In recent years, Brazil has seen a significant increase in the number of judicial recoveries. According to data from Serasa Experian, the growth was almost 70% last year and 71% in the first half of 2024 alone, compared to the same period in 2023. This phenomenon can be explained by several factors, ranging from the effects of the pandemic to the current economic scenario, with high interest rates and difficulties in accessing credit.
For companies in crisis, however, there are less explored but equally relevant options. One of them is out-of-court reorganization, which has some advantages over judicial reorganization: it does not require the participation of all creditors and allows negotiations to be carried out in a more targeted and efficient manner.
It is also particularly useful for companies that face occasional financial problems – such as defaults with suppliers or banks – but are still in business. The procedure is also usually quicker and less expensive, since the reorganization plan is already negotiated before going to the courts. And it is enough that more than half of the claims covered by the plan are accepted for it to be applied to dissenting creditors.
Despite its obvious advantages, out-of-court reorganization is still little used in Brazil. Before the law was changed in 2020, one of the difficulties was the lack of legal provision for a stay period, the period of suspension to protect the company from judicial foreclosures during the process. It was hoped that the introduction of this measure would increase the adoption of out-of-court recoveries, but this has not happened on the scale expected.
Several factors have contributed to this resistance. Firstly, Brazilian business culture does not yet sufficiently recognize this measure as a viable crisis management option. On the other hand, judicial recovery is seen as a more comprehensive and safer solution, albeit time-consuming and costly. In addition, the lack of specific legal provisions on “DIP financing” in out-of-court recoveries has hindered the use of this instrument.
Another important point is the sale of isolated production units (UPIs). While in judicial reorganizations there is express legal provision for the sale of assets without succession, guaranteeing greater security for investors, in out-of-court reorganizations this rule is not explicitly provided for, which puts off potential interested parties.
In order for out-of-court reorganizations to reach their full potential, effective legislative changes are welcome, but the work of legal practitioners and the courts in closing loopholes and resolving issues that the legislator has left open will certainly contribute to boosting this solution as an interesting alternative for overcoming business crises.
In an uncertain economic scenario with recurring crises, out-of-court reorganization is a valuable tool which, if properly developed and promoted, could be used more widely. Its main advantages, such as agility, flexibility and lower costs, are important attractions.
