On March 17, 2021, the National Congress rejected 12 of the 14 vetoes by President Jair Bolsonaro (veto nº 57/2020) on Law nº 14,112/2020, which amended the Brazilian Bankruptcy Code (Law nº 11,101/2005 - “LREF”).

The vetoes to articles 60, sole paragraph, and article 66, paragraph 3, of the LREF were rejected, which clearly state that, provided that a competitive process is carried out under the terms of the LREF, the object of the sale will be free from any onus, and there will be no succession of the acquirer (or bidder) in the debtor's obligations, including, but not limited to, those of an environmental, regulatory, administrative, criminal, anti-corruption, tax and labor nature. These provisions, applicable to the hypothesis of sale preceded by judicial authorization (art. 66 of the LREF) and Isolated Productive Units (art. 60 of the LREF), are in accordance with the Brazilian Court’s understanding prior to Law No. 14,112/2020, and gives legal certainty for investors, encouraging the acquisition of assets in the scope of bankruptcy and judicial reorganization.

Among the other rejected vetoes are:

(a) the provisions that allowed the full use of Net Operating Losses (NOLs) from previous years to offset taxable capital gains from the sale of assets of the company under judicial reorganization or bankruptcy or on the discounts obtained in debts renegotiations (haircut), not being applicable the general rule which limits the compensation with NOLs to 30 percent of taxable profits in a given year.

(b) the provisions that expressly provided that the gain obtained with the renegotiation of debts (discounts) would not be taxable by social contribution on net revenue (PIS and COFINS)

(c) the provisions that provided that the expenses corresponding to the obligations assumed in the judicial reorganization plan will be deductible in determining the taxable income and the CSLL calculation base, provided that they have not been subject to a previous deduction;

(d) the provision that determined that credits arising from cooperative acts practiced by cooperative societies will not be subject to the effects of judicial reorganization proceedings and that authorizes the judicial reorganization of medical cooperatives operating a health plan;

(e) the device that authorized the exclusion of the judicial reorganization proceeding of the credits and guarantees linked to a Rural Product Certificate (“CPR”) with physical settlement, in case of partial or full anticipation of the price or in case of exchange for inputs.

On the other hand, some of the vetoes were maintained: (i) the provision that determined the suspension of labor enforcements against “subsidiary or joint liability, until the plan was approved or the judicial reorganization was converted into bankruptcy” and (ii) the provision that determined that it would be up to the Ministry of Agriculture, Livestock and Supply to define which acts and events would be characterized as unforeseeable acts or bigger force (force majeure) for purposes of subjecting the credits linked to CPR with physical settlement to the effects of judicial reorganization. The rejected vetoes have to be approved by the President of the Republic, and, in his omission, promulgated directly by the president or vice president of the Brazilian Senate.

Our lawyers are available for further clarifications regarding the amended Bankruptcy Code and its practical consequences.

For more information related to this Legal Update, please contact our Restructuring & Bankruptcy or Tax team.