Priscilla Folgosi Castanha
Lawyer at Marcos Martins Advogados
Observatório da Insolvência (Insolvency Observatory), an initiative of the Center for the Study of Insolvency Proceedings at PUCSP and the Brazilian Association of Jurimetry (ABJ), surveyed and analyzed all insolvency proceedings distributed in the state of São Paulo between January 2010 and July 2017, evaluating the results obtained, with the aim of supporting legislative and academic debates aimed at improving bankruptcy and judicial reorganization law.
138 variables were analyzed in 906 cases, allowing for an accurate reflection on the reality experienced by companies in crisis during the course of their proceedings, as well as the viability and success of reorganization processes.
With regard to the profile of the applicants, the study found that 92 (10.1%) judicial recoveries were filed exclusively by Micro Companies (ME), 94 (10.3%) judicial recoveries were filed exclusively by Small Companies (EPP), 182 by corporate groups, even if they involved EPP and ME, and 538 (59.3%) exclusively by isolated companies not classified as EPP or ME.
The result reveals an imbalance between the size of companies registered with the Board of Trade and those that resort to the reorganization process, since there is a greater concentration of requests for medium-sized and large companies, while at the Board of Trade there is a preponderance of registration of smaller companies.
This result can be attributed to the cost of the process, both the direct costs involving legal fees, trustee fees, court costs and advisors, as well as the damage to the company’s reputation and difficulty in accessing credit.
As for the activities of the reorganized companies, the metal industry accounted for 128 requests (14%), the retail sector for 99 (10.9%), the food sector for 85 (9.3%), general industry for 81 (8.9%), wholesale for 78 (8. 6%), the real estate sector for 41 (8.6%). 6%), real estate 41 (4.5%), logistics 30 (3.3%), printing and communication 15 (1.6%), alcohol and sugar cane 13 (1.4%), clothing 6 (0.7%), travel agency 4 (0.4%), IT 4 (0.4%), private security 4 (0.4%) and outsourcing 3 (0.3%).
In addition, in cases where the plaintiffs are larger companies, the rate of approval of the reorganization process reaches 90%, which is believed to be due to the quality of the accounting and financial controls, which are often poor and inconclusive in small companies.
The controversial prior expertise, a practice that began in 2014, was carried out in 25 cases, 8.8% of the cases distributed before the specialized courts – Capital, while in the common courts (interior of the state) in 10.8% of the cases (68 cases). In the specialized courts, processing was granted in 19 of the 25 cases in which it was carried out, while without prior expertise it was granted in only 51.55% (133 cases out of 258). In the ordinary courts, prior expertise resulted in 84.1% of cases being processed (57 out of 68), while the rate of approval without prior expertise was 69.9% (388 out of 561). As such, there is a greater propensity for processing to be granted in cases where the procedure is carried out.
The average time between the filing of the lawsuit and its granting was 57 and 57.5 days in the common and specialized courts, respectively. Recovering companies with higher turnover had faster processing decisions.
The time between the processing being granted and the General Meeting of Creditors being held in the specialized courts averaged 314 days and 433 days in the ordinary courts. The study reveals what is already known in practice: the 180-day stay period[1] is unreasonable to allow for stable negotiations on the reorganization plan with creditors, so much so that, despite the legal rule, case law has consolidated the understanding that an extension is possible as long as the failure to hold the meeting within the indicated period is not attributable to the debtor[2].
The data collected indicates that the median time until the final decision on the judicial reorganization plan was 517 days. In specialized courts, the median time is 407 days, while in ordinary courts the median is 567.
As far as the approval of reorganization plans is concerned, the data revealed that it is widespread. Of all the judicial reorganizations analyzed in the survey, 17% had their bankruptcy decreed before the first General Meeting of Creditors was held. Of those that submitted their judicial reorganization plans for deliberation at the creditors’ meeting, 276 (or 72.1%) had their judicial reorganization plans approved. The plan was disapproved by the creditors in only 6.0% of the cases in the ordinary courts and in 6.9% of the cases in the specialized courts.
