
Cross-border insolvencies – competence of the Superior Court of Justice
The working group suggested certain amendments aimed at filling holes in the existing law, including an entirely new chapter to govern cross-border insolvencies and the inclusion of non-Brazilian affiliates in the in-Court restructuring processes. These amendments have been prepared in accordance with the UNCITRAL Model Law on Cross-border Insolvency, with some adjustments, and are expected to create a system for recognizing foreign restructuring processes – similar to the US Chapter 15 process.
In order to streamline both the recognition and the implementation of orders generated abroad, the preliminary bill prepared by the working group proposed that the Civil Court (or the Restructuring Court, in the places where it exists) with jurisdiction to rule on issues regarding the Brazilian subsidiary should also be entitled to decide whether or not to affirm the foreign Court’s decision.
However, in the bill sent to the Congress, the Government did not follow that suggestion and proposed that the Superior Court of Justice (STJ) would have competence to rule over this sort of matter, pursuant to Section 105, I, “a” of Federal Constitution. This Section sets forth that the STJ is entitled to rule on all the processes filed by an interested party for the homologation of a Court decision granted abroad, prior to its enforcing in Brazilian territory.
Extraconcursal claims’ classification
Furthermore, the Government preserved the working group’s proposal to clarify the recovery priority for extraconcursal claims in an insolvency scenario, which is not absolutely clear in the governing law, inverting the positions of certain financial claims.
The working group proposed to add a priming class of claims for creditors financing the process – DIP lenders – in order to incentivize new money loans to restructuring companies. In case of insolvency, this sort of claim would recover just after labor claims, urgent expenses and restitutions, and the bank loans guaranteed by fiduciary lien or related to Advance on Export Contracts. However, according to the bill to be examined by the Congress, claims arising from DIP financings will remain junior to labor and urgent expenses, but will recover before the bank loans – good news for DIP lenders.
Slow but steady
It is not possible yet to predict when a new reorganization law will be enacted. With the approaching Brazilian presidential elections scheduled for October, some political analysts say that the reform in the Brazilian Reorganization Law should be enacted soon, relying on the assumption that the need for a reform is a common-sense idea, so politicians will agree on the main terms in order to streamline the process and save time to fight over more controversial issues like welfare reform. On the other hand, other specialists say that nothing will happen before there is definition on who will be the next president.
In any event, the Government sending the bill to Congress appears to be an important update on this matter, and a sign that the process is moving, although at a slow pace. Thus, if Michel Temer is not able put into effect a new law by the end of his term, at least the base proposal will be ready for the new president to take on as one of the first important measures in 2018.
Finally, below there is an illustrative chart of the proposed amendments:
 On 16 December, 2016 the Government appointed a working group to study, develop and propose amendments to the Brazilian Reorganization Law and other laws related to the restructuring and insolvency universe. This group included representatives of both the Brazilian Finance Ministry and Central Bank, as well as frequent legal, financial and judicial restructuring players.
 Claims which can not be impacted by an in-Court process on the terms of the governing law, such as (i) those guaranteed by fiduciary lien, (ii) certain bank loans relating to export finance, including the ACC – Advance on Export Contracts – and (iii) tax claims.
 Cassio Cavalli is a professor of commercial and bankruptcy law at the Getulio Vargas Foundation Law School in Sao Paulo, and also a senior partner of Veirano Advogados. He has been advising both Brazilian and foreign clients on projects involving insolvency matters.
 Including: (i) new financing for companies under bankruptcy protection must be approved by both the creditors and the Court; (ii) debts to the FGTS (the workers’ severance fund) will have the same relevance as labor debts; and (iii) the Government will be able to request the liquidation of companies that did not comply with a payment plan for tax debt.
by Arthur Almeida
Arthur Almeida is a former restructuring attorney. Prior to joining Debtwire as a Legal Analyst, he practiced with Passos & Sticca Advogados Associados, as well as working in the legal department of Banco Fibra S.A. Arthur’s experience includes participating in major civil litigation on credit recovery. He has represented creditors such as banks and financial institutions in high-profile restructurings.
Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.