Mediation
and Judicial Restructuring Proceedings in Brazil
by Luciana Faria NOGUEIRA, Lawyer.
Bazilian mediation
was formally regulated in 2016, when two important laws came into force, the “Mediation Law”[1]
and the “Brazilian Civil Procedure Code”[2].
Both laws encourage the use of mediation. The Brazilian Civil Procedure Code
establishes that mediation “shall be encouraged by judges, lawyers, public
defenders and members of the Public Prosecution Service, even in the course of
judicial proceedings”[3].
The
Mediation Law provides that mediation is:
“the technical activity carried out by an impartial third
party without decision-maker power, which if chosen or accepted by the parties,
helps them and encourages them to identify or develop consensual solutions to
the controversy”[4].
The
Brazilian National Council of Mediation and Arbitration Institutions (CONIMA)
also states that “mediation is a non-adversarial and
voluntary method of dispute resolution, whereby two or more person seek a
consensual solution that enables them to preserve their relationship. To this
end, they use a third facilitator, impartial, competent, diligent, credible and
committed to secrecy; that stimulates and enables the communication and helps
in the search of the identification of the real interests involved.”[5]
Finally,
doctrine dictates that “mediation is one of the instruments of pacification of
a self-composition and voluntary nature, by which a third impartial party acts
as facilitator of the process of resumption of dialogue between the parties,
before or after the conflict initiates.”[6]
In sum, the
main aspects of mediation are: (i) it is voluntary, (ii) the solution is
consensual and not imposed to the parties and (iii) the mediator is impartial.
Many have
discussed whether those aspects are compatible or not with judicial
restructuring proceedings, due to the nature and characteristics of such
proceedings, analysed in detail further in this study.
The bill
that gave rise to the Mediation Law originally determined that conflicts
related to judicial restructuring proceedings would not be subjected to
mediation.[7]
This provision was changed before the enactment of the law and, as a result the
Mediation Law has no specific restriction on this matter.
In the other
direction, the Brazilian Federal Courts Council (“CJF”) has already stated that
mediation is compatible with judicial reorganization[8].
This statement does not bind Bankruptcies Courts, but may be used as
orientation to judges.
As
illustrated, the subject is very controversial. This study aims to analyse the
application of mediation in judicial restructuring proceedings and the best
moment to perform it.
Brazilian
companies willing to overcome an economic crisis may benefit from a judicial
restructuring proceeding, which is a mechanism that aims to allow a debtor
company to renegotiate its debts with its creditors.
The Brazilian Bankruptcy and Restructuring Law[9] (“BRL”) regulates the proceeding and establishes that:
“(i) only the debtor may file a court application for restructuring;
(ii) there is a 180-day stay period for claims subject to the proceeding (those existing at the date of the filing, whether matured or not, with few exceptions provided by law), but it is not automatic upon filing, and applies only if and when the court authorizes the proceeding[10];
(iii) tax and a few other types of debts are not subject to the proceeding and creditors holding such debts may initiate or proceed with individual collection lawsuits against the debtor[11];
(iv) BRL does not provide for a specific status such as “debtor in possession” as in Chapter 11 of The US Bankruptcy Code, and as a general rule, the existing management of the debtor continues to operate the business on its own behalf.
(v) Regular business acts are allowed, but any sale of "permanent" assets is only allowed if authorized by the Bankruptcy Court or provided for in the reorganization plan approved by the majority of creditors;
(vi) while a judicial administrator nominated by the Court monitors the activities performed by the debtor, he/she mainly manages the judicial procedure acts, instead of replacing the management of the debtor company in operating the business;
(vii) a judicial manager is only appointed when the debtor’s existing management has been removed from their positions in exceptional legal cases[12]; and
(viii) the general meeting of creditors is essential to the process.”
The main
premises of the judicial restructuring proceedings are: (i) creditors under the
same situation must receive equal treatment (par conditio creditorum)
and (ii) supremacy of the decisions taken at the general meeting of creditors.
The judicial restructuring is also based on the principle of the preservation
of the company, which provides that the goal of the proceeding is to allow the
debtor company to overcome its crisis[13].
