Doing Business in Brazil

28. Company Recovery and Bankruptcy

10/04/10

28.1. Introduction

The bankruptcy law in Brazil had as a base the Decree-law No 7.661 dated 1945. The political and economical scenery in Brazil or in the world formed the necessary requirements in order to publish this legal order together with the evolution of the capitalistic world that was under reconstruction after the disturbing wars period. The new political order of contesting the authoritarianism is to be added to the context.

It is to be considered that Brazil kept up with the changes. A totalitarian model of government was coming to an end and the election for chief executive was coming back to the political plan.

Thus it was necessary to elaborate a new bankruptcy legislation that would fulfill the objectives of the new order.

In this context, the Decree-law No 7.661 was published in the forties. It emphasized the bankruptcy and creditors’ composition rules of procedure, both in the preventive and the suspensive form.

Although the objective of the rules were to recover the business, their forms and methodologies used to create obstacles, which, at that specific stage of the economical development, in the daily life of the business world, were not considered efficient in the preservation of the wealth generating source.

Therefore, a new legislation which could progress with the evolution of the commercial activity was directed by the executive authorities during 1993. This project, even though very relevant to the economy, did not receive the necessary attention and was transformed in a law only in June, 2005. It is t Law No 11.101 dated February, 9th, 2005.

In the period when it was being considered by the National Congress, the law project received around 480 amendments and 5 replacements1. Although a long time has passed and lots of alterations have been suggested, the result (Law No 11.101) presents controversial points and inconsistencies can be identified as well, such as the ones pointed out in the proper report of the Senator Ramez Tebet:

Regarding the internal coherence of the law, repetitions, contradictions and
omissions make comprehension difficult and can affect the good application of the norms have been verified. It. 52, I, for example, seems to be in contradiction with it. 55, due to the fact that the first foresees the creditors general assembly meeting convocation as a requirement for the decision which defers the judicial recovery processing, while the second establishes that the assembly meeting shall only be convoked if there are creditors’ contests. It. 64, paragraphs I and II, in turn, repeats the stated in it. 52, I, in what concerns the nomination of the judicial administrator by the judge and the general assembly convocation. The items 148 and 91 contradict themselves even more flagrantly. They fix different elaboration periods for the same report. It. 125 repeats the main section of it. 7 in what concerns the suspension of the bankruptcy prescription.

In this context the new bankruptcy and companies recovery Law, although requiring an adjustment, represents progress and synchronizes the possibility for recovery of an enterprise in the world economical, financial and judicial order.

28.2. Important Alterations

The new legislation starts innovating from its first item where it defines that it shall discipline the judicial recovery, the extrajudicial recovery and the bankruptcy of the businessman and the company society.

Thus, the creditors’ composition regulation is no longer existent, the bankruptcy regulation is changed and the judicial and extrajudicial recovery procedures are established. As a reflection hereby we can say that it would be better if the definition started with the extrajudicial recovery and later, if it was the case, reached the judicial recovery as it could be in concrete cases.
In this new legislation, the creditors play an extremely relevant role in the context of a business recovery and, as a consequence, it increases the possibility to receive values from creditors with doubtful liquidation. The creditor which, in the previous legislation was passive in the composition with creditors and bankruptcy process, now turns to be, in the recovery regulation, a protagonist of a process that could guarantee the wealth generation.

28.3. The structure of the Law for bankruptcy and company recovery

In eight chapters we will find: the preliminary provisions, then the rules, common to the judicial recovery and bankruptcy, then a specific view of the judicial recovery following the possibility of transforming the judicial recovery into bankruptcy and also a chapter about the inherent to bankruptcy proceedings. There is also a chapter about the extrajudicial recovery and another designated to the criminal disposals and at the end the final and transitory dispositions.

As every judicial order, the law aims to present the procedures that shall be observed for those who, after starting a business, for various reasons, have difficulties to continue with it.

The analyzed hereby legal system is full of details about whom it is designated to and what the procedure requirements are to be observed in each stage of the process. However, its essence is seen in the aspects relevant to the possibility of a business recovery as a way to guarantee the wealth generation for the whole society in all of its sectors like government, workers, and investors.

28.4. Recovery Law No 11.101 / 05

The Law that covers the judicial and extrajudicial recovery and the bankruptcy of the business owner and the business society establishes that the debtor who practices his activities regularly for more than two years and is not bankrupt (in case he is, the responsibilities shall be extinct through a final and unappealable judicial sentence), has not obtained a concession for judicial recovery in the last five years (in case of micro-companies and small-sized companies the period is of eight years) and that has not been convicted or there is no administrator or supervising partner that has been convicted for crimes stated in the referred law, can propose and negotiate with his creditors an extrajudicial recovery plan.

The Law also determines that such procedure can be required by the live spouse; debtors’ heirs, executor or remaining partner.

