The crisis within the crisis: how to fulfill judicial recovery plans in the context of COVID-19?

When seeking the protection offered by judicial reorganization through the courts, a debtor must demonstrate that they are facing an economic and financial crisis or that they are already hearing its signs. For this reason, the objective of judicial reorganization is to enable the overcoming of this crisis, which occurs through the granting of certain legal protections and benefits, allowing the preparation of a recovery plan in which the company in crisis details the measures it intends to adopt to recover. If the plan is approved by the creditors and ratified by the judge, the debts submitted to judicial reorganization will be paid according to the plan.

The percentage of companies that overcome the economic crisis and emerge from bankruptcy protection is extremely low, which already suggests that fulfilling the plan is usually an arduous task. If fulfilling the recovery plan is a complex mission under normal conditions, what about doing it during a pandemic? What treatment should be given to companies surprised by COVID-19 in the midst of their efforts to fulfill their recovery plans?

The automatic response, based on the principle of preserving the company, tends to be to provide even more protection to the company undergoing judicial reorganization. One way to do this is to make the rule more flexible that requires the judge to declare bankruptcy for a company that fails to comply with the obligations of the plan within 2 years of its approval, as the National Council of Justice did a few days ago in its Recommendation No. 63, in which this guidance was explicitly given.

Recommendation No. 63 outlines the paths that companies with approved judicial reorganization plans can take in the pursuit of additional protection in the context of the pandemic, by guiding judges to "consider the occurrence of force majeure or fortuitous event" (Article 4, sole paragraph). Thus, such companies are temporarily protected from the main consequence of non-compliance with the plan's obligations during the first two years: bankruptcy.

However, providing the debtor company with extra protection should not be the only option to consider. Alongside the preservation of the company and its productive activity, there are other rights that also deserve protection and that may eventually be negatively affected by the decision to provide additional assistance to the debtor company due to COVID-19. Consider, for example, the right of workers to receive the credits stipulated in the plan, amounts often indispensable to their own livelihood, the maintenance of which stems directly from the dignity of the human person, a fundamental principle enshrined in Article 1, III, of the Federal Constitution.

In a conflict between the rights of a company undergoing judicial reorganization and those of its creditors, there is no solution that applies to all situations. Even so, it is possible to identify guidelines to guide the resolution of specific cases. The first of these is a careful assessment of whether the pandemic has affected the company's ability to comply with the reorganization plan.

Caution is justified for two reasons: the first is that – depending on which obligations have been assumed in the plan – COVID-19 may have zero impact on the debtor's ability to fulfill it. The second is the need to guard against opportunists who may intend to take advantage of the pandemic to boost their chances of obtaining a moratorium.

To distinguish between serious and opportunistic claims, it is necessary to analyze how the debtor was behaving in relation to the obligations of the plan before the pandemic: If, before Covid-19, the debtor was already unable to recover even with the stimulus of the generous discounts and grace periods typically provided for in recovery plans, it is possible that its difficulties were not caused (nor aggravated) by Covid-19.

If the question about the impact of the pandemic is answered affirmatively, the next step is to measure that impact. Since COVID-19 affects different economic sectors asymmetrically, its influence on the debtor's ability to fulfill the plan may be greater or lesser. It is necessary to clearly establish the extent of the obstacles brought about by the pandemic, even to calibrate the remedy to be administered.

Regarding this calibration, any decisions made should be made in a general assembly, even if virtual, so that the participation of creditors legitimizes the extra protection that the debtor will seek. This additional safeguard may take the form of a substitute for the recovery plan, with extensions of deadlines, temporary suspension of payments, and other arrangements.

The key to successfully managing the legal challenges brought about by COVID-19 is to keep a close eye on the balance of interests at stake. Restoring the debtor's ability to comply with the recovery plan cannot lead to a disproportionate transfer of burdens to creditors.

By Luciano Velasque Rocha and João Carlos Duarte de Toledo

Source: Estadão