Since the beginning of the Covid-19 pandemic, due to the closure of commerce, mobility restrictions, mandatory isolation of risk groups, drop in demand, the shutdown of the automotive industry, etc., companies have faced a dilemma: I do not have cash to pay my suppliers, what to do?
The first solution that comes up for discussion is to file for judicial reorganization. But will this be the best alternative? Will judicial reorganization be the lifeline for the company to navigate the turbulent waters of the pandemic? This alternative requires a thorough analysis to verify whether it is the viable alternative to safeguard the maintenance of the company’s activities.
The first point to be analyzed is the time of the judicial proceeding. Judge Daniel Carnio Costa, presiding judge of the 1st Court of Bankruptcies and Judicial Reorganizations of São Paulo, explains that, on account of Covid-19, creditors have sought the Courts to receive their credits and, on the other hand, debtors have sought the revision of the contract or the non-performance of the obligation. And he comments that if these demands turn into millions of lawsuits, the Judiciary will not have the arms to handle the volume of demand, causing the inefficiency of the judicial action, since, in the delay of the efficiency of jurisdictional protection, a large portion of the debtors will no longer have income and revenue to pay their creditors[1].
Another point that must be considered, which is potentially a consequence of the request for judicial reorganization, is the potential scarcity of credit. A survey by the Central Bank, disclosed by O Estado de S. Paulo on 04/29/2020[2], shows that the credit balance rose 9% in operations with larger companies, while there was an increase of only 2.1% in the case of smaller ones[3]. If there is difficulty in accessing credit, this difficulty increases enormously for the company under judicial reorganization, because, as soon as the processing of the reorganization is granted, there is a natural retraction of the credit market, which resists lending money to a company under a judicial reorganization regime.
Before the Covid-19 pandemic, a study carried out by the Insolvency Observatory of PUC-SP, disclosed by O Estado de S. Paulo on 09/15/2019, shows that 60% of the companies in the State of São Paulo that opted for the judicial proceeding between 2010 and 2018 were unable to fulfill the plan in the first two years, having created a wave of “zombie” companies, without the capacity for investment and cash generation[4].
Therefore, given that the current crisis caused by Covid-19 is much more severe than previous crises, the expectation that a company under judicial reorganization will have more difficulties in recovering is much more latent, because, in addition to the difficulty of accessing credit, there will be the difficulty of resuming business activities for the “new normality,” the difficulty of forecasting what post-pandemic business will be like, combined with the high cost of maintaining a judicial reorganization.
In this scenario, in the initial moments of a company’s financial crisis, a legal alternative to be analyzed by the company in difficulty is the Extrajudicial Reorganization, regulated by Law No. 11.101/2002 (Law of Judicial Reorganization and Bankruptcy), which allows the continuity of business activities without the need for the intervention of a judicial administrator, the Public Prosecutor’s Office, or the involvement of all classes of the company’s creditors.
The fact of not having the involvement of a judicial administrator and the negotiations being carried out by the company itself means less bureaucracy and lower costs, because in Judicial Reorganization, in addition to the fees of the judicial administrator, there are the costs of holding meetings and the court costs, in addition to the procedural deadlines and the potential slowness of the judicial process if there is an overload of the judiciary after the pandemic.
On the other hand, in the Extrajudicial Reorganization the payment plan does not have the breathing room of the stay period (180 days) that exists in the Judicial Reorganization, and granted after the approval of the reorganization request, a period that is granted for the reorganization of business activities without the risk of attachment or constriction that would harm the construction of the plan for the survival of business activities.
In general terms, the Extrajudicial Reorganization is a debt restructuring entered into between the debtor company and a certain class of creditors, for example, the suppliers, with the objective of entering into an agreement for the payment of the debt. The agreement is the acceptance by the creditors of the payment plan proposed by the debtor company, and the plan may not contemplate the early payment of debts nor unfavorable treatment to any creditor. However, credits of a tax and labor nature, advances on a foreign exchange contract for export, and extra-bankruptcy credits (fiduciary creditor of movable or immovable assets, for example).
The plan may encompass the totality of one or more types of credits, or a group of creditors of the same nature and subject to similar payment conditions and, at the discretion of the debtor company, may or may not be judicially ratified. However, judicial ratification is necessary to bind all creditors of the types encompassed by it, with respect to the credits constituted up to the date of the ratification request, provided that there is the agreement/adhesion of 3/5 (three-fifths) of all the credits of each type encompassed in the Extrajudicial Reorganization.
The judgment ratifying the judicial reorganization plan has the nature of a judicial enforcement instrument and, therefore, if the plan is not fulfilled, it may be enforced judicially.
Each company has its own history, its peculiarities, its realities. Therefore, in a moment of crisis it is necessary to assess the feasible alternatives for the recovery of the company, because the bankruptcy of business activities does not bring benefits to the debtor, to the creditor, or to society as a whole.
This article has a generic and informational character and does not constitute a legal opinion for any specific case.
[1] https://www.conjur.com.br/2020-abr-22/tribunais-podem-nao-dar-conta-demandas-recuperacao-judicial
[2] https://bit.ly/digital-estadao-lassori
[3] The Central Bank classifies as small and medium-sized enterprises those with annual gross revenue of up to 300MM or assets of up to 240MM. Above these amounts they are considered large enterprises.
[4] https://economia.uol.com.br/noticias/estadao-conteudo/2019/09/15/em-sp-quase-60-das-empresas-em-recuperacao-judicial-viram-zumbis.htm
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