Priscilla Folgosi
Lawyer at Marcos Martins Advogados
Law No. 11.101/2005, the Judicial Reorganization and Bankruptcy Law (LRF), established the business reorganization regime in the Brazilian legal system, which allows business owners to negotiate a plan with their creditors that will enable their effective recovery.
To this end, a number of legal requirements must be met, including the absence of opposition from creditors to the plan presented by the debtor, or, if there is any objection, its approval at a general meeting of creditors, taking into account the quorum provided for in Article 45 of the LRF.
However, even if this quorum is not reached, the LRF authorizes the judge to intervene in the outcome of the vote and impose approval of the plan on the creditors who rejected it, a hypothesis which has been given the name cram dowm, given its origins in US law.
This hypothesis is regulated in paragraph 1 of article 58 of the LRF, so the judge may grant the judicial reorganization even if the plan has not been approved by the legal quorum, provided that, at the same meeting, cumulatively: (i) the favorable vote of creditors representing more than half the value of all the claims present at the meeting, regardless of class; (ii) the approval of two of the classes of creditors under the terms of article 45 or, if there are only two classes with voting creditors, the approval of at least one of them; and (II) in the class that rejected it, the favorable vote of more than 1/3 of the creditors, computed under the terms of paragraphs 1 and 2 of article 45.
All the provisions on the quorum for a cram down are based on the old wording of article 45, which provided for the existence of only three classes of creditors. However, Complementary Law 147, of August 7, 2014 (LCP 147) made significant changes to the LRF, including the creation of a new class of creditors, that of holders of credits classified as micro-enterprises or small businesses, called Class IV, whose votes will be counted by a simple majority of the creditors present, regardless of the value of their credit (art. 45, §2).
Thus, originally, when we only had three classes of creditors, approval in two of the classes was one of the cumulative requirements for the cram down, however, since LCP 147 came into force, there is the possibility of four classes of creditors coexisting. Despite this, LCP 147 did not change the wording of article 58, paragraph 1, making the legislation silent as to whether there was a rejection in two of the possible four classes and, if this was the balance of the meeting, whether it would be a case of decreeing bankruptcy or whether there would be the possibility of granting reorganization based on cram down.
Although this innovation has been positive in that it aims to safeguard the interests of micro-enterprises and small companies, as well as strengthening their negotiating power, the legislator’s omission in not foreseeing its effects on the application of cram down has led to serious interpretative difficulties and legal uncertainty.
In an attempt to clarify the issue and provide greater uniformity in decisions, the II Commercial Law Conference, held on February 27, 2015 by the Center for Judicial Studies of the Federal Justice Council (CEJ/CJF), approved Statement no. 79, according to which the requirement of item III of §1 of art. 58 of Law no. 11101 applies to all classes in which the judicial reorganization plan did not obtain approval under the terms of art. 45 of this Law.
Even so, the Statement does not clarify whether it would be possible for judicial reorganization to be granted even if the judicial reorganization plan is rejected by two classes of creditors, as can be seen from the legal wording, and there are different currents in formation.
In view of the omission pointed out and the exponential growth in requests for judicial reorganization[1] in this period of serious political and economic crisis faced by Brazil, and also considering the potential compromise of its results, it is up to the legislator to clarify this as soon as possible, given the importance of allowing the effective application of the institute and of curbing the abuse of voting rights by creditors whose personal interests conflict with the main objective of the LRF, which is the preservation of business activity.
Marcos Martins Advogados Associados is prepared to handle judicial reorganization processes, the complexity of which requires professionals committed to their clients’ business strategies and always in search of innovative legal solutions.