In
insolvency proceedings, where a debtor company does not have enough assets to
pay all its debts, creditors in the same situation must receive equal
treatment, to ensure that the losses will be equally divided among all
creditors.
In the
past, much had been discussed on the application of the par condicio creditorum
principle in judicial restructurings, on the basis that the equal treatment
would be limited to forced liquidation proceedings.
This
controversy is now over, after the Brazilian Federal Courts Council (“CJF”)
stated that the judicial restructuring is indeed subject to the par condicio creditorum principle[14].
However, in
judicial restructuring proceedings it is possible to have differences of
treatment between the creditors, as long as these creditors are not in the same
situation and the variation of the treatment is reasonable and proportional to
the distinctions between the creditors.
Doctrine
dictates that:
“it is precisely the diversity of interests to justify the
separation of creditors into classes that brings as a reflection the
possibility of assigning creditors differential treatment, according to the
legal position they held”[15].
Also, “such
differentiated treatment is possible provided that there is a homogeneous
interest between those creditors, whether on the basis of the nature of the
credit or any other criterion of similarity justified in the plan, and that, of
course, it does not harm other creditors and has been approved by the four
classes”.[16]
Following
these lines of thought, the Brazilian Federal Courts Council (“CJF”) concluded
that:
“the judicial reorganization plan shall provide for equal treatment
for members of the same class of creditors who have homogeneous interests,
whether these are based on the nature of the claim, the amount of the claim or
other similarity criterion justified by the proposer of the plan and approved
by the judge” [17].
Caselaw
follows this same position and admits different treatments between creditors,
provided the differences are justified[18]
and approved by the General Meeting of Creditors.
Thus, even though some differential treatment is permitted, the debtor company is not allowed to propose certain payment terms only to a creditor (or group of creditors) at its own convenience. The payment terms must be proposed to all creditors under the same conditions, whether the debtor company is inclined to do so or not.
The General Meeting of Creditors is a deliberation body essential to the judicial restructuring proceeding, with irrefutable authority over the matters it decides. The entity ultimately determines the outcome of the proceeding and the debtor company, once it has the function to approve or reject the restructuring plan[19].
Any reorganization plan must be approved by the following four categories of creditors in the General Meeting of Creditors: (i) labor creditors and creditors from workplace accidents, (ii) secured creditors, (iii) unsecured creditors and (iv) Small Business creditors[20].
In the first and fourth classes of creditors (labor and Small Business), approval is achieved with the favorable vote of the majority of creditors present at the meeting, regardless of the amount of their credits. In the other two classes (secured and unsecured), approval is achieved with the favorable vote of both (i) creditors representing more than half of the credit amounts represented at the meeting (“by amount”) and (ii) the majority of creditors present at the meeting (“by head”).
To avoid abuse of voting rights, the court may grant the judicial restructuring even when the plan is not approved pursuant to the quorum explained above, if certain vote combinations specified in the BRL are met. This court approval, known as cram down, is exceptional.
The decisions taken by the General Meeting of Creditors bind all creditors, even those who did not attend the meeting or vote against them.
The supremacy of the General Meeting of Creditors is such that it may deliberate the creation and termination of obligations and rights, provided the deliberations are not against the law. The Bankruptcy Courts have the power to control the legality of the deliberations of the General Meeting of Creditors and, if necessary, may annul them.
The doctrine exposes the essentiality of the General Meeting of Creditors: “the General Meeting of Creditors is the collective and deliberative body responsible for the manifestation of the predominant interest among those who hold credits against the debtor company [....]. For this reason, in respect to the interests of the creditors (without whose collaboration the reorganization is frustrated), the law reserves the most important decisions related to the overcoming of the economic activity in crisis.”[21]
Also, “in this sense, the General Meeting of Creditors is a novelty in relation to the previous regime, because it brings the creditors to the center of the proceeding; they have been distanced from insolvency proceedings practically throughout the entire 20th century. Thus, just as the debtor can prepare the judicial recovery plan with great freedom, creditors have ample room to deliberate freely on the approval, modification or rejection of the recovery plan.”[22]
The Brazilian Superior Court of Justice (“STJ”) has ruled that “the judge must exercise control of the legality of the judicial recovery plan - which includes the repudiation of fraud and abuse of rights - but not the control of its economic feasibility”[23].
