Judicial recovery: how does it work and what are the phases of this process?

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2023

With the advent of the pandemic and its consequent social, economic, cultural and political impacts, several companies suffered the closure of their doors, albeit temporarily, due to the measures adopted by the Federal and State Governments to contain the spread of the Covid-19 virus.

However, this temporary closure ended up triggering a series of financial problems for companies, especially for micro and small companies; those that offered a service that could not be performed in any other way than in person, such as beauty salons; and those that offered services or sold products not considered essential, especially at such a delicate and insecure moment, such as bag stores and buffets of parties.

There were several financial problems, because, with the absence of sales or provision of services, there was, consequently, no cash inflow, which ended up hurting the cash flow of companies that, while behind closed doors, had to continue paying their rents, employees, suppliers, taxes, etc.

All of this turned into a snowball for many companies that, unfortunately, had to permanently close their doors (bankruptcy) or file a request for judicial reorganization in order to get back on their feet.

In this sense, according to data collected by Serasa Experian, in the month of June 2023, there were a total of 92 (ninety-two) requests for judicial reorganization, 63 (sixty-three) of them from micro and small companies, 26 (twenty-six) from medium-sized companies and 3 (three) from large companies.

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What is judicial reorganization?

Judicial reorganization, as its name suggests, is a judicial procedure whose objective is to prevent the company that made this request from permanently closing its activities, making dismissals and ceasing to pay what it owes, either to its employees or to its suppliers, for example. It is a procedure that aims to assist companies that are experiencing an economic-financial crisis.

In this sense, we can see the provisions of article 47 of the Judicial Recovery Act (No. 11,101/2005):

”Art. 47. Judicial reorganization has as its objective enable the debtor to overcome the situation of economic and financial crisis, in order to allow the maintenance of the source of production, the employment of the workers and the interests of the creditors, thus promoting the preservation of the company, its social function and the encouragement of economic activity”.

In other words, the judicial reorganization process is an important instrument for overcoming an economic-financial crisis of a company that, aims to grant economic impetus to the company, allowing it to suspend and renegotiate its labor, tax, supplier and other debts, for a longer term and in installments; and avoid the death of the company, that is, the decree of its bankruptcy.

What is the difference between judicial reorganization and extrajudicial recovery?

Regardless of the type of recovery sought by the company, both, judicial or extrajudicial, allow/aim for the company with financial difficulties to restructure and organize its debts before its employees and creditors. The Judicial Recovery Act applies to both cases.

However, there are some important differences between the types of recovery.

In judicial reorganization, the request is made to a judge, that is, the procedure is before the Courts, more specifically, before the Bankruptcy and Judicial Recovery Court. The judge will review and decide on the debt renegotiation plan.

In the case of extrajudicial recovery, the company negotiates its debts directly with its creditors, who must agree with the recovery plan presented, requiring approval of at least three-fifths of all credits of each type that will be renegotiated.

With 100% (one hundred percent) of creditors joining, there is no need for the plan to be approved by a judge. However, in situations where there is no agreement of all creditors, the recovery plan must be submitted for approval by the Judiciary.

Another important difference between them is that in judicial reorganization, the company is protected against lawsuits for debt enforcement, that is, it is possible to temporarily suspend the payment of those debts; and bankruptcy filings. In extrajudicial recovery, there are no such protections.

In addition, while in judicial reorganization it is possible to include tax, labor and occupational accident claims in the plan, in extrajudicial recovery, this negotiation is not possible.

For these reasons, before opting for one or another type of recovery, the company must map all its debts and verify whether or not they can be negotiated extrajudicially.

When is a request for judicial reorganization valid?

As we have seen, the purpose of judicial reorganization is to help a company recover in the face of an economic and financial crisis.

But can any and every company request judicial reorganization? In what situations can this request be made?

That's what we'll see in this chapter.

Article 2, of the Judicial Recovery Act, states that its terms are not applicable to public companies and mixed-capital corporations; and public or private financial institutions, credit unions, consortiums, supplementary pension entities, companies operating health care plans, insurance companies, capitalization companies, and other entities legally equivalent to the previous ones.

Not falling under some of the exceptions presented above, the company may file a request for judicial reorganization, provided that it meets the cumulative requirements set out in article 48 of the above-mentioned law, that is, all the premises must be present in order for the request to be made. They are:

Regular exercise of business activities for more than 2 (two) years;
Not to be bankrupt and, if already was, to have the obligations/liabilities resulting therefrom declared extinct, by a final judgment (i.e., there is no further appeal);
Not having obtained, less than 5 (five) years ago, the judicial reorganization grant; and
Not to have been convicted or not to have, as an administrator or controlling partner, a person convicted of a bankruptcy crime.

