In a recent interview published on the Metrópoles website, Dr. Camila Crespi, our lawyer specializing in judicial recovery, comments on the significant increase in requests for judicial recovery in 2023, indicating the possibility of reaching record numbers.

From January to October, 1,128 companies filed for bankruptcy protection in Brazil, an increase of 61.8%. Economic and legal factors explain the phenomenon.

The total number of requests for judicial recovery by Brazilian companies may approach, in 2023, the historical record already registered in the country, according to information from Serasa Experian. From January to October of this year (latest data available), 1,128 companies resorted to this instrument, which corresponds to an increase of 61.8% compared to the same period in 2022.

In October alone, according to the Bankruptcy and Judicial Recovery Indicator from Serasa Experian, 162 companies filed for judicial recovery – an annual growth of 51.4% and the highest mark for a single month in more than four years, since July 2019 (176). It is also the highest number for October since the beginning of the historical series, in 2005. Compared to the previous month, requests jumped by 19.1%.

Judicial recovery is a process that allows organizations to renegotiate their debts, avoiding the closure of activities, layoffs or non-payment of employees. Through this instrument, companies are no longer required to pay creditors for a period of time, but they must present a plan to settle their accounts and continue operating. In general terms, judicial recovery is an attempt to avoid bankruptcy. In the first 10 months of 2023, 896 companies went bankrupt in the country.

To date, the annual record in Serasa Experian's historical series was registered in 2016, with 1,863 requests for judicial recovery in Brazil. In 2017, the number fell to 1,420, remaining practically stable in 2018 (1,408) and 2019 (1,387).

In 2020, the first year of the Covid-19 pandemic, 1,179 companies filed for bankruptcy protection. In 2021, there were 891 and, in 2022, 833. The accumulated number between January and October 2023, therefore, exceeds the total for 2021 and 2022 and practically equals the mark reached in 2020.

The Serasa Experian study shows that, in October of this year, micro and small companies led the requests for judicial recovery in Brazil (113), followed by medium-sized companies (33) and large companies (16). The largest number of requests came from the services sector, ahead of retail and industry.

In 2023, among the major brands that filed for bankruptcy protection, the most notorious case involved Americanas, a retail giant that is facing the most serious crisis in its history since a billion-dollar accounting fraud came to light in January. In addition to the retailer, companies such as Hi (for the second time), Light, 123 Miles, Maxmiles, Petropolis Group, M5 Group (owner of M.Officer) and, more recently, SouthRock, operator of brands such as Starbucks, Subway and TGI Fridays in Brazil.

Default, recession and pandemic

Among the reasons that explain the increase in the number of requests for judicial recovery in Brazil in recent months, according to experts in corporate restructuring interviewed by Metrópoles, are the difficulties arising from turbulent periods in the country's economy recently, such as the recession of 2015 and 2016 and the Covid-19 pandemic, since 2020.

Changes to the Bankruptcy and Judicial Recovery Law (14,112/2020) also influenced companies. In general terms, these changes in legislation allowed for greater effectiveness in the restructuring of companies experiencing financial difficulties and provided more incentives for the economic development of these companies, through new forms of granting credit and installment payments of tax debts, among other measures.

“There are legal and economic factors that explain this phenomenon. We had a recession before the pandemic, then Covid-19 came along and things went downhill. The banks, which are the main creditors of these companies, created a series of policies to try to negotiate and were not so on top of these debtor companies,” says Renato Scardoa, partner at S.DS Scardoa e Del Sole Advogados.
“From a legal perspective, we had the reform of the Judicial Recovery Law. Many companies preferred to wait a little to find out how this new law would be applied and whether it would be successful. Companies ended up seeking judicial recovery as a renegotiation measure,” explains Scardoa.

For Max Mustrangi, founding partner of the consultancy firm Excellance, which specializes in corporate restructuring, many companies have been accumulating debt and financing in recent years “to keep their operations running”. “They have been leveraging themselves financially with debt and money has become expensive. When there is no longer anywhere to find financing in the market, which is without credit liquidity, these companies are stranded and have no place to find money. They either file for bankruptcy or go bankrupt”, he says.

“It’s always like this. Shareholders, executives and controllers take too long to make this decision. When they file for bankruptcy protection, the company is already too fragile,” Mustrangi continues. “The problem is not the instrument itself. It’s how you use this remedy, often late and incorrectly.”

Camila Crespi, a corporate restructuring specialist at Luchesi Advogados, shares her assessment of the delay in filing for bankruptcy protection. “Many large companies seek the courts at a stage in which their debts have become unpayable. Even if they present a recovery plan, they are often unable to honor these commitments and some end up opting to terminate the bankruptcy protection,” she says.

According to the lawyer, judicial recovery “is an effective instrument as long as it is used correctly”. “What we have seen, unfortunately, are many cases of fraud or misuse of judicial recoveries, so much so that creditors are changing their stance, paying more attention to the accounting side and the financial issues of companies, especially after what happened with Americanas”, says the lawyer.

Renato Scardoa also believes that the instrument has often been “used too late”. “There is still a culture that believes that judicial recovery is the last gasp. When you carry out this process with more planning, in a structured manner, the result is more positive not only for the company but also for the creditors”, he observes.

“Crisis market” and what to expect in 2024

Faced with a more restricted credit scenario, amid the financial difficulties of small, medium and large companies, an increasingly larger space was opening up for the so-called “crisis market” – formed by managers, consultancies and law firms specialized in judicial recovery and corporate restructuring.

According to a survey by Spectra Investments, there are at least 39 independent asset managers operating in this segment – in 2015, there were only five. Together, these companies have more than R$13 billion in capital available for investment, compared to just over R$1 billion in 2012. The main activities carried out by these managers include financing for companies undergoing judicial recovery, funds for the purchase of court-ordered debts and assistance in granting credit.

“Historically, judicial recovery was seen as a very bad thing for companies and had a terrible impact on the market. Companies held on as long as they could and, when they started, they were already almost bankrupt,” highlights Renato Scardoa. “The positive side of this increase in judicial recoveries is that, over time, we see that judicial recovery is not a seven-headed beast.”
For Max Mustrangi, from Excellance, the trend for 2024 is that the “crisis market” will continue to expand rapidly. “Quarter after quarter, results are getting worse for many companies and the math doesn’t add up. The fourth quarter should be very bad in terms of results, just look at what happened on Black Friday,” he says.

“There is a continuous drop in revenue and many companies will open an even bigger cash hole and will have to seek financing to keep their operations running. The number of judicial recoveries and bankruptcies, especially in the first half of next year, tends to continue to increase,” Mustrangi predicts.
Renato Scardoa, from S.DS Scardoa e Del Sole Advogados, understands that, at least in the case of large companies, traumatic episodes that occurred this year may inhibit new requests for judicial recovery in the coming months.

“Unless another balance sheet scandal emerges, as happened with Americanas, or an unfortunate economic activity, as in the case of 123 Milhas, I cannot see other large companies going into judicial recovery. Especially because some of them were very traumatic, especially for the banks, with long processes. I believe that these companies will be more open to direct negotiation with financial institutions.”

Reproduction source: Metropolises