Brazil: New Rules For Judicial Recovery Of Micro And Small Companies In Brazil

Last Updated: 22 August 2014
Article by Walter Stuber

Among other provisions Complementary Law No. 147, of August 7, 2014 (LC 147/2014), amended the rules laid down in Law No. 11101, of February 9, 2005 (Law 11101/2005), which regulates the judicial and out-of-court recovery and the bankruptcy of businessmen and business companies, known as the Brazilian Company Recovery and Bankruptcy Law, bringing a number of advantages to micro and small companies.

Judicial recovery is a court-approved rehabilitation procedure, whose main purpose is to preserve the company.

The relevant changes that have been introduced by LC 147/2014 regarding micro and small companies are outlined below. All the provisions mentioned herein without specifying the applicable legislation refer to Law 11101/2005.

According to article 24 of Law 11101/2005, the judge shall establish the amount and conditions of payment of the trustee's fees, with due regard for the debtor's payment capacity, the degree of complexity of the work and the market values for similar duties. In any event, in the case of micro and small companies, the total amount paid to the trustee shall not exceed 2% of the amount payable to the creditors submitted to judicial recovery or of the proceeds of the sale of assets in bankruptcy (new paragraph 5 of article 24). For all other companies the applicable limit is 5% (paragraph 1 of article 24).

From now on, the holders of claims framed as micro or small companies will have more power in the approval of the judicial recovery plan and will be more active in the general meetings of creditors.

The class of creditors constituted by micro and small companies is also entitled to appoint one representative and two alternates for the Committee of Creditors (new item IV of article 26).

The general meeting shall be composed of the following classes of creditors: (i) holders of labor-related claims or occupational accident claims; (ii) holders of claims with in rem guarantees; (iii) holders of unsecured claims, with special privilege, with general privilege, or subordinated; and (iv) holders of claims framed as micro or small companies (new item IV of article 41). This means that creditors are also classified according to their size. Traditionally, creditors were only classified by the nature of their respective claims (labor or not) and their guarantee (with or without collateral).

In resolutions on the judicial recovery plan, all classes of creditors referred to above shall approve the proposal. In the classes under items (i) and (iv) above, the proposal shall be approved by simple majority of the creditors present, independently of the amount of the claim (new wording of paragraph 2 of article 45).

Judicial reorganization may be petitioned for by any debtor who, at the time of the petition, has been doing business regularly for over two years and meets the following requirements, cumulatively: (i) he shall not be bankrupt, and if he has been, the resulting liabilities have been declared extinguished by final and conclusive decision; (ii) he shall not have obtained a concession of judicial recovery within the last five years; (iii) he shall not have obtained, within the last five years, a concession of judicial recovery based on the special plan provided for micro and small companies (the term was reduced from eight to five years by the new wording of item III of article 48); and (iv) he shall not have been convicted or does not have, as an officer or controlling partner, a person convicted of any of the crimes provided for herein.

The Public Treasuries and the National Social Security Institute (Instituto Nacional do Seguro Social – INSS) may grant, pursuant to specific law, installment payment of their claims, in the sphere of judicial recovery, in accordance with the guidelines established in Law No. 5172, of October 25, 1966 (the Brazilian Tax Code). The micro and small companies will be entitled to deadlines 20% higher than those regularly granted to other companies (new sole paragraph of article 68).

The special judicial recovery plan shall be submitted within the term of 60 days after publication of the decision granting processing of the judicial recovery, on pain of conversion into bankruptcy, and shall be limited to the following conditions: (i) it shall extend to all existing claims on the date of the petition, including non-matured claims, except for those resulting from on-lending of official funds, tax claims and those provided for in paragraphs 3 and 4 of article 49 (new wording of item I of article 68); (ii) it shall provide for installment payment in up to 36 monthly, equal and successive amounts, with interest equivalent to the Special System of Settlement and Custody Rate (taxa Sistema Especial de Liquidação e de Custódia – SELIC), which may even contain a proposal to reduce the value of the debts (new wording of item II of article 68); (iii) it shall provide for payment of the first installment in a maximum term of 180 days as from distribution of the judicial recovery petition; and (iv) it shall establish the need for authorization by the judge, after hearing the trustee and the Committee of Creditors, for the debtor to increase expenses or hire employees.

