The
Innefficiency of the Current Judicial Reorganization
Process of Companies in Brazil
by Eduardo
COUBE DE CARVALHO, Student of the 3rd year of Law School
at Instituição Toledo de Ensino. Administrator
graduated by Insper. Master in Risk Management and
Insurance by Cass Business School.
The perception
that companies in financial difficulties need to be preserved on behalf of
social welfare (jobs and stimulation to the economic activity), nearly
generating a state obligation to guarantee their survival at any cost, has
given rise to excesses.
The current
legal device for judicial reorganization and bankruptcy (Law 11.101/2005) in
force in Brazil enables maneuvers of companies which aim solely at having
bankruptcy and execution claims against them suspended, taking advantage of the
so-called stay period of 180 days. As an evidence of that, we cite the
statistic of only 30% of concession of recoveries in view of the total of
requests[1]. That is, for every ten filings of
judicial reorganizations, only three undergo the scrutiny of Article 58 of the
Judicial Reorganization Law. The vast majority fails to present their
reorganization plan or has the plan rejected by the creditors’ meeting.
On the other
hand, it is seen that the corporate reorganization mechanism often does not
allow for an effective processing of the reorganization plan, failing to
encourage a healthy relationship between those involved and leading viable
enterprises to bankruptcy. One cannot
suppose that the creditors, just for being responsible for the plan approval,
must necessarily do so consciously. Besides leaving little or no margin for the
creditors to present alternative plans, bankruptcy is put as the immediate
consequence of the non-approval at the meeting. In the first case, the
creditors fail to suggest broad changes to the plan or lack the necessary
information for an alternative. In the second situation, in turn, the
creditor’s options are greatly reduced. Either he votes for the approval of any
plan - even perceiving its evident inconsistency - or he will face the certain
loss for the debtor’s bankruptcy (COELHO, 2018).
Thus, even if
there is good intention by the debtor, the creditors are susceptible to an
innocuous meeting and to an often-inconsistent plan. In this scenario,
according to Oliveira (2015), the operators of this important company recovery
mechanism find rates of only 5% of closure of the judicial lawsuit for
compliance with the plan. Besides cases in which the stir drags on for several
years ahead of the stipulated by the legislation.
In order to
digest the flaws of the current corporate recovery mechanism, suggestions for
the adequacy of Law 11.101/05 are widely discussed in the legal, political,
corporate and academic environment, in order to assert to society, the costly
judicial recovery process. The expectation is that the recovery institute in
Brazil may have its version updated. This may provide higher effectiveness,
both from the point of view of the recovery of the debts inserted in the
lawsuit, of the time and necessary costs[2], as well as of the greater control and
criterion for the deferral of requests at the time of the initial appeal.
To have an
idea of the importance of discussing the efficiency of the recovery processes,
member countries of the Organization for Economic Co-operation and Development
(OECD) have the average cost of judicial reorganization operations at 9.1% of
the total assets of the debtor[3]. That is, it is indeed a tremendous
effort on the part of everyone involved, to have such an operation unanswered
for years.
In Brazil, the
legislation reform in 2005 mainly aimed at increasing the amount of debts paid
by firms which entered the bankruptcy process. At the time of the legislative
amendment, the creditors of firms undergoing judicial reorganization were
facing a rate of only 0.2% recovery of their assets. In comparison, at the same
time, creditors in the United States recovered their assets at a rate of 80.2%,
in China at a rate of 31.7% and in India 24.6% [4] (PONTICELLI; ALENCAR, 2006).
Law
11.101/2005 brought an undeniable improvement to the asset recovery
environment. Two of the major improvements presented by the current legislation
were: (i) greater ease of sale of firms undergoing
judicial reorganization through the exclusion of purchaser’s responsibility
(Articles 60 and 141); (ii) alteration in the order of payments, with a limit
for the labor claims, and the position of credits with real guarantee by the
taxpayers (article 83).
Already in the
first years of validity, the new legislation provided an increase in the asset
recovery rate[5] for something around 12%, such a leap
in the effectiveness of the recovery system. Over the years, however, the performance
of the Brazilian judicial reorganization system under the aegis of Law
11.101/2005 has been proven weak. It has been found, in the World Bank’s Doing
Business report that, despite an encouraging performance in the early years,
the new system did not have the strength to take off, and fell far short of the
other countries.
As a form of
analysis, Figure 1 presents the historical performance of the asset recovery
rate in Brazil, compared to countries with similar economic activity[6] (Comparison Base), as well as of the
more developed OECD countries. The result is a clear difference between the
Brazilian system and the rest of the world. While the countries with activity
similar to ours and the most developed ones nowadays recover, respectively, 37%
and 72% of the assets involved in a judicial reorganization, Brazil is at a
much lower level, close to 18% over the past few years.
Figure
1: Asset Recovery Rate
Source:
Author’s elaboration with data from the World Bank – Doing Business Report
Figure 2: Dispersion of
the asset recovery rate with respective duration in 74 economies
Source:
Author’s elaboration with data from the World Bank – Doing Business Report
Clearly, the
longer the period under judicial reorganization (horizontal axis), the lower
the amount of recovered debt (vertical axis). Therefore, the hypothesis that
judicial reorganizations take time for good use of the process to be made and
debts to be paid is excluded. The delay is mere procrastination by opportunists
or inefficiency of a system still without a practical result.