As a consequence of the supremacy of the General Meeting of Creditors, all business and economic measures to be adopted by the debtor company to solve its debts must be submitted to the General Meeting of Creditors. As an example of those measures, we could mention payments conditions and any difference of treatment between creditors.
BRL
establishes that “the judicial
restructuring proceeding aims to provide the means to overcome the economic and
financial crisis of the debtor, to allow the maintenance of the productive
source, the employment of workers and the interests of creditors, thus
promoting the preservation of the company, its social function and the stimulus
to the economic activity”[24].
In other
words, according to BRL, the main concerns of the judicial restructuring
proceedings are: (i) overcome the crisis, (ii) maintenance of the productive
source, (iii) employment, (iv) interests of creditors
and (v) the preservation of the company.
Although
the law mentions several concerns, doctrine and case law have agreed that the
most important aspect of the judicial restructuring proceeding is the
preservation of the company, having even elevated such aspect to the status of
principle.
In this
regard: “not by chance the Law establishes an order of priorities in the
purpose it aims to pursue, placing as its first objective the ‘maintenance of
the productive source’, which means, to maintain the business activity as fully
as possible, making also possible the maintenance of the ‘employment of workers’.
Maintaining the business activity and the work of the employees, it will then
be possible to satisfy the ‘interests of the creditors’”[25]
And, “the
analysis of the mentioned legal provision (section 47) reveals that judicial
restructuring is a proceeding that aims at preserving the economically viable
company and fulfilling its social function, stimulating the business activity.”[26]
The
principle of the preservation of the company has been the foundation of
countless judicial decisions[27]
and leads to the conclusion that the preservation of the company is the goal of
a restructuring proceeding.
After this
brief explanation, we point out the main challenges of performing a mediation within a judicial proceeding. For that, it is
important to bear in mind that the main aspects of a
mediation are: (i) it is voluntary, (ii) the solution is consensual and
not imposed to the parties and (iii) the mediator is impartial.
Firstly, in
case a mediation with certain creditor reaches a
composition on the payments terms, the debtor company must propose those terms
to all creditors under the same situation, due to the equal treatment rule.
This weakens the voluntary and consensual aspects of a
mediation.
Also, any
agreement involving business and economic measures must be submitted to the
General Meeting of Creditors, due to its supremacy. Thus, no settlement will be
fully valid until the approval of the majority of creditors, including those
not affected by the mediation[28].
Lastly, as
the main goal of the judicial restructuring proceeding is the preservation of
the company, the mediator may tend to favour the debtor company instead of
being impartial.
Moreover,
the restructuring proceeding is by nature a proceeding whereby several different
players negotiate aiming to reach a consensual solution that may benefit (or
reduce the losses) of the majority of the parties involved. Thus, performing
mediation in a judicial reorganization proceeding may end up being an
unnecessary overlapping of procedures with similar objectives and different
premises.
In 2017, a
Brazilian debtor - Oi Group - has resorted to mediation within its judicial
restructuring[29].
Oi Group is the largest judicial restructuring ever filed in Brazil, with more
them 65,000 (sixty-five thousand) creditors and with a debt of over R$ 65
billion (sixty-five billion Reais) – approximately
US$ 20 billion[30].
Oi Group
had presented different mediations for players in different situations. This
study will analyse the mediation proposed to private creditors, which gave rise
to the discussions analysed herein.[31]
This
mediation would have the purpose to simplify the proceedings at the General
Meeting of Creditors by reducing the number of creditors, once the Creditors
that settled would not attend to such meeting[32].
According to Oi Group the number would reduce over 85%, about 55.000
(fifty-five thousand) creditors.
The
mediation aims at creditors with credits lower than R$
50,000.00 (fifty thousand Reais) – approximately US$
15,000.00, which represents a large number of creditors[33].