In addition to this, the above-mentioned law allows the request for judicial reorganization to be requested by the surviving spouse, the debtor's heirs, inventors, or remaining partners.

What are the stages of the judicial reorganization process?

Once the necessary and cumulative requirements for filing a request for judicial reorganization have been fulfilled, the company may take the first step and file, before the competent judge, its request.

Request for recovery

Nessa 1st phase, the company must prove that it is, in fact, facing a serious economic and financial crisis.

This proof may be made by collecting various documents, such as, but not limited to: late payment of salaries, outstanding debts, charges made by your creditors, protests, bank statements, etc.

Once the order has been placed, the company goes to 2nd phase, that is, the review and approval of the request for judicial reorganization by the judge.

Suspension of charges

If the request is accepted, the judge, by means of a non-terminative decision (it is not a judgment that judges and puts an end to the process, but rather, a mere initial decision), will appoint a judicial administrator and will order the suspension of all actions and executions against the company, for a period of 180 days.

After this decision, the 3rd phase. Here, the company must, within 60 days of the publication of the decision that granted the processing of the judicial reorganization, submit a recovery plan to the General Meeting of creditors, which must approve or reject the plan, under penalty of declaring its bankruptcy.

Creation of the recovery plan

The plan to be submitted by the company must contain:

the detailed breakdown of the means of recovery to be employed;
the demonstration of your economic viability to comply with what has been proposed;
economic and financial report and valuation of the company's assets and assets, signed by a legally qualified professional or specialized company.

In other words, the plan must contain the measures that the company intends and may adopt to reorganize and rebuild. The company must present something that it is able to comply with.

In addition, the judicial reorganization plan may not provide for a period exceeding one year for the payment of labor claims or claims resulting from accidents at work, due on the date of the request for judicial reorganization; and 30 days for the payment, up to a limit of five minimum wages per employee, of strictly wage credits due in the three months prior to the request for judicial reorganization.

Approval of the recovery plan

Once the plan is approved by the creditors, the judge authorizes the recovery plan and determines its execution. If, however, the plan is not approved, the judicial administrator will submit to the vote of the General Meeting of creditors the granting of a period of 30 days to submit a judicial reorganization plan by them.

To grant this period by the judicial administrator, approval is required by creditors who represent more than half of the claims present at the General Meeting of creditors; in the absence of agreement, the company may be declared bankrupt.

There is talk of “may be enacted”, given that article 58, paragraph 1, of the Judicial Recovery Act, provides that, if there is no full approval of the plan submitted by the company, the judicial reorganization plan may still be approved by the competent court, provided that: there is a favorable vote of creditors representing more than half of the amount of all the credits present at the meeting; three of the creditor classes are approved; and in the class that has rejected it, there must be a favorable vote of more than a third of the creditors.

Once approval is obtained, the 4th phase, that is, the one for complying with the recovery plan.

Implementation of the judicial reorganization plan

At this stage, the company must faithfully comply with the approved recovery plan, paying its debts and maintaining its activities in a sustainable manner, under penalty of convolving the recovery in bankruptcy.

To let the judge and creditors know if, in fact, the plan is being fulfilled, the judicial administrator previously appointed by the judge will inspect the company for a period of 2 (two) years and will regularly submit reports in the judicial process.

It is important to note that the debtor will remain under judicial reorganization until all obligations under the plan are fulfilled and are due no more than 2 (two) years after the judicial reorganization is granted.

Once all the obligations contained in the plan have been fulfilled, we start 5th phase, where the judge declares, by judgment, the closure of the judicial reorganization and the company, consequently, is released from the restrictions imposed on it during the proceedings.

From now on, with her breath regained, she will be able, on her own and without restrictions, to resume the search for her growth, in addition, it will be less difficult to obtain credits from financial institutions and investments.

Bankruptcy and its consequences

Unlike judicial reorganization, bankruptcy occurs when the company has a liability greater than the asset. In this situation, the financial problems are so great that it is not even possible to recover through a judicial reorganization plan, so that bankruptcy is declared.

In fact, filing for bankruptcy before the courts is independent of any attempt at judicial or extrajudicial recovery.

When bankruptcy is declared, the debts of the company and of the unlimited and jointly and severally liable partners are due due early; the decision to declare the bankruptcy of a company with unlimited liability partners also extends to them (bankrupt partner).

