Electric Power Concessionaires Prevented From Resorting To Judicial Reorganization

Author:Mr António Manuel França Aires and Ana Barbara Costa Teixeira

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...

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