Bill on Judicial Reorganization could improve the economic environment, say experts.

The Federal Senate is expected to consider in the coming days Bill 1,397/2020, which amends the legal framework for judicial and extrajudicial reorganization and bankruptcy during the period of public calamity caused by the Covid-19 pandemic. The text has already passed through the Chamber of Deputies last Thursday (May 21).

Experts consulted by JOTA state that the proposal is an attempt to give companies a lifeline by creating a favorable environment for agreements between creditors and debtors. To this end, contractual and legal obligations are suspended, as is the declaration of bankruptcy for companies. However, they caution that the changes should be specific and have a deadline to avoid problems such as legal uncertainty and misuse of the benefits provided by the law during a time of crisis.

“The bill is not interfering with contracts, it is not changing obligations, it is not reducing debt. The bill is suspending the exercise of a creditor's contractual rights, with specific deadlines to facilitate and help the parties find a solution,” analyzes André Chateaubriand, partner in Litigation and Arbitration at the Mattos Filho law firm and member of the Turnaround Management Association Committee, which prepared a report to analyze the measures proposed in the bill.

According to data from Serasa Experian, 120 requests for judicial reorganization were registered in Brazil in April, representing a 46.3% increase compared to March. Bankruptcy filings totaled 75 – 25% more than the previous month. The company's economists expect these numbers to rise even further given the economic crisis generated by measures to control the coronavirus.

Given the growing financial fragility of companies, the Senate should prioritize the bill. According to experts, one of the most significant changes is the 30-day suspension of contractual and legal obligations after the law is published. This suspends judicial or extrajudicial executions, lawsuits, bankruptcy declarations, unilateral terminations, contract review actions, and the collection of fines in contracts in general and in taxes for all companies. The suspension does not apply to obligations arising from wage-related credits or cooperative contracts.

According to the text approved by the Chamber of Deputies, the changes apply to both ongoing judicial reorganizations and those that may occur during the pandemic period. However, it is limited to the time frame of March 20, 2020, to December 31, 2020, the expected end date of the state of public calamity decree generated by Covid-19. Companies of all sizes, sole proprietors, rural producers, and self-employed professionals are covered by the law.

Dóris de Souza Castelo Branco, a specialist in judicial reorganization and senior partner in the General Civil Litigation department at Martorelli Advogados, explains that the bill prioritizes negotiation between the parties, preferably before the judicial reorganization process. “Negotiation is always the best path, and within what the bill proposes, it provides a strong incentive for out-of-court negotiation. The ultimate goal would be, in theory, to unclog the Judiciary, allowing potential debts to be avoided through more complex discussions involving, for example, enforcement proceedings.”

The text also raises the threshold for protested bills required for bankruptcy proceedings from 40 minimum wages (approximately R$ 40,000) to R$ 100,000. Furthermore, judicial reorganization can now be requested by companies less than two years old, which is prohibited by bankruptcy law. The quorum of creditors who agree to the extrajudicial reorganization plan decreases from 3/5 to a mere half plus one of the creditors.

Steps to give businesses a boost

According to an analysis by experts consulted by JOTA, the 30-day suspension of obligations stipulated in the bill will allow creditors and debtors more time to negotiate without resorting to the courts. After this period, if no agreement is reached and the debtor proves a reduction of at least 30% in their revenue, they can request preventive negotiation.

This procedure will be carried out before the court specializing in bankruptcy. Acceptance of the request, which may be submitted within 60 days, guarantees the continuation of the suspension initially obtained for another 90 days. "In practice, the law guarantees another 180 days for negotiation," explains Doris.

Creditor participation in pre-trial negotiation sessions will be optional, and it is the debtor's responsibility to inform them about the start of negotiations. During the pre-trial negotiation period, the debtor may obtain financing to cover restructuring costs and preserve the value of assets. Financing obtained by the debtor will not be included in the list of outstanding debts.

"If there is a request for extrajudicial or judicial recovery, the entire suspension period foreseen in the project will be deducted," adds Doris.

New plans and approved plans

The bill presented in the Chamber allows debtors to not comply for 120 days with the measures foreseen in judicial or extrajudicial recovery plans already approved. Similarly, bankruptcy cannot be declared while the law is in effect, that is, in principle until December 31, 2020. Furthermore, it authorizes the debtor to present a new plan, with the right to an additional 120 days of suspension of judicial executions of the debt and guarantees.

In the case of new judicial reorganization plans, they will be subject to approval by creditors, deducting what has already been paid under the previous plan to calculate the amount to be paid and to determine the creditors' votes according to the type of credit.

André Chateaubriand points out that the proposal needs to be careful not to discourage agreements made before the filing for judicial reorganization. According to him, as it stands today, when a creditor makes an agreement, if the debtor still files for judicial reorganization, the debtor's credit will be the amount negotiated before the reorganization. For Chateaubriand, the best approach would be the restitution of the credit existing before the agreement because this could generate resistance from creditors towards preventative negotiation.

“Since this is an unprecedented situation, the issue of cash flow is also sensitive for the creditors at the table. They may be a creditor in one relationship and a debtor in another. Everyone is suffering from the crisis. It's a solution that must be negotiated within limits and within reason,” he reflects.

Micro-enterprises

Micro and small businesses receive differentiated treatment under the bill, following the logic of the Bankruptcy Law. Therefore, according to the text of the bill, the special judicial reorganization plan for this group must provide for payment in installments of up to 60 months, allowing for discounts or reductions, and, if applicable, monetary correction will be limited to the Selic rate. There will also be a 360-day grace period to pay the first installment. This period is counted from the filing of the judicial reorganization request or its amendment.

According to Silas Santiago, public policy manager at Sebrae, differentiation for small businesses is essential. “All businesses are suffering from the pandemic. But, proportionally, we know that small businesses suffer more. They have less power to react, less access to credit. Therefore, they need differentiated treatment,” he emphasizes.

He emphasizes that the path of negotiation and the differentiated deadlines for small businesses were good bets in the text under analysis in Congress. "We consider that both measures, both the prevention of insolvency, with the use of mediation and conciliation mechanisms, and these temporarily differentiated deadlines for installment payments and grace periods, are important for micro and small businesses."

However, Silas suggests that the Senate include the possibility of negotiation and new deadlines also in relation to the bank debts of small businesses.

By: Flavia Maia

Source: jota.info