Oi Group
requested the Bankruptcy Court to approve the initiation of the mediation. Any
creditor that agrees to take part of the mediation would have to accept the
following requirements:
– Only creditors of up to R$ 50,000.00 (fifty thousand Reais) – approximately US$ 15,000.00 – would be able to take part in the mediation.
– Prearranged fixed payment terms: 90% of the credit paid on the date of the signing of the agreement and the remaining 10% paid after the approval of the reorganization plan.
– The respective creditor must renounce any challenge related to the amount of its credit.
– The respective creditor has to commit itself to vote in favor of the reorganization plan yet to be presented, by granting a power of attorney to a trustee appointed by the bankruptcy Court;
– The approval of the reorganization plan by the General Meeting of Creditors is a condition to the validity of the agreement.
The Lower Bankruptcy Court accepted the
requirements imposed by Oi Group, with one exception. In view of the equal
treatment rule, the court ruled that all creditors would be able to be part of
the mediation regardless of the amount of its credit, provided that the
agreement only regulates the payment of
R$ 50,000.00 (fifty thousand Reais) and the remaining
amount is paid in accordance to the reorganization plan.
This mediation has faced a considerable amount of challenges[34],
due to the legal uncertainty of the requirements imposed by Oi Group and to a
resistance to mediation within a judicial reorganization proceeding. We will
now analyse the main arguments raised.
Some
creditors argue that the so-called mediation proposed by Oi Group is not
actually a mediation, but rather a unilateral
proposal. The procedure does not have the characteristics of a mediation -
voluntary, not imposed to the parties and with an impartial mediator – and is,
in fact, a standard form that aims to protect only the interests of Oi Group[35].
In
response, Oi Group defends that even if the procedure is not considered as a mediation, it must be used as a method of conflict
resolution, that will simplify the restructuring proceeding with the reduction
of the number of creditors on benefit of all players involved[36].
Other arguments against the mediation, is that the creditors will be treated differently, which is only acceptable if (i) it is justified, (ii) it is approved at the General Meeting of Creditors and (iii) does not harm other creditors[37].
This is rebutted on the grounds that there is no difference in treatment, once all creditors have the option to accept the proposal.
Some claim that creditors who accept the proposal will receive around R$ 45,000.00 (forty-five Reais) – 90% of the credit up to the limit of R$ 50,000.00 – at the signing of the agreement (mediation). This is an advance payment, which is against the equal treatment rule.
The counter-argument is that the par conditio creditorum does not prevent the advance payment, as long as all creditor have the same conditions.
Also against the proposed mediation, some suggest that the creditors´ commitment to vote in favor of the plan will restrict Oi Group from making its plan attractive to other creditors, once the company will have already assured the favorable vote of the majority of the creditors[38].
As opposition, Oi Group explains that, according to BRL, the plan must be approved by both the majority of creditors and credits[39] and, therefore, the company must propose a plan that pleases higher creditors.
Some also claim that the proposed mediation is indeed a disguised way of buying votes, once the creditor receives an advance payment on the condition of voting in favor of the plan.
In response, Oi Group asserts that any creditor has the authority to vote at its own convenience, and if the advance payment meets its interest, there is no irregularity in that. In addition, Oi Group invokes the principle of the preservation of the company to demonstrate the importance of the mediation in overcoming its crises.
At last, those who are against the mediation explain that in view of the advance payment, the respective credit is extinguished and therefore, the corresponding creditor should not be allowed to vote in the General Meeting of Creditors[40].
In its defense, Oi Group inform that the approval of the reorganization plan by the General Meeting of Creditors is a condition to the validity of the agreement. Thus, the extinguishment of the credit will only occur after the General Meeting of Creditors.
