Brazilian Congress has partially enacted the PEC Precatórios
Last Wednesday (December 8th), the Brazilian Congress has enacted part of the proposal to amend the Brazilian Constitution (“PEC”) No. 23/2021, the so-called “PEC Precatórios”, which introduces relevant modifications to the rules governing the payment of federal Precatórios and release space in the Government Budget for 2022 for investments in Federal Government programs.
The voting of the full text of the PEC Precatórios was marked by disagreements between the Senate and the House of the Representatives. The Senate introduced several changes to the text that had been approved by the House of the Representatives, returning the PEC to the House of the Representatives to vote on the amended excerpts. However, in order accelerate the matter, the chairmen of both Houses decided to enact the provisions that had been already approved by both. The remaining sections, amended or added by the Senate, shall be voted on Tuesday (December 14th), in two separate rounds, which will be approved should it have a quorum of at least 3/5 members.
The enacted provisions shall take effect immediately and may be object of direct actions of unconstitutionality addressed to the Supreme Court, as were other Constitutional Amendments that amended the rules on precatórios.
Below we explain some of the main changes introduced by the PEC Precatórios: (1) the modifications to the calculation of the Federal Government annual cap; (2) the payment of municipal debts in installments; (3) the offsetting of state and municipal debts; (4) the deposit of precatórios to a judicial account in the event of outstanding debts by the creditor; and (5) the adjustment for inflation by SELIC. We also explain the main changes that are still to be voted on December 14th: (1) the cap for payment of precatórios; (2) the possibility of settlement to receive amounts arising from precatórios; and (3) the creation of a commission to oversee the precatórios.
Main changes enacted by the PEC Precatórios
1. Modifications to the calculation of the Federal Government Annual Cap
The Federal Government’s annual cap, which limits federal spending to the previous year’s inflation, had been previously adjusted for inflation measured by the IPCA in 12 months, between July of the previous year and June of the current year. With the partial approval of the PEC Precatórios, the amount of the Federal Government annual cap shall be recalculated based on the IPCA from January to December of the previous year, which increased the cap. This adjustment to the Federal Government annual cap does not impact, at the moment, the payment of precatórios.
2. Payment of municipal debts in installments
The payment of social security debts of municipalities could be divided into up to 200 installments. With the approval of the PEC, such number was increased to 240 installments, ensuring relief for municipal finances. As a condition for this benefit, municipalities must demonstrate reforms to local social security rules.
3. Offsetting of state and municipal debts
The PEC enabled the States and Municipalities to use precatórios to pay off debts with the Federal Government. A State or a Municipality may therefore use a precatório to offset a corresponding debt with the Federal Government.
4. Deposit of precatórios in a court account in the event of outstanding debt
If the creditor of a precatório and its substitutes have debts enrolled as overdue tax liabilities, the amount corresponding to such debts must be deposited in the account of the court responsible for the collection lawsuit, which shall decide on their final destination.
5. Monetary adjustment based on SELIC
Irrespective of the nature of the precatório and for purposes of monetary adjustment, remuneration of capital and compensation for late payment, the reference rate index of the Special System for Settlement and Custody (Selic) shall be applied to the value of the precatório, exclusively and until actual payment, accrued monthly.
Main changes that are still to be voted
1. Cap for payment of precatórios
Currently, the totality of the precatórios registered in the Budget in effect are paid. In the event of approval of the reminder text of the PEC Precatórios, a cap to the payment of precatórios in the respective year shall be established. The precatórios cap shall be the amount paid by the Federal Government in connection with legal claims in 2016, adjusted for inflation. The precatórios exceeding this value shall be paid in subsequent years, subject to the order of preference already provided for in the Brazilian Federal Constitution and which shall include, under specific rules, precatórios due to states and municipalities on behalf of FUNDEF (i.e. precatórios due to the states and municipalities re: benefits the Federal Government failed to pay to education professionals).
Therefore, according to Treasury calculations, out of the BRL 89.1 billion of precatórios originally scheduled for 2022, only BRL 45.3 billion would be paid. The other BRL 43.8 billion would be postponed to the following years. The original text of the PEC provided the possibility of these postponements until 2036, but the Senate reduced the deadline to 2026.
2. Possibility of agreement to pay amounts arising from precatórios
Creditors of precatórios that are not issued due to the creation of the cap for payment of precatórios and creditors of precatórios already issued and not included in the 2022 budget proposal, may choose to receive their credit by the end of the following year, but with a 40% (forty percent) discount in the value of the credit.
3. Commission to monitor the precatórios
The Senate included in the PEC the possibility of creating a commission in the Brazilian National Congress, composed by Congressmen and women, to monitor the issuance of federal precatórios. The purpose of the commission is to reduce the risk of issuing excessive precatórios and, consequently, of paying high amounts of precatórios in a certain year, as occurred for 2022.
Our Firm has teams specialized in Investment Fund, Special Situations and Dispute Resolution. If you want to learn more about the PEC Precatórios or other related topics, please reach out to our lawyers.
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