The Third Chamber of the Brazilian Superior Court of Justice (Superior Tribunal de Justiça - STJ) recently ruled1 that who did business with a company after its judicial recovery plan is granted takes precedence in the line of creditors, if the recovery is not feasible and it is converted into bankruptcy.

The special appeal in which the creditor sought the classification of its credits as post-petition claims (créditos extraconcursais) was partially granted by the STJ. The ordinary instances had decided that only the acceptance of the judicial recovery plan is not enough to make these credits post-petition claims as the preference only exists for credits contracted after the effective granting of the benefit.

The post-petition claims referred to in article 84 of Law No. 11,101, of February 9, 2005 (the Company Recovery and Bankruptcy Law)2 have preference in relation to the petition claims (créditos concursais), which are listed in the schedule set forth in article 83 of the same law. To the Third Chamber of the STJ the company is under recovery proceedings from the moment the judge grants the judicial recovery plan, so that the creditor in the case at hand is entitled to the claimed preference.

According to article 83 of the Company Recovery and Bankruptcy Law, the petition claims will apply in the following order of preference:

  1. labor credits up to 150 (one hundred and fifty) current minimum wages per creditor and those deriving from occupational accidents, which are also subject to the same limit per creditor3;
  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 rights4;
  5. credits with general rights5;
  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.

It is also important to mention article 67 of the Company Recovery and Bankruptcy, which states that the claims resulting from obligations contracted by the debtor during the judicial recovery plan, including those relating to expenses with goods or service suppliers and loan agreements, will be considered post-petition claims in the event of decree of bankruptcy, with due regard, as applicable, for the order established in article 83 of the same law. Unsecured claims subject to the judicial recovery plan held by goods or service suppliers who continue to provide them normally after the petition for judicial recovery plan will have general privilege of receipt in the event of decree of bankruptcy, to the limit of the amount of the goods or services supplied during the recovery plan period.

The bankruptcy was decreed at the request of the debtor company itself even before the deadline for delivery of the recovery plan.

In the case at hand, the Union that represents the employees of the debtor company challenged the list of creditors prepared by the judicial administrator of the bankruptcy estate. For the Union, the credits of the claimant/appellant should be classified in the class of unsecured credits, i.e. without any privilege. Both the judge of first instance and the Court of the State of Santa Catarina (Tribunal de Justiça de Santa Catarina - TJSC) agreed with the Union.

The creditor filed an appeal in the STJ based on the argument that the preemptive right is indispensable for a company under recovery proceedings to find on the market the support required for the continuity of its activities.

According to the Reporting Justice Nancy Andrighi, the main effects of the recovery emerge with the decision to grant the request and it is precisely at this moment that is given publicity to the market about the economic situation of the company. As an example of the effects of the recovery we can mention the suspension of any execution against the company and the exemption from the requirement of clearance certificates. She also stated that the company under recovery proceedings loses its productive capacity on the grounds of suspicion of the suppliers and customers, and to ensure the preemptive right is the means to compensate for those who actively participate in the recovery process.

Following the vote of the Reporting Justice, the other associate justices considered that the preemptive right is a measure for stimulating economic agents to invest in the recovery of the company in financial difficulties. Assign preemptive right in the payment order to those who actively participated in the process of recovery in the event of bankruptcy of the debtor was the way that the legislator found to compensate them for the increased risk.

Article 67 of the Company Recovery and Bankruptcy provides that claims arising from obligations entered into by the debtor during the recovery will be considered post-petition claims, in the event of decree of bankruptcy. Article 84, item IV, of the same law determines that the post-petition claims relating to obligations resulting from valid legal acts committed during the recovery or after the bankruptcy will be paid with precedence.

For the Reporting Justice, the reclassification of credits powered by strength of these legal provisions is due to the importance that they represent to ensure fulfillment of the goals of the Company Recovery and Bankruptcy Law, contemplated in article 47, i.e. the preservation of the company and its social function6.

If the recovery is not feasible, it is important to recognize that who negotiated with the debtor from the moment in which the situation of crisis was evident (prior to the date of approval of the application for the judicial recovery plan), collaborated greatly with the attempt of rebuilding of the company and therefore must occupy a privileged position in the line of creditors.


1 Special Appeal (Recurso Especial) No. 1,398,092 – SC (2013/0265703-2), having Framcred Factoring Mercantil de Crédito Ltda. as Claimant/Appellant (Recorrente) and Sindicato dos Trabalhadores nas Indústrias de Ceramicas para Construção, do Fibrocimento e Outras Fibras Minerais e Sintéticas, da Construção Civil, do Mobiliário e de Artfefatos de Madeira de Criciuma e Região as Respondent/Appellee (Recorrida), and as Reporting (Relatora) Justice Nancy Andrighi, of the Brazilian Superior Court of Justice (Superior Tribunal de Justiça – STJ). The company under bankruptcy proceedings is De Lucca Revestimentos Cerâmicos Ltda. – Massa Falida. The decision was issued on May 6, 2014 and published in the Electronic Official Gazette (Diário da Justiça Eletrônico - DJE) of May 19, 2014.

2 This provision establishes that:

"Article 84. - Claims relating to the following shall be considered post-petition claims and shall be paid with precedence over those mentioned in article 83 hereof, in the order set forth below:

I. – fees payable to the trustee and his assistants, and labor-related claims or occupational accident claims referring to services rendered after the decree of bankruptcy;

II. – sums provided to the bankrupt estate by the creditors;

III. – expenses with schedules, management, asset realization and distribution of the proceeds, as well as court costs of the bankruptcy proceedings;

IV. – court costs with respect to actions and executions in which the bankrupt estate is defeated;

V. – obligations resulting from valid juristic acts performed during the judicial recovery plan, pursuant to article 67 hereof, or after the decree of bankruptcy, and taxes relating to generating facts occurring after the decree of bankruptcy, with due regard for the order established in article 83 hereof."

3 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 the Company Recovery and Bankruptcy Law. 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.

4 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 this Law; and (x) to whose holders law grants the right of retention with respect to an asset given as guarantee.

5 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 this Law.

6 This article regulates the matter as follows:

"Article 47. - The object of the judicial recovery is to make it possible for the debtor to overcome his economic and financial crisis in order to be able to maintain the production source, employment of workers and interests of the creditors, thus contributing to preserve the company and its social function and to foster economic activity."

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.