Judicial and Extrajudicial Recovery of Companies: Tools for Overcoming the Economic Crisis in Brazilian Law

Judicial and extrajudicial recovery are essential legal mechanisms in Brazilian business law, designed to enable the restructuring of companies facing financial difficulties. These processes, regulated by Law No. 11.101/2005 and amended by Law No. 14.112/2020, aim to preserve the continuity of business activities, maintain jobs, and protect creditors, thereby avoiding bankruptcy.

This article explores the concepts, characteristics, requirements, and procedures of these forms of recovery, the interpretation of the courts, and highlights their relevance as tools for overcoming the economic crisis, especially in a post-COVID-19 scenario.

1. Concept of Judicial and Extrajudicial Recovery

Judicial Recovery: A formal process supervised by the Judiciary aimed at the economic and financial reorganization of the debtor company to allow its continuity.

Extrajudicial Recovery: A voluntary agreement between the debtor company and its creditors to restructure debts, requiring judicial ratification but without direct judicial intervention in the management of the process.

2. Eligible Companies for Judicial and Extrajudicial Recovery

Micro, Small, and Medium Enterprises (MSMEs): Law No. 14.112/2020 introduced specific provisions to facilitate the recovery of these companies, recognizing their unique characteristics and challenges.

Medium and Large Enterprises: Traditionally more common in these processes due to complexity and cost, but the new legislation aims to increase accessibility for MSMEs as well.

3. Characteristics of Judicial and Extrajudicial Recovery

Preventive and Restructuring Nature: Both aim to prevent bankruptcy and restructure the company to ensure its future viability.

Creditors' Participation: In judicial recovery, creditors participate in the General Creditors' Meeting, while in extrajudicial recovery, the agreement is made directly with creditors and ratified by the Judiciary.

Judicialization: Judicial recovery involves greater judicial supervision, while extrajudicial recovery only requires ratification of the agreement.

Recovery Plan: Necessary in both cases, detailing measures for restructuring the company's finances and operations.

4. Requirements for Judicial and Extrajudicial Recovery

Judicial Recovery:

-Proof of financial difficulty.

-Presentation of a viable recovery plan.

-Approval of the plan by creditors in a General Meeting.

Extrajudicial Recovery:

-Prior agreement with creditors representing at least 3/5 of the credits.

-Judicial ratification of the agreement.

-Adequate transparency and disclosure.

5. Procedures for Requesting Judicial and Extrajudicial Recovery

Judicial Route:

-Initial petition to the competent court with the necessary documentation.

-Appointment of a judicial administrator to monitor the process.

-Convening the General Creditors' Meeting.

Extrajudicial Route:

-Direct negotiation and formalization of the agreement with creditors.

-Petition for judicial ratification of the agreement.

6. Circumstances to Consider Judicial or Extrajudicial Recovery

Prolonged Financial Difficulties: When the company faces significant and prolonged difficulties.

Immediate Insolvency or Threat of Insolvency: Inability to pay important obligations.

Interruption of Credit Access: Difficulties obtaining new financing.

Liquidity Crisis: Lack of sufficient assets to cover expenses and obligations.

Impact of External Factors: Economic crises, pandemics, regulatory changes, etc.

Failure in Individual Negotiations with Creditors: When direct negotiations are insufficient.

Long-term Sustainability at Risk: Need for complete reorganization.

Preservation of Jobs and Economic Activity: Preservation of jobs and business continuity.

7. Impact of the COVID-19 Pandemic

The pandemic brought significant challenges, such as:

Revenue and Cash Flow Reduction: Negative impact on finances.

Increased Indebtedness: Need for loans for maintenance.

Supply Chain Interruption: Problems in production and distribution.

Changes in Consumer Behavior: Demands for quick adaptation.

8. Government Measures and Restructuring Strategies

Emergency Credit Lines: Financing with favorable conditions.

Temporary Suspension of Tax Obligations: Postponement of tax payments.

Incentives for Job Maintenance: Subsidies to avoid layoffs.

9. Changes Introduced by Law No. 14.112/2020

Simplified Recovery Plan for MSMEs: More agile and less costly procedure.

Financing in Judicial Recovery: New financing with payment priority.

Greater Flexibility in Deadlines: More flexible deadlines for recovery plans.

Mediation and Conciliation: Encouragement of mediation and conciliation for conflict resolution.

10. Positive and Negative Effects of Judicial and Extrajudicial Recovery

Positive Effects:

-Preservation of the Company: Continuity of activities and maintenance of jobs.

-Debt Renegotiation: Controlled environment for adjusting debt terms.

-Transparency and Judicial Control: Guarantee of transparency and protection of creditors.

-Access to New Financing: Facilitation of obtaining new financing.

Negative Effects:

-High Cost: Processes can be costly, especially for MSMEs.

-Bureaucracy and Delay: Judicial processing can be slow.

-Stigma and Loss of Reputation: Negative impact on the company's reputation.

-Rigid Control: Judicial intervention can limit managers' autonomy.

11. Jurisprudence and Interpretation of the Courts

The interpretation of the courts, especially by the Superior Court of Justice (STJ), has emphasized the importance of preserving the company and protecting creditors. The decisions highlight the balance between the rights of creditors and the viability of debtor companies.

12. Important Considerations and Precautions

Viable Recovery Plan: Develop a realistic plan with clear goals.

Transparency: Maintain open communication with all stakeholders.

Specialized Consultancy: Seek guidance from lawyers and consultants.

Asset and Property Management: Evaluate asset sales and debt renegotiation.

Adaptation and Innovation: Implement strategies to adapt to new market realities.

Conclusion

Judicial and extrajudicial recovery are crucial mechanisms for restructuring companies and preserving economic activity in Brazil. These processes offer a second chance for struggling companies, promoting economic and social justice, especially in challenging contexts such as post-COVID-19. The new legislation and government measures have improved these tools, making them more accessible and effective in facing financial crises and ensuring the continuity of business operations.