In the specialized courts, out of a total of 152 cases, only in 8 cases was the approval of the judicial reorganization plan by cram down, i.e. by approval through the alternative quorum for deliberation on the judicial reorganization plan provided for in article 58, paragraph 1, of Law 11.101/05. In the ordinary courts, the percentage was even lower. Out of a total of 445 judicial reorganizations approved, in only 14 were the judicial reorganization plans approved by cram down.
The survey also assessed the content of the approved plans, such as the term, interest rate, monetary correction index, sale of assets in general and sale of isolated production units – UPI.
At least 10.3% of the plans provide for the sale of isolated production units, under the terms of article 60 of Law 11.101/2005. Its use in the specialized courts has grown more recently, reaching approximately 30% in the specialized courts, while its use in the ordinary courts has fallen.
Only 16.2% of the plans provided for the release of third party guarantors, with waiver of collection from co-obligors. This figure is lower than expected, but is possibly due to case law on the ineffectiveness of such a provision vis-à-vis creditors who do not expressly agree with the clause, which is quite common.
With regard to payment methods, labor debts take an average of one year to be settled and it is uncommon for these debts to be discounted by any amount. Only in 4.3% of cases was there any discount. In those cases, however, the average discount was 29.33%.
As for credits with real guarantees, class 2, the recovery plans provided for an average discount of 37.6% and a payment period of 9.24 years. The TR was the most common adjustment index, used in 75.6% of the cases.
With regard to unsecured debts, the survey showed an average payment period of 9.82 years for unsecured creditors, with an average discount of 38.31%. In only 17.3% of the cases was the debt paid in full, with no discount. Disregarding these plans in the accounts, the average discount was 46.43%. There was also an average annual interest rate of 1.94% for unsecured creditors and the TR as the most commonly used index. In most cases, payments are made annually.
Finally, it was found that the time taken to supervise and monitor judicial reorganizations, as a rule, exceeds the two years provided for in the legislation. While in the ordinary courts 73.3% of judicial recoveries that have already exceeded the 2-year deadline are still ongoing, in the specialized courts this rate is only 40.5%. Disregarding unfinished reorganizations, the relative frequency of success in the enforcement phase in ordinary courts is 30.5% (7 out of 23) compared to 52% in specialized courts (26 out of 50). In other words, the success rate for recoveries is 22% higher in the specialized courts.
The full study can be downloaded from the Marcos Martins law firm and is also available on the website of the Brazilian Association of Jurimetry[3].
[1] Art. 6 of Law 11.101/05: The decree of bankruptcy or the granting of processing of judicial reorganization suspends the running of the statute of limitations and all actions and executions against the debtor, including those of the private creditors of the joint partner.
§ Paragraph 4. In judicial reorganization, the suspension referred to in the main body of this article shall in no event exceed the non-extendable period of 180 (one hundred and eighty) days from the granting of the reorganization, and, after the expiry of the period, the right of creditors to initiate or continue their actions and executions shall be re-established, regardless of judicial pronouncement.
[2] STJ, 4th Panel, AGInt in the Interlocutory Appeal in REsp 443.665/RS, rel. Marco Buzzi, DJ 15-9-2016; STJ, 4th Panel, AgInt in the Interlocutory Appeal in REsp 887.860/SE, rel. Raul Araújo, DJ 23-8-2016; TJSP, 1st Chamber Reserved for Business Law, AI 20000601-16.2016, rel. Des. Francisco Loureiro, DJ 10-3-2016; TJSP, 2nd Chamber Reserved for Business Law, Ag Reg 2165078-56.2016, rel. Des. Fábio Tabosa, DJ 28-11-2016; TJSP, 1st Chamber Reserved for Business Law, AI 2148981-15.2015, rel. Des. Pereira Calças, DJ 3-2-2016.
[3] WAISBERG, Ivo; SACRAMONE, Marcelo Barbosa; NUNES, Marcelo Guedes; CORRÊA, Fernando. Judicial Recovery in the State of São Paulo – 2nd Phase of the Insolvency Observatory. Available at: <https://abj.org.br/cases/2a-fase-observatorio-da-insolvencia/>.
