Latest developments from brazilian insolvency courts
One of the immediate impacts of the ongoing covid-19 sanitary crisis is heavy systemic distress – debtors fail to timely perform their contracts in full, causing a ripple effect across the market. Debtors on the verge of filing for, or already undergoing, in-court reorganization (“recuperação judicial”) and Brazilian-style pre-packs (“recuperação extrajudicial”) are no exception. A few noteworthy decisions have been issued by Brazilian insolvency courts in that context over the last month.
A decision of the Court of Appeals of São Paulo, dated April 15, 2020, protects the interests of creditors holding fiduciary collateral against Brazilian entities and individuals during the coronavirus disease pandemic.
Under Brazilian law, debts covered by one particular type of in rem guarantee known as fiduciary transfer of assets (“alienação fiduciária”) fall outside the scope of in-court reorganization. Thus, in case of default, the creditor will be allowed to enforce the collateral and sell the underlying asset irrespective of a reorganization proceeding having been commenced against the debtor. The fiduciary transfer can benefit Brazilian or non-Brazilian lenders and can be created over different assets, such as movable properties (for example, vehicles and rights over bank accounts) or real estate (including rural land).
In spite of this clear rule, a first instance judge granted a relief in favor of a Brazilian entity facing in-court reorganization, according to which one of its lenders secured by a fiduciary collateral was prevented from enforcing its collateral during the reorganization’s stay period of 180 days. The fiduciary transfer had been constituted over a third-party real estate property.
The fiduciary creditor appealed, and the Court of Justice of São Paulo reversed the decision. Consequently, the creditor was authorized to enforce its fiduciary transfer against the security provider. The Appeal also states that not even the negative impacts possibly caused by the pandemic of the coronavirus would change this judgement.
Claims discussing the possibility of delaying the 180 days-term of debtors’ protection from enforcement measures, the so-called stay period, due to covid-19 crisis were also brought to courts’ analysis. Although the Business Insolvency Act sets forth that the stay period is “non-extendable”, Brazilian courts usually prolong it based on an extensive interpretation of the law, in order to preserve the company until the recovery plan is voted.
Nonetheless, a decision of the Court of São Paulo, dated April 27, 2020, dismissed a debtors’ request to extend the stay period due to financial difficulties caused by the pandemic. The Court had previously rejected a same debtors’ claim made before the covid-19 outbreak and recognized the excessive lengthiness of the proceedings, stating that coronavirus crisis was not a reasonable justification to the further delay of it, thwarting creditors’ rights.
On the other hand, decisions have been entered granting the extension of the stay period in order to mitigate financial impacts of covid-19 pandemic, such as one of the Court of São Paulo, dated April 9, 2020, which extended the stay period for 90 days to a debtor facing the interruption of its business. However, the court stressed that covid-19 crisis could not turn into a warrant for disregarding obligations and in-court reorganization’s purposes. On the contrary, covid-19 exceptional situation should be cautiously interpreted in the light of reasonable principles and in a case-by-case analysis.
Some decisions have also been entered upon the possibility of suspending payment obligations stemming from the restructuring plan, which did not disregard the creditors’ interests.
On April 27, 2020, the Court of São Paulo dismissed the required suspension of plan’s execution and suggested that debtor should amend the payment conditions of the restructuring plan and negotiate it with creditors. The same conclusion was reached by the Court in a previous decision rejecting debtor’s pretension to suspend payments based on the argument that judges cannot intervene in the merits of restructuring plan as only creditors have the right to deliberate about its flexibilization.
Regarding a debtor’s claim under Brazilian-style pre-packs, looking for the suspension of obligations stemming from the approved plan and of creditors’ legal actions, the Court of São Paulo once more presented a pro-creditor position. On April 17, 2020, the court found that debtor’s claim was intended to simply delay a filling for in-court reorganization, and that the requested judicial intervention was incompatible with the nature, finality and effects of pre-packs. More than this, the court affirmed that covid-19 crisis did not authorize the concession of extraordinary, irresponsible and opportunist pretensions.
Finally, in relation to claims for recovering constrained assets in creditors’ claims, courts mostly adopted a pro-creditor position. As an example, a decision of the Court of São Paulo, dated April 23, 2020, dismissed debtor’s request for a preliminary injunction, on the grounds that recovering such assets before the decision authorizing in-court reorganization would represent an unacceptable anticipation of the final decision’s effects.
In spite of this, a decision of the Superior Court of Justice, dated April 13, 2020, granted a debtor’s claim to recover constrained assets in view of the exceptional situation arising from covid-19 crisis. Consequently, the secured credit became subject to the restructuring plan.
At least so far, recent precedents from the trend-setting Brazilian insolvency courts remain consistent with the position that those courts used to hold prior to the emergence of covid-19. This is good news, as the country needs legal certainty to attract foreign investments – not only in connection with the acquisition of distressed assets but also in long-term projects once the crisis is over. Notwithstanding, decisions like the one mentioned above entered by the Court of Justice of São Paulo regarding stay period prolongation show that there is still a risk that courts may be over-protective in favor of debtors; in doing so, those courts could jeopardize the economy even more without realizing it: creditors could face their own liquidity problems, cut down on jobs and pay fewer taxes. As always, Brazilian courts must pay close attention to the broader economic impact of their decisions, to avoid solutions the side effects of which become worse than the disease that they seek to combat.