Court-supervised Reorganization and Bankruptcy

Finocchio & Ustra Sociedade de Advogados | View firm profile

The Law on court-supervised reorganization and Bankruptcy (Law 11,101/2005) was created in 2005 and underwent some changes in 2020. The sanction of Law 14,112 brought some news to creditors and debtors on matters regarding: mediation, stay of proceedings, provisional asset protection, reorganization plan presented by creditors, financing for debtors undergoing reorganization, fresh start, individual rural producer, reorganization.

  1. Mediation

Mediation is now expressly provided for in a preventive manner in court-supervised Reorganization processes. If the agreement is approved, the request for court-supervised reorganization is expected to be avoided. Still, suppose the debtor files a request within 360 days of the agreement during the pre-trial phase. In that case, the creditors shall have their rights and guarantees reconstituted and the credits amortized.

  1. Stay of Proceedings

After the request for court-supervised reorganization is approved, the enforcement proceedings are suspended, which can substantially damage the debtor and creditors as it poses barriers to overcoming the crisis.

With the new wording, the Law details the stay measures, namely:

  1. Stay of the statutory limit.
  2. Enforcement proceedings against the debtor for credits are subject to collective insolvency proceedings.
  3. Any form of “retention, arrest, attachment, sequestration, search and seizure and lien on the debtor’s assets, arising from claims whose credits or obligations are subject to court-supervised reorganization.”

Originally the Law provided that: “under no circumstances” could the “non-extendable” stay period of 180 days be extended. Now, it allows a single extension of another 180 days, if and only if the debtor did not contribute to bar the time.

  1. Provisional asset protection

It is possible to anticipate the effects of reorganization by employing provisional asset protection to protect overall assets from credit claims before the reorganization plan is not yet approved, provided that specific requirements are met. The same can occur in mediation procedures already initiated as long as the reorganization requirements are met.

  1. Reorganization plans filed by creditors

Creditors are now entitled to file an alternative court-supervised reorganization plan when:

  1. the debtor’s plan is not deliberately filed within the stay period, and
  2. the plan is not approved, in which case creditors can file a new one within thirty days.

If the plan proposed by the creditors is not approved, the court-supervised reorganization will be converted into bankruptcy.

  1. Financing for debtors undergoing court-supervised reorganization 

Debtor-in-possession (DIP) financing, the most crucial financing modality for companies undergoing reorganization, gives the lenders certain privileges in receiving the credit granted and provides the companies chance to obtain new credit for the reorganization.

DIP Financing can be provided by individuals and legal entities, including partners, family members, and members of the company’s group, and not only by a financial institution. The lenders are given priority on the company’s assets.

Obtaining credit in this modality is subject to the Judge’s authorization or provision in the court-supervised reorganization plan, aiming to give ample publicity to the other creditors about the financing condition and the assets provided as collateral by the debtor or from third parties.

Fulfilling legal requirements assures the lenders the receipt. And, in the event of default, whether in court-supervised reorganization or bankruptcy, the lender may resort to the guarantees to which he is entitled. Moreover, the receipt in this modality is not court-supervised.

  1. Fresh Start

The Fresh Start process came from the American bankruptcy law. It was brought to our legislation to accelerate the reorganization of companies that went through bankruptcy and to help them return to their economic activities faster and more efficiently. The goal is for the entrepreneur to restart business as soon as possible, even in other economic activities.

  1. Individual rural producer

 With the change in the Law, the individual rural producer may apply for court-supervised reorganization. However, the Law provides relevant restrictions concerning credits. For example, unlike other businesses, only credits duly accounted for in the documentation required for the request will be submitted to the reorganization plan. And credits that do not arise exclusively from rural activities are excluded. As well as credits to promote rural activities granted by the National Monetary Council (Law 4829/1965) that have been renegotiated at some point and those that arise from the acquisition of rural property, granted in the three years before the request.

  1. Reorganization

It is a liability negotiation involving all types of credits or groups of creditors of the same nature that are subject to similar payment conditions, at the debtor’s choice, except those strictly excluded by Law. Once approved, the process is binding on all credits constituted up to the approval date, even if the creditors have not formally adhered to the court-supervised reorganization plan. The request for judicial approval can be filed with 1/3 of the adhesion of creditors. The consent of half of the creditors and the labor union (in case the plan deals with labor claims) is necessary for the approval.

In short, most of the amendments mentioned above have enabled greater effectiveness for reorganization in companies that are going through financial trouble and also provided greater legal clarity concerning the court-supervised reorganization procedures.

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