Brazil: Electric Power Concessionaires Prevented From Resorting To Judicial Reorganization

Legislation provides for the immediate freezing on former managers' assets

Until the enactment of Provisional Presidential Decree (MP) 577 on August 29, 2012, later transformed into Law no. 12.767/2012, electric power concessionaires and licensees had the possibility of resorting to the judicial or extrajudicial reorganization procedure under Law no. 11.101/2005 (Law on Corporate Reorganization and Bankruptcy, "LRF", in the Portuguese acronym) to seek a solution to their financial problems.

However, Law no. 12.767 simply ruled out those companies' right to resort to the most beneficial regime under the LRF, while the concession is in effect. This is so because, according to the preamble of said law, the lawmaker's essential intent was to protect the concession authority from any burden assumed by the company holder of the public concession.

Before the new legislation, electric power concessionaires were able to rearrange their debt profile by resorting to the mechanisms under the LRF, such as selling assets (provided that not reversible assets) without succession of labor and tax liabilities (according to the Tax Code adaptation to the judicial reorganization), obtaining discounts in their debts, in sum, all the mechanisms available to any kind of company, either electric power concessionaires or not.

Under the LRF, the future of electric power operators was in the hands of the creditors, to the extent that they might or might not approve the Judicial Reorganization Plan ("PRJ", in the Portuguese acronym) prepared by concessionaires facing a judicial reorganization procedure. This had the potential of generating a situation inconsistent with the demands of the provision of a public service, considering that the fundamental purpose of creditors is to have their credit rights satisfied. In view of that situation, the Federal Government considered that said creditors' conduct might generate a considerable risk of termination of concession contracts for non-performance, should the PRJ be rejected.

The Government's conclusion was that the concession authority was under the risk of (i) being prevented from providing an essential public service, such as electric power, if the PRJ were rejected, and (ii) the concessionaire selling its assets, without the tax liabilities being taken over by the purchaser. Hence, the Government might run the risk of having to take over the services and the tax debts.

In other words, further to losing the right to collect overdue taxes from the new purchaser of the assets, the Government would have to assume the payment of the services. A double burden, therefore.

Those were the circumstances that led the Executive to enact MP 577, later transformed into Law no. 12.767, and to exclude electric power concessionaires from the judicial reorganization regime under the LRF and, above all, to prevent the concession authority from having to assume any liability in regard to taxes, charges, burdens, obligations or commitments to third parties or employees related to a period prior to the termination of the concession (art. 2, par. 2, Law no. 12.767).

Furthermore, recent cases to which Law no. 12.767 was applied show that companies controlling electric power operators and facing a reorganization procedure have a limited capacity to restructure themselves and dispose of their assets, which is now in the hands of the Brazilian Electricity Regulatory Agency (Aneel).

Risk to the Management. Under the new legislation, Aneel gained power to intervene directly in the concessionaire's economic activity by appointing an intervenor (paid by the concessionaire itself) for one year, extendable to two years. Furthermore, in the intervention, the concessionaire's management and audit committee are immediately suspended, and the intervenor appointed by Aneel gains full managerial powers.

As the former managers cannot defend themselves, their assets are immediately frozen "and they may not, in any manner, directly or indirectly sell or encumber such assets until their liabilities are determined and finally settled", as set forth in art. 16 of Law no. 12.767. Said provision reaches not only the company's management at the time of the intervention, but also the management in the twelve months prior to Aneel's intervention.

In other words, the question is whether the new law's attempt to prevent the Government from taking over possible liabilities of the concessionaires ultimately increased or decreased the legal safety to investors and creditors of the concessionaires.

The State intervention in the economy, especially in the concession of essential services, should be a subsidiary measure, to give the private sector space to act in the market. And the services should continue to be inspected and directed by the State, as the regulatory body, as such inspection and direction are essential to the services' quality and safety.

It is important to evaluate whether or not this model of regulation currently implemented by the Government, based on specious measures such as the enactment of MP 577, has the inherent capacity of increasing the infrastructure investors' perception of the regulatory risk, especially because it sets a precedent (even if theoretical) for its extension to other regulated sectors. This happens in a scenario in which the Brazilian Government is attempting to set reasonable tariffs, with a visible exhaustion of the public financing model and an increasing need to attract private capitals for the materialization of structural projects essential to ensure the economic growth of Brazil.

António Manuel França Aires and Ana Barbara Costa Teixeira are partners in the Infrastructure Practice Area of Demarest Advogados

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.

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