Other questions can be found in chapter VI of the mentioned law that shall be observed by the debtor who intends to use the extrajudicial recovery regulation.

By the above listed requirements we can identify the legislator’s interest in focusing to apply this regulation in cases where there are reasonable indications for debtor’s recovery possibilities. From the negotiation point of view this logic should be the center of the decisions and it should only give its best efforts in those situations where the recovery plan indicates that, if implemented, can lead the debtor (individual or society entity) to a liquidity condition which allows him to administrate his business according to its original intent.

However, it must be considered that a recovery plan alone will not be sufficient for preserving the debtors’ assets and, consequently the creditors’ liabilities liquidation. In the history of success and failure of society entities recovery, we can find cases with satisfactory recovery plans that reached their objectives and well structured plans which did not obtain the expected results. There are lot more questions to be considered apart from the recovery plans.

In this context, there are points to be observed.

First, the difficulty of the debtor in admitting that his business plan has not shown success and needs alterations and negotiation with his creditors.

It’s noticeable that businessman’s culture is prone to deny a financial crisis situation or even underestimate such crisis. The smoke signals are evident, however, they rather switch off the fire alarm instead of searching for the fire origin and finding solutions to avoid fire propagation.

It is imagined that when the businessman, is in procedure to open a negotiation process with the creditors, he will be exposing his weaknesses and probably even his incapacity to manage the business. It is also imagined that such weakness would benefit the creditors that would then impose negotiation conditions which could be adverse for the businessman or even could lead to an attack from other competitors by convincing their suppliers and customers to stop their transactions due to the uncertainty in continueing with the operations indicated hereby by the extrajudicial recovery request.

From another side, we have still incipient tradition in negotiation and re-negotiation of multilateral debts (involving several creditors). It is not rare when the creditor, admitting the debtor’s difficulty and, keeping an intolerance, risks to lose all his credit or limits to receive his part by a judicial process that is held for years and years in appeals and more appeals in our courts.

It is interesting to observe in this process that the creditor’s should behave as supporting, discussing, analyzing and accompanying the recovery plan, because once his debtor has been recovered, there would be a partnership already formed, supplies preserved and that credit would be regained, which probably would have not been able through a judicial process.

Besides, the creditor should analyze that, starting form a judicial process, thus not supporting a recovery plan, he would be opening the doors for his competitor to establish a commercial relation with that debtor.

By not accepting a debtor in his clients’ list due to his difficulties a creditor may be committing a mistake thus, be giving a chance to his competitor to deal freely with that debtor.

Observe that debts contracted after the negotiation plan will be new debts and shall be paid within the due period agreed between the parts, thus, in thesis, they shall be, from financial point of view, more guaranteed than the ones included in the recovery plans or even the ones that come to be collected through a judicial process.

In addition to what has been said, it is obvious that if the recovery is successful, the creditor who assisted the company in the time of financial difficulty will certainly be in better position compared to the one who refused to help trying to save his credit.

Hence, a creditor’s engagement in a recovery plan that has signals of success increases its potential recovery and preserves the relationship. On the other hand, the one who seeks credit in an intransigent manner may lose it completely and, depending on the dependence level might fall in the same condition of his debtor.

Following this path, credibility is a major factor in the debtor – creditor relation. If there is credibility in the recovery plan, the creditor can accept the time prorogation for payment to be done or even not interrupt supplying either raw material or consumables. If there is lack of credibility for the implementation of the recovery plan, there will be no chance even if such plan is confirmed by the Judiciary, since the restrictions presented by the suppliers will place under risk the operational continuity of the debtor.

Thus, we see that the recovery proposal stated in the law will only be useful if the creditor analyzes in details the recovery plan that has been proposed to him, as well as participate actively in the recovery plan by exercising a constant monitoring either operational or financial of his creditors.

As such procedure is still incipient in the negotiation context, involving specialized consulters comes to be an essential instrument for the debtor.

The specialists shall analyze, recommend, monitor and conclude the viability of the debtor’s recovery, analyzing the causes that lead to a situation of almost insolvency and the solutions to be applied, considering the extension and the intensity of the corrective actions.

Preparing the diagnosis and the plan analyzes, it fits to mention now the follow-up of the plan implementation considering all the risk factors that may, if not observed, lead the plan to a failure.

It is noticed in these processes that many variables influence the plan conduction from the effective communication process to the external and internal audience; passing processes evaluations until even the discontinuity of a line or product. The whole process requires a very accurate analysis of each step that, not always, the ones involved in the daily routine can execute successfully.

Finally, it is up to the debtor or the one who will grant credit a change in attitude. Acting in a preventive way and avoiding granting credit inadequately may prevent from having more losses than benefits.


 

PricewaterhouseCoopers
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