Senate approves draft of new law on judicial reorganization and bankruptcy.

The Senate has concluded the approval of the new Bankruptcy and Judicial Reorganization Law project, which aims to modernize legislation, expand extrajudicial recovery mechanisms, and increase the number of companies that manage to overcome financial crises and maintain their operations. The text now goes to President Jair Bolsonaro for his signature.

The proposal was approved in the same terms as in the Chamber of Deputies, but with some drafting amendments that broaden the effects of the law to, for example, expressly allow the inclusion of rural producers as eligible subjects for the benefits of the law and, therefore, eligible to request judicial reorganization.

Companies that request or have had a request for judicial reorganization accepted will be able to pay their debts to the National Treasury in installments over up to ten years. The proposal also establishes a 60-day suspension of debt enforcement to allow for extrajudicial negotiations. This timeframe does not currently exist, and while the company negotiates with creditors, it can still be subject to execution by other creditors. The proposal reduces the quorum required to approve the extrajudicial reorganization plan from 60% to 50% of credit holders.

According to the rapporteur, Senator Rodrigo Pacheco (DEM-MG), by establishing a maximum period of 180 days for the sale of assets of the bankrupt estate and the consequent closure of the bankruptcy proceedings, the bill "solves one of the major legal bottlenecks in Brazil, as it aims to reduce the time it takes to complete bankruptcy proceedings in Brazil, thus fostering re-entrepreneurship." The distribution of profits and dividends during the business recovery period is prohibited. The debtor is exempt from paying income tax and social security contributions on net profit in the case of capital gains derived from the sale of assets in recovery or bankruptcy, unless the acquirer is a company within the same economic group.

The draft text defines that a debtor may request judicial reorganization if, at the time of the request, they have been regularly carrying out their activities for more than two years. In the case of those engaged in rural activity, proof of the period is accepted through the Fiscal Accounting Records (ECF), or through a legal obligation to maintain accounting records.

The only amendment voted on was presented by the PT (Workers' Party), to alter a provision and prevent the judge from ordering the extinction of all the bankrupt's obligations, including labor obligations. "The extinction of obligations is unacceptable, as it would unduly benefit the bankrupt," assessed the PT leader, Rogério Carvalho (SE). However, the senators rejected the change by 52 votes to 20.

The economic team was enthusiastic about the proposal and argues that, with the Covid-19 pandemic, there has been an increase in the number of business closures. The view is that it is necessary to create conditions for the good capital of these failing companies to be redirected more quickly to other projects, thus also increasing the productivity of the economy.

Therefore, the expectation is that the government will approve the measure quickly.

Source: Economic Value