Requests for judicial reorganization and bankruptcy are increasing in the country and are affecting small businesses the most.

Bankruptcy and judicial reorganization filings increased in April compared to March. The assessment is that the volume of cases is expected to skyrocket in the coming months, given the prospect of a sharp downturn in the Brazilian and global economies in 2020 and the financial difficulties faced by companies amid the coronavirus pandemic.

A monthly survey by Serasa Experian, previewed by G1, shows that in April there were 120 requests for judicial reorganization in the country, a 46.3% increase compared to March. Meanwhile, bankruptcy filings totaled 75, a 25% increase compared to the previous month.

Despite the monthly increase, the numbers were still below those observed in April 2019.

According to economist Luiz Rabi from Serasa Experian, due to social isolation and restrictive measures, many registry offices and courts did not function normally, which caused a backlog in the number of requests. Because of this and the scenario of strong recession, he predicts an avalanche of requests this year and a return to the record level observed during the 2016 economic crisis.

"With the recession setting in and the difficulties that various sectors are facing, both the number of bankruptcies and judicial reorganizations are expected to increase. Regardless of the length of the isolation period, the impacts on the economy have already occurred and will take time to be fully overcome," says the expert.

According to Serasa's figures, the year with the highest number of business insolvencies so far was 2016, when a record 1,863 requests for judicial reorganization were reached in the country.

"At the beginning of the year, it seemed that the number of bankruptcy filings would remain below 1,400 and the average of previous years. With the crisis, it should return to the level of the 2016 recession," assesses Rabi, highlighting that default rates have once again reached record levels in the country. According to Serasa, 6.2 million companies had overdue debts or financial commitments in March.

"Insolvency happens in stages. First, companies have difficulty honoring their commitments and become delinquent. In a second stage, the creditors themselves, due to this accumulation of defaults, file for bankruptcy, or the company itself, on its own initiative, requests that a judicial reorganization process be opened to try to reach a financial agreement," he explains.

According to lawyer Guilherme Marcondes Machado, a specialist in judicial reorganization, the current crisis is expected to be deeper than that of 2016/2017 because it is a global recession of uncertain duration.

"We live in a globalized, interdependent economy today. The entire supply chain has been broken," he says. "The increase in these numbers will be more substantial in the second half of the year, and certainly much greater than in 2016."

The lawyer warns, however, that judicial reorganization is a tool that should be used with caution, since it does not guarantee a greater chance of reaching an agreement with creditors or a lower risk of bankruptcy.

"We have been approached by many companies seeking some kind of solution to the crisis, and we always recommend trying out-of-court renegotiation before resorting to judicial reorganization. Taking the problem to court can hinder negotiation – especially with banks – and may even have the opposite effect, accelerating the company's bankruptcy," he explains.

Small businesses lead in insolvency cases.

Data from Serasa shows that during times of crisis, small businesses are the most vulnerable and most impacted by insolvency proceedings.

Of the 120 bankruptcy filings made in April, 53 were from micro and small businesses, 44 from medium-sized businesses, and 23 from large businesses. From January to April, of the 377 cases in the country, 226 involved small businesses, 99 medium-sized businesses, and 52 large businesses.

In the 75 bankruptcy filings, 39 were against micro and small businesses, 20 against large companies, and 16 against medium-sized businesses. In the year to date, of the 315 filings, 173 involved small businesses, 85 large companies, and 57 medium-sized businesses.

"Whenever there's a recession, banks become more restrictive and cautious when granting credit. The burden always falls on small businesses, which are the weakest link in the chain," says the economist from Serasa. "One month without revenue practically bankrupts these companies, which usually don't have capital reserves or shareholders who can inject resources."

Research by Sebrae (Brazilian Service for Support to Micro and Small Businesses) released this Monday (18) showed that, since the beginning of isolation measures in Brazil, only 14% of micro and small businesses that requested credit were able to obtain it.

Brazil currently has around 17 million small businesses. Of these, almost 7 million (38%) sought credit during the period. However, more than half of them (58%) did not obtain the funds, and 28% are still waiting for bank approval, according to Sebrae.

The service sector leads in the number of bankruptcy filings.

Analyzing by sector, the Serasa survey reveals that the service sector was the most impacted, with the number of requests for judicial reorganization jumping from 44 in March to 92 in April. In the same month last year, there were 56.

In the retail sector, there were 13 requests in April, in industry, 12, and in the primary sector, 3.

"The service sector has the highest concentration of defaulting companies in the country, half of the total," notes Rabi.

Serasa's survey only monitors cases of insolvency that have gone to court, not including out-of-court settlements or cases where companies have decided to cease operations on their own initiative.

According to a study by Sebrae, 44% of small businesses interrupted their activities due to the coronavirus crisis, as they depend on in-person operation. Business owners reported an average 60% drop in revenue due to the pandemic. Although all sectors registered losses, they were more pronounced in activities of the so-called creative economy, which involve events and productions (-77%), in tourism (-75%), and in gyms.

Source: Globo.com