Judicial Reorganisation in the midst of the COVID-19 pandemic: a Brazilian perspective

The COVID-19 pandemic has brought disruption and economic hardship to several businesses around the globe. In Brazil, the effects of lockdown and restriction measures by the Governments have caused numerous companies to file for bankruptcy or judicial reorganisation, the latter being the legal restructuring instrument which aims to assist companies to continue their activities and avoid becoming bankrupt.

Relevant Aspects of the Judicial Reorganisation process

In Brazil, bankruptcy and judicial reorganisation are mainly regulated by Law n. 11.101/2005 (the Brazilian Insolvency Act).

The Brazilian Insolvency Act was inspired by the US Bankruptcy Code. In Brazil, the term "bankruptcy" is equivalent to liquidation and contains similarities to "Chapter 7" under the US Bankruptcy Code, whilst the institute of "judicial reorganization" is understood as the Brazilian version of the American "Chapter 11".

The purpose of the judicial reorganisation is to avoid the bankruptcy of companies undergoing financial difficulties by restructuring the business and maintaining its economic operations as a going concern.

Jurisdiction over insolvency proceedings is determined by the location of the debtor's main business. Certain judicial districts have courts that specialize in bankruptcy (such as São Paulo), otherwise, the judicial reorganisation proceedings are conducted in regular civil courts.

Pursuant to the Brazilian Insolvency Act there are two types of judicial reorganisation: out-of-court judicial reorganisation and in-court judicial reorganisation.

The first type requires an out-of-court Judicial Reorganisation Plan being negotiated and approved between the company and certain majorities of classes of creditors which is thereafter approved by a Court. It is worth mentioning that the extrajudicial reorganisation does not involve labour nor tax credits (the latter also not being included in the in-court judicial reorganisation).

The in-court judicial reorganisation, on the other hand, involves the commencement of proceedings in Court. These must be initiated at the request of the debtor, not by its creditors, and shall be used when a particular business, although facing difficulties, is still viable and may overcome its financial crisis.

The main aspects of the in-court judicial reorganisation proceedings are the following:

• The approval of the judicial reorganisation proceedings suspends all time limitation, lawsuits and enforcement proceedings against the company for a period of 180 days. These start to run again from the end of the proceedings.

• In order to be part of the judicial reorganisation proceedings, creditors need to have their credits recognised in one of the preliminary stages of the proceedings. The judicial administrator, appointed by the Court, is responsible for verifying and recognising each credit. The debts verified by the administrator form the creditors list. The order of preference provided for in the law may be followed in the proceedings, as the law allows the parties to agree a different order provided that the preference of labour credits is preserved. The judge then orders the publication of the Notice (Edital), in which the creditors are nominally listed together with the nature, preference and amount of the credit.

• All credits existing on the date when the company file for administration are subject to it, even those not yet due. The exception are creditors secured through fiduciary transfer of assets or the proprietors of sales with reserve of ownership, as these are not subject to the judicial reorganisation plan, given that their rights are protected. However, if the charged assets are essential to the activities of the company, the law provides that a grace period of 180 days will apply, during which the creditors shall not be able to proceed with the sale of the assets.

• The Brazilian Insolvency Act provides several alternatives for the restructuring of the company, including: special conditions for payment of matured or not yet matured financial obligations;   corporate restructurings (spin-off, merger, split-off, amongst others); partial sale of assets; assignment of leases; change of control, amongst others.

• The company must submit a Judicial Reorganisation Plan (hereinafter referred to as ''the Plan'') describing the means of reorganisation, within 60 days from the decision that approves the judicial reorganisation proceedings, otherwise the judicial reorganisation is converted into bankruptcy proceedings. The Plan must contain a detailed description of the recovery steps to be taken by the company and evidence showing the company's economic feasibility. The Plan is then voted on at the Creditors General Meeting. If the Plan is not approved, the Court must declare the company bankrupt.

New Developments in the legislation and jurisprudence in the light of the pandemic

Legislation

Bill n. 1.397/2020 has been submitted to the Brazilian Congress on 1 April 2020, with proposals of amendments to the Brazilian Insolvency Act in view of the pandemic.

The Bill contain emergency measures for companies suffering with the economic crisis following the outbreak of COVID-19, including amongst others:  suspension of obligations under  judicial organisations plans for 90 days; a requirement that companies may only be declared as bankrupt if the defaulted credit (s) reaches the minimum amount of R$ 100,000.00 (and no longer 40 minimum wages); order that all credits held by micro and small businesses, regardless of its nature or guarantee, shall be subject to the procedures regulated by the Brazilian Insolvency Act, due to the vulnerability of such companies; amongst other measures.

The Bill is currently awaiting approval by the Senate.

Jurisprudence

There are recent precedents from the Brazilian Courts on judicial reorganisation cases where the Brazilian Insolvency Act has been interpreted in a flexible manner, in the light of the pandemic.

For instance, a Court of Itaquaquecetuba, State of Sao Paulo, allowed a company undergoing judicial reorganisation to suspend all payments of labour credits until the end of the COVID-19 pandemic, given the economic impacts of the outbreak of the virus in the company's activities.

In the judicial reorganization of the Odebrecht Group (the largest proceeding of this nature in progress in Brazil), the judge authorized the holding of a general meeting of creditors by remote means, despite the fact that there is no legal authorization for this modality in the Brazilian Insolvency Act.

In another judicial reorganisation proceeding before the Civil Court of Sao Paulo, the judge granted a preliminary order to the company determining that, based on the economic and humanitarian crisis following the pandemic, the Concessionaires would not be allowed to cut the essential services of water, electricity, phone, internet and natural gas, in view of the debtor's lack of payments during the months of March and April 2020.

Conclusion

The outbreak of Covid-19 has triggered an unprecedented global crisis with a series of events that has caused economic hardship to several businesses, with some of them becoming bankrupt or requesting to undergo judicial reorganisation. The complete economic and financial impacts of the outbreak of the virus in the corporate environment are yet to be seen and the Courts have been issuing decisions interpreting the Brazilian Insolvency Act to deal with the new circumstances and challenges involved in the coronavirus crisis. Also, Brazil awaits the implementation of the new Bill which shall create a more friendly environment to companies undergoing difficulties during the pandemic.