The preservation of financially challenged companies is arguably the greatest innovation introduced by the Judicial Recovery Law (11.101/2005).(1) The old Decree Law 7661/1945 no longer fulfilled the purpose of helping companies to survive business crises; nor did it present legal solutions to businesses, instead often resulting in companies filing for bankruptcy.
The first example of change introduced by the new Judicial Recovery Law was through Article 50, which established several forms of recovery for companies in financial difficulty, including detailing the ways in which assets or isolated productive units could be disposed of. It was thought illogical to allow the legal system to encourage the acquisition of a distressed company's assets by third parties and yet, through the same legal provision, to allow for ineffective disposal of such assets in the sole interest of creditors following a judicial recovery proceeding.(2)
Articles 60 and 141(2) of the law specified that the subject matter of judicial disposals should be free from liens. Furthermore, the acquirer should inherit no civil, tax or labour obligations pertaining to the recovering company.
In addition, Article 133 of the National Tax Code has been adapted to provide that the succession of tax debt does "not apply in the event of judicial disposals: (i) in bankruptcy cases [or] (ii) of subsidiaries or isolated productive units, subject to judicial recovery proceedings". Therefore, the acquirer of the assets of a company in judicial recovery is protected from any tax succession by express provision of the National Tax Code.
The Labour Democratic Party filed a direct action of unconstitutionality against Articles 60 and 141 of the law, arguing that such provisions would release the acquirers of assets of companies in judicial recovery from their labour obligations, making them immune to the burden of succession and thus arguably violating the constitutional values of dignity and the labour rights of company employees.
In response, the Federal Supreme Court - through the opinion of Justice Ricardo Lewandowski - ruled that Articles 60 and 141 of the law are in fact constitutional, as they allow a financially challenged company to be preserved, thus protecting jobs and encouraging the circulation of wealth, which are prerequisites for free enterprise and maintenance of the Brazilian economic order.(3)
This opinion is not novel and can also be found in the legislation of other countries - including France,(4) Spain(5) and Italy(6) - thus substantiating the approach adopted by the Brazilian legislature. Therefore, the law, alongside the opinions of the Federal Supreme Court and the Superior Court of Justice, grants the necessary legal protection to acquirers of assets or rights of companies in judicial recovery before their creditors, in line with the current needs of Brazil's economic system.
For further information on this topic please contact Ricardo Tosto de Oliveira Carvalho or Rodrigo Eduardo Quadrante at Leite Tosto E Barros Advogados Associados by telephone (+55 11 3847 3939), fax (+55 11 3847 3800) or email ([email protected] or [email protected]).
(1) Conflict of Competence 118.183-MG, Superior Court of Justice, Justice Nancy Andrighi.
(2) Conflict of Competence 117.184-RS, Superior Court of Justice, Justice Sidnei Beneti.
(3) Direct Action of Unconstitutionality 3.934-2, Supreme Court, Justice Ricardo Lewandowski.
(4) Code de Commerce, Articles L631-1, L631-13 and L642-1.