On the other hand, the personal liability of the partners, controllers and directors of the bankrupt company who have limited liability will be duly ascertained.

After the bankruptcy is declared, creditors' claims must be authorized in the order established by Law No. 11,101/2005, and the due payments must be initiated.

The bankruptcy process will end when the assets of the bankruptcy estate (universality of assets and interests left by the company that went bankrupt - assets and liabilities) are exhausted and the creditors have their claims satisfied.

However, we must not lose sight of the fact that, in cases where the company is seeking judicial reorganization, it is also possible to declare its bankruptcy, in accordance with articles 61 and 62, of the Judicial Recovery Act:

”Art. 61. Once the decision provided for in art. 58 of this Law has been issued, the judge may order the debtor to be kept under judicial reorganization until they are fulfilled all obligations provided for in the plan that expire no later than 2 (two) years after the granting of judicial reorganization, regardless of the possible grace period.

Paragraph 1 During the period established in the caput of this article, non-compliance with any obligation provided for in the plan will result in the initiation of a bankruptcy recovery, pursuant to art. 73 of this Law.

§ 2 Once a bankruptcy has been declared, creditors will have their rights and guarantees reconstituted under the originally contracted conditions, minus any amounts paid and subject to the acts validly performed within the framework of the judicial reorganization.

Art. 62. After the period provided for in art. 61 of this Law, in the event of non-compliance with any obligation provided for in the judicial reorganization plan, any creditor may apply the specific execution or bankruptcy based on art. 94 of this Law.”

Therefore, in the event of non-compliance with the plan, within two years, counting from the granting of the judicial reorganization, the judge will declare the company bankrupt.

In addition, even if the two-year period has passed, after the judicial reorganization has been granted, it is possible to file for bankruptcy of the company, in cases provided for by law, such as: non-compliance with any other obligation provided for in the judicial reorganization plan, use of fraudulent means by the company to make payments, transfer by the company of its establishment to a third party, creditor or not, without the consent of all creditors and without having sufficient assets to settle its liabilities, among others.

Labor claims in judicial reorganization

Considering that labor claims are food in nature, they are preferred in the payment order of the judicial reorganization plan and are placed at the top of the paylist, as long as they are limited to 150 minimum wages per creditor; credits derived from accidents at work are also at the top of the list.

In addition, the Superior Court of Justice (STJ), in November/2022, established an understanding, by a majority of votes, in the records of Special Appeal No. 1,634,046/RS, that labor credit that originates from the provision of services, at a time prior to the request for judicial reorganization, must be subject to it, so that it does not matter if the judgment was handed down by the Labor Court after the request for judicial reorganization made by the company. In the words of Minister Marco Aurélio Bellize”a judgment that recognizes the worker's right in relation to the above-mentioned labor amount certainly does not constitute this claim, it only declares it”.

Thus, it is possible to qualify for labor credit in judicial reorganization, even if the labor judgment was issued after the request for judicial reorganization, given that the provision of services originated before such request.

Until then, the creditor claimant who had a final labor judgment required the authorization of their credit in the judicial reorganization process. However, he saw his claim being dismissed, given that the labor judgment had been handed down after the date of the recovery request, so that the Labor Court and Judicial Recovery Court were left in this obstacle, which only harmed the employee seeking his credit.

After the closing of the judicial reorganization, the competence for expropriation and other enforcement acts returns to the Labor Court, in cases where the execution has not been exhausted or the labor claim has been ascertained after the closing of the judicial reorganization process.

A chance to get back on your feet

Business life is not easy, so it is common for companies to experience challenges, after all, there are countless and diverse laws that must be observed, there are countless competitors and the market is constantly evolving. Many events take place at the same time.

For these and other reasons, companies that experience economic and financial crises can use the request for judicial or extrajudicial recovery, depending on the type of credit due, to try to reorganize and rebuild.

Both types of recovery aim to bring the oxygen that is lacking to the company at any given time, without the need for it to permanently close its doors.

However, it is important to remember that labor funds are food in nature, so that they cannot be negotiated in an extrajudicial recovery plan, but only and only in a judicial plan.

These funds are so important that they are preferred in the payment order. The legislator's intention was not to leave employees completely empty, since they would be without a job and salary.

Although the term “judicial reorganization” seems daunting, the procedure must be seen as an opportunity and, with full compliance with the plan and subsequent decree of the closing of the judicial reorganization, the company, now freed from the restrictions that had been imposed on it during the process, can once again find itself achieving new flights and strengthening its name in the market.