Bankruptcy filings rise 28.9% in June; requests for judicial reorganization increase by 82.2%.

Bankruptcy filings increased by 28.9% in June of this year compared to May. Filings for judicial reorganization grew by 82.2%. This is according to a survey by Boa Vista released last Wednesday (July 8th). The study was based on information collected by the Central Credit Protection Service (SCPC) from courts, bankruptcy courts, official gazettes, and court records.

In the case of bankruptcies declared within the same period, there was a 93% jump, while accepted judicial reorganizations doubled, with a 103.3% increase.

The impacts of the crisis caused by the new coronavirus are even more visible when comparing June of this year and June of 2019: bankruptcy filings rose 87.1%; decrees, 71.3%; requests for judicial reorganization, rose 44.6%; decrees, 123.4%.

"According to the accumulated results over 12 months, although declared bankruptcies are still showing a decrease, there is a noticeable increase in bankruptcy filings, reflecting the difficulties that companies have encountered in maintaining their activities in the first half of the year. Furthermore, with the economic impacts caused by the arrival of the new coronavirus, and as already observed in the monthly analysis, the trend is that companies will continue to show a worsening in their solvency indicators during the most acute period of the crisis," states Boa Vista.

Small businesses
Small businesses were the hardest hit by Covid-19. On average over 12 months, these companies accounted for 93.4% of bankruptcy filings; 95.8% of approvals; 94.2% of requests for judicial reorganization; and 94.3% of decrees. By comparison, only 1.3% of large companies filed for bankruptcy and 1.1% of them filed for judicial reorganization.

This trend is easily explained. According to data from Sebrae, small companies have, on average, cash available for only 12 days in case of any disruption to their revenue. Micro-entrepreneurs, not mentioned in the Boa Vista survey, are the ones who suffer the most, with about eight days of cash on hand.

The drop in GDP is closely linked to bankruptcy filings, according to a study by the consulting firm Alvares & Marsal, published in April by the newspaper O Estado de S. Paulo.

According to the research, a 3% drop in GDP could generate 2,200 requests for judicial reorganization. The Focus bulletin, released by the Central Bank in April, predicted a 2.96% contraction in GDP for this year.

According to the same consultancy, if the GDP falls by 5% — the International Monetary Fund projected a decline of 5.3% — it is estimated that 2,500 companies will knock on the doors of the Judiciary invoking Law 11.101/05 , which deals with judicial and extrajudicial reorganization and bankruptcy.

If verified in 2020, this number will be 40% higher than that recorded in 2016, when 1,800 business entities resorted to the courts—a record figure at the time.

As reported by ConJur in April, judges and lawyers were already predicting an increase in bankruptcy filings. According to them, the delicate situation, resulting from defaults and the difficulties companies face in meeting their obligations, could lead to an avalanche of requests, making it impossible for the courts to handle the demand.

By Tiago Angelo

Source: Conjur