Pursuant to article 49, all claims existing on the date of the petition are subject to judicial recovery, even if not yet due. Creditors of a debtor under judicial recovery preserve their rights and privileges against the co-obligors, sureties and other obligors by recourse action (paragraph 1 of article 49). Obligations preceding the judicial recovery shall comply with the terms contracted originally or defined by law, including with respect to charges, unless otherwise established in the judicial reorganization plan (paragraph 2 of article 49).

In the case of a claim guaranteed by pledge over credit instruments, credit rights, financial investments or securities, guarantees liquidated or fallen due during the judicial recovery may be replaced or renewed, and until they are renewed or replaced any amount received in payment of the guarantees shall be kept in a blocked account during the period of suspension (paragraph 5 of article 49). Under judicial recovery, the creditors' right to commence or continue their actions and executions against the company under recovery proceedings is suspended and the suspension shall in no event whatsoever exceed the non-extendable term of 180 days as from granting of processing of the recovery (paragraph 4 of article 6).

The two exceptions provided for in article 49 which are mentioned above are the following:

(i) in the case of a creditor holding the position of fiduciary owner of real or personal property, financial lessor, owner or committed seller of real estate whose respective agreements include an irrevocability or irreversibility clause, including under real estate developments, or an owner under a sale agreement with title retention, his claim shall not be subject to the effects of the judicial recovery, and the ownership rights over the item and the agreement terms shall prevail, with due regard for the respective law; during the suspension term, however, it shall not be permitted to sell or remove from the debtor's establishment any capital goods essential to his business (paragraph 3 of article 49); and

(ii) item II of article 86 establishes that restitution of the amount delivered to the debtor shall be made in cash, in domestic currency, resulting from an advance on an export exchange contract, pursuant to article 75, paragraphs 3 and 4, of Law 4728, of July 14, 1965 (Law 4728/1965), provided the full term of the transaction, including any extensions, does not exceed the term established in the specific rules of the proper authority. The proper authority in this case is the Central Bank of Brazil (Banco Central do Brasil - Bacen). This amount is not subject to the effects of the judicial recovery (paragraph 4 of article 49).

In accordance with article 75 of Law 4728/1965, an exchange contract, provided it is protested by an official with authority to protest bills, is a sufficient instrument to file execution action. By this procedure the creditor is entitled to the difference between the exchange rate in the contract and that prevailing on the date when the payment is made, according to the quotation furnished by Bacen, plus default interest (paragraph 1 of article 75 of Law 4728/1965). The same procedure applies for actions to collect advances made by financial institutions to exporters on account of the value of the exchange contract, provided the corresponding amounts have been annotated in the contract, with the seller´s consent (paragraph 2 of article 75 of Law 4728/1965). In the event of bankruptcy or judicial recovery, the creditor may apply for a refund of the sum advanced, as mentioned in the previous paragraph (paragraph 3 of article 75 of Law 4728/1965). The amounts advanced pursuant to paragraph 2 of article 75 of Law 4728/1965 shall be used in the event of bankruptcy, extrajudicial liquidation or intervention in any financial institution for payment of commercial credit lines they have given rise, on the terms and conditions established by Bacen (paragraph 4 of article 75 of Law 4728/1965).

Pursuant to article 72, if the debtor is a micro or small company and opts for a judicial recovery petition based on the special plan provided for micro and small companies, the general meeting of creditors shall not be called to resolve on the plan, and the judge will grant the judicial recovery if all other requirements hereunder have been met. The judge will also dismiss the judicial recovery petition and decree the bankruptcy of the debtor in the event of objections of creditors holding over half of the claims of any of the classes of creditors listed in the schedule set forth in article 83 (new wording of sole paragraph of article 72).