In Brazil, as
occurred with the asset recovery rate, the average time of legal
reorganizations was significantly improved with the institution of the new
company reorganization law in 2005. However, once again the improvement was not
sufficient. Still based on the excellent study annually elaborated by the World
Bank, the Doing Business report, Brazil moved from an average duration of
judicial reorganizations from 10 to 4 years[7] after the new legislation. That is
still distant from the average of countries such as the United States (1 year),
China (1.7), Japan (0.6), Argentina (2.4), Russia (2) and Italy (1.8).
In addition to
learning that the delay in the bankruptcy process greatly jeopardizes the
effectiveness of asset recovery, it has also been determined that it
drastically increases its cost to society, especially to the debtor. Figure 3
illustrates that processes with longer duration present higher costs necessary
for the recovery of assets[8], indicating that inefficiency is
contagious, as the longer the process, the more expensive and less effective it
becomes.
Figure 3: Dispersion of
the cost of the judicial reorganization process with respective duration in 74
economies
Source:
Author’s elaboration with data from the World Bank – Doing Business Report
The
suggestions for the reform of law 11.101/2005, the Law on Judicial and
Extrajudicial Reorganization and Bankruptcy, come from diverse sectors. In
order for the bill, altering the current legislation, to contemplate different
opinions of society, the Ministry of Finance created, at the end of 2016, a
work group composed by 21 professionals.
The first
point that deserves highlighting among the proposals for modernization of the
Brazilian bankruptcy environment refers to the competent court to conduct the
proceeding. Nowadays, incredibly complex proceedings and supported by an
entanglement of economic-financial situations are under the responsibility of
unprepared judges and without any experience in the subject.
Article 3 of
the law in force establishes that the competent court is that of the location
of the debtor’s main place of business. The draft amendment suggests, in § 1 of
the same article, that in cases of judicial reorganization or bankruptcy with
liabilities higher than three hundred thousand (300,000) minimum wages, on the
date of filing, will be competent to the court of the state capital or the
Federal District in which the main establishment is located. It further
reinforces that this guideline must be followed until the Courts of Justice
program specialized regional courts.
Another
important theme under discussion is the so-called prior investigation. In sum,
the aim is the opportunity for utilization of accounting information to avoid
the deferral of the reorganization process to economically infeasible
companies, and to identify settlement processes in which the collected assets
are insufficient to reimburse the creditors (JUPETIPE, 2017).
The financing
of the debtor during the judicial reorganization is also remembered in the
modernization suggestions of the law. Today, a company in bitter judicial
reorganization, besides the delicate situation of having its survival
challenged, an incredible difficulty to obtain new financing, an unforgivable
gap of the current legislation. It is as if someone, even after being rescued
from drowning, is deprived of vital oxygen.
Section IV-A
of bill 10220/2018, which includes articles 69-A to 69-I, allows the debtor to
enter into financing agreements, including those secured by encumbrance or
alienation of assets and rights, theirs or third parties’, to finance their
restructuring activities. In case of bankruptcy of the debtor, the amount of
the funding effectively delivered to the debtor during the judicial
reorganization will be considered exempt from bankruptcy and will confer
preference to the lender (except in cases where the lender is a partner or
relative up to the fourth degree). Thus, great progress in the success rates in
judicial reorganizations is expected, recovering the confidence of the
entrepreneurs and, consequently, heating up the economy.
Besides the
aforementioned alterations, others are still being proposed and will require
intense debate within the legislative branch, aiming at the due measurement of
the aid each one of them will bring to the recovery environment. Bringing the spotlight to the discussion
about the current process of judicial reorganization in Brazil is of
fundamental importance, for the tragic consequence of continuing with an
inefficient recovery mechanism. Several business opportunities are being lost,
capital is deteriorating, and jobs are being lost, while huge amounts of
resources are spent on lawsuits, mostly innocuous and time-consuming. The uncertainties
which bring about an ineffective judicial reorganization process generate,
besides distress to the affected parties (workers, creditors and debtors),
irreversible losses to the productive chain.
The business reorganization
tool is put into disrepute when its crooked utilization is allowed, both from
the point of view of the debtor and of the creditor. Sometimes, there is an
attempt to utilize the institute with the intention of merely procrastinating
an inevitable bankruptcy and defrauding the creditors. Also, events in which
the creditors’ hostile performance, acting deceitfully and truculently, directs
the process towards an undue liquidation direction, are not uncommon. In both
cases, society as a whole loses, due to the contamination of the important
recovery environment.
References
COELHO, F. U. Comentários à Lei de Falências e de Recuperação de
Empresa. Revista dos Tribunais, 2018.
Serasa Experian Bankruptcy and Recovery
Indicator: Monthly survey of total bankruptcies required and decreed, as well
as total judicial reorganizations required, deferred and granted.
JUPETIPE, F. K. N. Utilidade da informação contábil para eficiência dos
processos de falência e de recuperação judicial. Universidade de São Paulo,
Departamento de Contabilidade, 2017.
OLIVEIRA, R. A. (2015), RECUPERAÇÃO JUDICIAL. Fundação Getúlio
Vargas. São Paulo (2005).
PONTICELLI,
J.; ALENCAR, L. 2016. “Court Enforcement, Bank Loans and Firm Investment:
Evidence from a Bankruptcy Reform in Brazil”. Working Paper No. 425. Banco Central
do Brasil.
RESOLVING
INSOLVENCY. Doing Business Studies. 2017. Available at: < http://www.doingbusiness.org/data/exploretopics/resolving-insolvency>. Accessed on: July/2018