The section 60, sole paragraph, of Federal Law 11.101/05, is likely one of the most discussed and actually used tools brought by the almost 10-year old Brazilian Bankruptcy Act.
In summary, such section establishes that the purchaser of an isolated business division of a company under judicial recovery (the Brazilian Chapter 11 equivalent), provided that certain requisites are met, should not inherit any liability from the Seller.
Such a section has been developed to give to the company under judicial recovery, and to its creditors, a genuine opportunity to timely generate an important cash flow. In such situation, if a due diligence had to be performed by the Purchaser, it is likely that the results would cause the business not to be sold, or at least to be sold under not very attractive conditions from Seller's standpoint. Likewise, a sale preceded by a due diligence would likely not meet the pace required by an insolvent company with urgent cash flow needs.
After almost 10 years from the enactment of the Brazilian Bankruptcy Act, section 60 has proved to be a very solid means to enable the acquisition of assets from a company under judicial recovery. Actually, the "Superior Tribunal de Justiça", the highest Court in Brazil to decide issues on Federal Law, has been constantly upholding the validity of section 60 and the actual insulation brought by it to the Purchaser.
From a practical standpoint, the assets sold in the context of a judicial recovery are commonly dropped by the Seller (the company in judicial recovery) into a new company before the sale takes place. As a consequence, the Purchaser acquires the shares of such new company, under which the desired assets are.
The question is how such a process, commonly and successfully used so far, will be seen under section 4 of Federal Law n. 12.846/13, the so-called Brazilian Anticorruption Act. Such section sets forth that the company remains liable even in case of any contractual change, transformation, incorporation, merger or spin off.
Additionally, paragraph 1 of the aforementioned section 4 establishes that, in case of incorporation or merger, the succeeding company becomes liable for fines and damages (and not the other penalties set forth by the Anticorruption Act), and up to the limit of the assets transferred or merged, unless fraud is found.
The purpose of section 4 is two-fold: (i) it avoids that the company adopts any maneuver to set aside its liability or cause the company not to hold sufficient assets for the payment of fines and damages; (ii) it transfers to third parties which have merged into or incorporated the problematic company the liability originally held by it.
As a consequence, it could be said that the Anticorruption Act brought the need to perform a specific due diligence fashioned to check out whether there might be any violation of such act. Any failure in such assessment may bring to the third party acquiring the problematic company, or part of that, the aforementioned liability.
Having it said, it is worth checking out whether a purchase made under section 60 of the Bankruptcy Act is suited to insulate the Purchaser and the assets acquired from the liabilities set forth by the Anticorruption Act. As mentioned earlier, a section 60 sale is often preceded by a spin off, which by virtue of the Anticorruption Act is not capable of setting aside the liabilities established by such law.
The answer is not clear and Brazilian Courts have not been faced with such a circumstance yet. We believe, however, that the insulation brought by section 60 of the Bankruptcy Act should be sufficient, basically due to the following reasons:
- section 60 has a very broad wording, according to which it should protect Purchaser from any liability;
- if section 4 of the Anticorruption Act prevails over section 60, it is likely to cause section 60 no longer to be used, or at least not as much as it has been used;
- the section 60 sale takes place under Court's supervision, so that it will not be used for any fraudulent purpose.
Regardless of the aforementioned understanding, this is a situation that will be extensively discussed and debated in any purchase under section 60 of the Bankruptcy Act, particularly when the company under judicial recovery has long-term relationships with governmental entities.
For such reasons, until Brazilian Courts have repeatedly decided about the matter, Purchasers should be skeptical on any purchase and should see the acquisition from the aforementioned perspective, which poses some questions about the full applicability of section 60 of the Bankruptcy Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.