For full comprehension, the table below summarizes the main arguments against and pro the mediation proposed by Oi Group:
|
Against[41] |
Pro[42] |
|
It is a
unilateral proposal (and not a mediation). |
There is no irregularity in pursuing an amicable settlement. |
|
The differential treatment must be approved by the General Meeting of
Creditors. |
There is no difference in treatment, once all creditors have the
option to accept the proposal. |
|
The advance
payment is against the equal treatment rule. |
The par
conditio creditorum does not prevent the advance payment, as long as all creditor in the sae conditions have the same
opportunities. |
|
The creditors’
commitment to vote in favor of the plan will restrict Oi Group from making
its plan attractive to other creditors[43]. |
The plan must be approved by both the majority of
creditors and credits and, therefore, the company must propose a plan
that pleases higher creditors. |
|
Disguised way of
buying votes. |
Any creditor has the authority to vote at its own convenience.
Principle of the Preservation of the Company. |
|
Extinguishment of
the credit: no voting rights. |
The approval of the reorganization plan by the General Meeting of
Creditors is a condition to the validity of the agreement. |
After analyzing all challenges, the Bankruptcy Court of Appeals has ruled that the commitment to vote in favor of the plan and the obligation of granting a power of attorney to a trustee cannot be a requirement to the mediation. Other than that, the Court declared that the analysis of the arguments against the mediation will only be possible after the final conclusion of the General Meeting of Creditors.
In other words, the Bankruptcy Court of Appeals has not yet
decided on the merits of these challenges, and the outcome is unpredictable.
Mediation
is a method of conflict resolution that aims to get the parties together and
amicably to a non-imposed solution. It is encouraged by Brazilian law and
should be performed as frequently as possible.
Although
the performance of mediation within judicial restructuring proceedings has some
limitations, it should also be encouraged, as long as it respects the premises
and principles of the BRL[44].
Incidental
matters – not directly related to the business and economic
measures to be adopted by the debtor company to solve its debts - may be solved through mediation
without much controversy. As examples of these incidental matters, we may
mention (i) the amount and class of the credit of a certain creditor and (ii)
the maintenance or termination of a business relationship between the debtor
company and a supplier. The solution, however, must be
ratified by the Bankruptcy Court, who will verify its legality.
Matters
directly related to the business and economic measures
to be adopted by the debtor company to solve its debts must be subjected to the
General Meeting of Creditors. As a result, performing the mediation before the
meeting may not be as helpful as desirable, especially because the General
Meeting of Creditors is already the opportunity for different players negotiate aiming to reach a
consensual solution.
Moreover,
after the approval of a restructuring plan by the General Meeting of Creditors,
the conflicts may be solved through mediation, as long as the plan approved
provides so.
The
reorganization proceeding of Oi Group is a leading case on the subject and the
outcome is still unpredictable. This case, however, may not even be considered
as a mediation and has several particularities. This
could strengthen the natural resistance of insolvency practitioners to
mediation.
[1] Federal Law number 13.140/2015.
[2] Federal Law number 13.105/2015.
[3] Section 3, sole paragraph, Brazilian Civil Procedure Code. Free translation
[4] Section 1, sole paragraph, Mediation Law. Free translation.
[5]Concept available at CONIMA´s website: http://www.conima.org.br/regula_modm
ed). Free translation.
[6] F. Cahali, Curso de Arbitragem, 6th ed. Revista dos Tribunais, São Paulo, 2017, p. 87. Free Translation.
[7] Bill of law 7169/2014. Section 3, Third paragraph. Free translation.
[8] Brazilian Federal Courts Council (CJF). I Jornada de Prevenção e Solução Extrajudicial de Litígios. Enunciado 45. Available at: http://www.cjf.jus.br/enunciados/enunsciado/900
[9] Federal Law number 11.101/2005.
[10] In practice, Courts tend to extend this 180-day term if they understand that this is essential for the company to overcome its crises.
[11] For more details regarding credits not subject to Brazilian reorganization proceedings, please see http://ojs.imodev.org/index.php/IJIL/article/view/157.
[12] Those exceptions are provided for in Section 64, BRL, and are related to the commitment of previous crimes and/or a fraudulent intent to lead the company to a bankruptcy in detriment of the creditors.
[13] Section 47, BRL.
[14] Brazilian Federal Courts Council (CJF). II Jornada de Direito Comercial. Enunciado 81. Available at http://www.cjf.jus.br/enunciados/enunciado/795.