The schedule set forth in article 83 of Law 11101/2005 will apply, to wit:

  1. labor credits up to 150 current minimum wages per creditor and those deriving from occupational accidents, which are also subject to the same limit per creditor1;
  2. credits guaranteed by rights in rem up to the value of the encumbered property;
  3. tax credits, independent of their nature, except for tax-related fines;
  4. credits with special rights2;
  5. credits with general rights3;
  6. ordinary credits, which are: (a) those not provided in the other items of this article; (b) balance of credits not benefiting from the sale of the assets linked to their payment; and (c) balance of credits deriving from labor laws and regulations exceeding the limitation set forth in item (i) above;
  7. credits regarding penalties for noncompliance of contracts; tax penalties and pecuniary penalties for violation of criminal and administrative laws; and
  8. subordinated credits, which are: (a) those regarded as such under any law or agreement; and (b) credits of partners and officers without an employment relationship.

The changes to Law 11101/2005 introduced by LC 147/2014 should stimulate the use of the judicial recovery for micro and small companies, raising further their participation in the volume of applications analyzed by the Brazilian justice. According to Serasa Experian, in 2013 half of the 690 judicial recoveries were granted in favor of small businesses.

Footnotes

The current value of the minimum wage is R$ 724.00. The limit (cap) established in the law is 150 times the value of the minimum wage, i.e. up to R$ 108,600.00 per creditor. Labor credits or credits deriving from occupational accidents (accidents at work) are privileged in relation to any other type of credit up to the cap of R$ 108,600.00 per creditor. The creditor must be an employee of the company. Any amount which exceeds this cap is considered ordinary credit and will have to be included in item (vi) of the schedule set forth in article 83 of Law 11101/2005. For example, if the creditor (employee) is entitled to receive the total amount of R$ 208,600.00, the balance of R$ 100,000.00 will be deemed ordinary credit.

2 Under Brazilian law, credits with special rights are those: (i) deriving from court fees or expenses incurred in the collection or settlement of a claim; (ii) deriving from a claim for salvage expenses; (iii) deriving from a claim for necessary or useful improvement; (iv) deriving from a claim for materials, monies or services for the erection, reconstruction or betterment of any construction; (v) deriving from a claim for seeds, instruments and services to the growing or harvesting of agricultural produce; (vi) deriving from a claim for rent,; (vii) deriving from publishing agreements; (viii) deriving from harvest produce, with the involvement of rural labor, (ix) those regarded as such under other civil and commercial laws, except as provided otherwise in Law 11101/2005; (x) to whose holders law grants the right of retention with respect to an asset given as guarantee; and (xi) those in favor of individual micro entrepreneurs and micro and small companies pursuant to Complementary Law No. 123, of December 14, 2006 [new wording of letter d) of item IV of article 83 of Law 11101/2005].

3 Under Brazilian Law, credits with general rights are those: (i) deriving from expenses incurred in funerals, undertaken as specified by the deceased and the customs of the place; (ii) deriving from court fees, or expenses incurred in the collection and liquidation of an estate; (iii) deriving from expenses incurred in the mourning of the surviving spouse and children of the deceased debtor, provided that they are reasonable; (iv) deriving from expenses incurred in connection with a disease from which the debtor suffered and died from, arising during the six months preceding his/her death; (v) expenditures necessary to support deceased debtor and his/her family, in the quarter preceding the death; (vi) taxes owing to the Public Treasury, in current and preceding years; (vii) salaries of debtor's household help, in his/her last six months of life; (viii) other credits of general privilege; (ix) credits deriving from obligations assumed by debtor during the judicial recovery, including supplies of goods or services and loan agreements; and (x) credits regarded as such under other civil and commercial laws, except as otherwise provided in Law 11101/2005.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Walter Stuber
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.