The future of court-assisted reorganisation in Brazilian regulated sectors

April 2013 | PROFESSIONAL INSIGHT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

Last August, the Brazilian government passed Provisional Executive Act No. 577/12, which establishes that concessionaires of electricity as a public service are not subject to the judicial reorganisation procedure regulated by Federal Law No. 11.101/05 (the Brazilian Bankruptcy and Reorganisation Law).

According to this Provisional Executive Act, concessionaires of electricity are subject to specific rules for intervention by the concession-granting authority, embodied by the Brazilian Electric Energy Agency (ANEEL). Under this intervention procedure, if deemed necessary (including in situations of indebtment), ANEEL is entitled to declare the forfeiture of the concession; take over, restructure or assign shares in the company that holds the concession, or incorporate a wholly owned subsidiary; increase the capital of the company holding the concession; and/or incorporate a special purpose entity to assign the assets previously owned by the concessionaire by way of payment to creditors, amongst other provisions.

The enactment of Provisional Executive Act No. 577/12 by the Brazilian government gave rise to intense debate within the legal community, especially in terms of its constitutionality and reasonability.

From a formal point of view, the constitutionality of Provisional Executive Act No. 577/12 may be questioned on the grounds that the requirements for the passing of an executive order by the Brazilian government were not present when the statute was enacted. For instance, it is questionable whether the procedure applicable to concessionaires of electricity in the event of severe indebtment could be ruled through a provisional executive act, since Brazil’s Constitution establishes that procedural law cannot be ruled through executive orders (Art. 62, I, ‘b’, of the Brazilian Federal Constitution).

The Provisional Executive Act in question was already converted into law, which enfeebles, to some extent, the discussion about its formal irregularities. This, however, does not completely overcome the irregularities, which may be questioned at any time.

So far, despite intense debate on the matter, the constitutionality of the Provisional Executive Act No. 577/12 has not been formally questioned before the Supreme Court of Brazil, but this possibility cannot be dismissed. However, there is already one judicial precedent contrary to the validity of the Provisional Executive Act in question. Indeed, in the judicial reorganisation procedure involving the concessionaire of electricity Centrais Elétricas do Pará S.A. (CELPA), the judge responsible for the case ruled that the Provisional Act No. 557/12 was not valid and, therefore, could not be an obstacle to the court-assisted reorganisation required by CELPA. Although this is to date an isolated decision, its precedent is certainly relevant.

Apart from its questionable formal regularity, the Provisional Executive Act No. 577/12 has also raised many disputes concerning the reasonability of its material content.

In fact, considering that since the enactment of the Brazilian Bankruptcy and Reorganisation Law there have been many successful cases of court-assisted reorganisation, with the full recovery and preservation of the companies involved, it is rather surprising that the government has chosen to deprive the concessionaires of electricity of this right.

In other words, given that the judicial reorganisation procedure established under Law No. 11.101/05 has proven itself to be an efficient and advantageous means of solving indebtment problems (not only for the indebted company, but also for its creditors and employees) and, at the same time, preserving the company, it is not fully comprehendible why the Brazilian government would want to replace it with an intervention procedure. To be sure, the Brazilian government’s increasing desire to intervene in regulated sectors is one possible answer.

In this context, the inevitable question arises: will the Brazilian government’s intervening tendency repeat itself in other regulated and equally important sectors of the national economy? Only time will reveal the future of court-assisted reorganisation procedures in regulated and strategic sectors of the Brazilian economy.

Rogério Carmona Bianco, Luiz Felipe Pereira Gomes Lopes and Maria Beatriz Rizzo are partners at Lilla, Huck, Otranto, Camargo Advogados. Mr Bianco can be contacted on +55 11 3038 1019 or by email: rogerio.bianco@lhm.com.br. Mr Lopes can be contacted on +55 11 3038 1223 or by email: luizfelipe.lopes@lhm.com.br. Ms Rizzo can be contacted on +55 11 3038 1066 or by email: maria.rizzo@lhm.com.br.

Rogério Carmona Bianco, Luiz Felipe Pereira Gomes Lopes and Maria Beatriz Rizzo

Lilla, Huck, Otranto, Camargo Advogados