[15] Sh. Cerezzeti,
“As Classes de Credores como Técnica de Organização de Interesses: em Defesa da
Alteração da Disciplina das Classes na Recuperação Judicial” in P. Toledo,
F. Satiro, Direito das Empresas em
Crise, ed. Quartier Latin, p. 369.
Free Translation.
[16] L. Salomão,
P. Santos, Recuperação Judicial, Extrajudicial e Falência. Editora Forense, 2nd ed., p. 319. Free Translation.
[17] Brazilian Federal Courts Council (CJF). I Jornada de Direito Comercial. Enunciado 57. Available at: http://www.cjf.jus.br/enunciados/enunciado/795. Free translation.
[18] São Paulo Court of Appeals. Interlocutories appeals 0187811-89.2012, 0372448-49.2010 and 2139325-68.2014.8.26.0000.
[19] Section 35, I, a, BRL: The General Meeting of Creditors will have the function to approve, reject or modify the judicial reorganization plan. Free Translation.
[20] Complementary Law 123/2006. Small Business are companies with an annual revenue up to a limit established by law and that have differentiated and favored treatment.
[21] F. Coelho,
Curso de direito comercial: direito de
empresa: contratos, falência e recuperação de empresas, 17th ed. Revista
dos Tribunais, São Paulo, 2016. V.3. p.
366-367. Free Translation.
[22] L. Ayoub, C. Cavalli, A Construção Jurisprudencial da Recuperação Judicial de Empresas, Editora Forense GV-Rio, 2013, pp. 249-250. Free Translation.
[23] Brazilian Superior Court of Justice (STJ), 4th Group., Resp 1.359.311/SP.
[24] Section 47,
BRL. Free translation.
[25] M. Bezerra Filho, Lei de recuperação de empresas e falência: Lei 11.101/2005:comentada
artigo por artigo. 12. ed. Ver., atual. e amlpl. 7. Ed.rev., atual. e ampl. São Paulo: Revista dos Tribunais, 2017. p. 159. Free Translation.
[26] M. Vale, C. Chaves,
A recuperação judicial à luz do novo
Código de Processo Civil Brasileiro. Revista de Direito Empresarial,
Curitiba, v. 2, n. 2, p. 80-101.
[28] All four classes of creditors (labor, secured, unsecured and Small Business) are called to the General Creditors Meetings that deliberates business and economic measures.
[29] 7th Business Court of Rio de Janeiro, lawsuit under number 0203711-65.2016.8.19.0001.
[30] The second largest judicial restructuring is Sete Brazil, with a debt around R$ 19 billion.
[31] Other very controversial mediation within Oi Group reorganization proceeding was proposed to the Brazilian Telecom Agency (“Anatel”) and aims at converting the credit that Anatel holds against Oi Group (around R$ 11 billion) into measures for the improvement of the services provided by Oi Group. The Agency argues that its credit cannot be subject to a private mediation, besides not being subject to the proceeding.
[32] They would be all replaced by a single Trustee, as better explained below.
[33] Most of them are consumer, not used to complex negotiations.
[34] From several different categories of creditors (financial, suppliers and consumers).
[35] That would count on several creditors voting in favor of the plan (through a Trustee), regardless of the fact that these creditors would not be paid under such a plan.
[36] By simplifying the General Meeting of Creditors and its logistics.
[37] These criteria could only be present if the mediation takes places after the General Meeting of Creditors, following the agreement of the majority of creditors.
[38] Due to the
large number of creditors that would meet the requirements for the mediation
(about 55.000 (fifty-five thousand) creditors).
[39] In the secured and unsecured classes.
[40] BRL provides that the creditor will not be entitled to vote if the plan does not change the amount or the payments conditions of its credits. (Section 45, paragraph 3).
[41] Some creditors presented the cons arguments.
[42] Oi Group itself presented the pros arguments.
[43] And would be against the freedom of voting, once the plan could change after the commitment is signed.
[44] Equal treatment rule, supremacy of the General Meeting of Creditors, principle of the preservation of the company, among others.