Investors, beware! Judicial Recovery does not protect you from labor debts

Dear readers,

Hope you’re all well.

Today I’d like to address a particularly sensitive topic that, in my opinion, every single person who intends to invest in Brazil should be aware of: if your company faces a labor law legal suit, the limitation of liability won’t apply to the owners.

And now, since a recent decision from the 4th Chamber of Regional Labor Court, Third Region (TRT3), the novation promoted by the approval of a judicial recovery plan apparently doesn’t either.

Even though there’s a precedent of the same Court (Precedent nº 55/TRT3), and a well-established Superior Court of Justice case law, that the Bankruptcy Court has sole jurisdiction regarding the matter, the 4th Chamber ruled that, if the Plan doesn’t cover the owners personal properties, it’s fair game to proceed with the execution against them.

For more direct details, check this link.

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“Change the rules in the middle of the game?” STJ sees no problem at all!

Foreigner investors should be well aware of a Brazil’s Superior Court of Justice recent decision regarding secured creditors guarantees within the approval of judicial reorganization plan under Brazilian Bankruptcy Law.

One of the main competences of the Superior Court of Justice (STJ) is to uniform all infra-constitutional matter (with the exception of Labor Law issues), including Bankruptcy Law. And, recently, they were asked to interpret article 59 of Law nº 11,101/2005 (Bankruptcy Law), according to what the approval of the judicial reorganization plan implies a novation of previous credits and binds all creditors, without prejudice of the warranties provided at article 50, paragraph 1º, of the same statute.

Article 50, paragraph 1º, in its turn, says that, on the event of the transfer or disposal of an asset burdened with an in rem guarantee, such as mortgage or commercial pledge, the secured creditor must give express approval.

It follows that the judicial reorganization measures shall not affect the rights in rem of creditors without their express consent, even if the reorganization plan is approved by all the presents at the general creditor’s meeting.

That was changed by the recent decision of the Third Panel of Superior Court of Justice in Special Appeal nº 1,532,943 that deemed valid a provision that suppressed all secured and fiduciary guarantees of the credits subjected to the appellant’s judicial reorganization plan.

In other words, STJ has enforced a judicial reorganization plan clause that has extinguished both real and personal guarantees from creditors that agreed with the plan, that abstained from voting, and that voted against such measure.

That decision violated not only the mens legis, but also STJ’s own precedents, such as the Fourth Panel’s Special Appeal nº 1,326,888, and has created a gigantic problem to every other secured creditor in Brazil. A point that is only aggravated by our current political and economic scenario.

It’s, therefore, imperative to any foreign investor, willing to invest in Brazil, or, even more, to any foreign creditor to seek advise from their legal counselors regarding their current position within Brazilian companies, and to reassess the default risk of their debtors concerning that new jurisprudence.

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Brazilian Special Judicial Recovery

Dear readers,

How are you doing?

I’ll try my best to translate a few of my posts to other languages so they can reach a broader public. My English is a little rusty, but I hope my audience will indulge me.

Continue reading Brazilian Special Judicial Recovery

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