A Company in Crisis: Alternatives to Judicial Reorganization

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

Before turning to judicial reorganization, a company in crisis can try negotiated solutions, operational restructuring and out-of-court mechanisms that preserve the business at a lower cost and with less exposure.

Judicial reorganization is a powerful tool, but it is expensive, slow and damaging to a company’s reputation. Knowing the alternatives lets you choose the path that best fits the severity of the crisis and the makeup of the company’s debt, and spare yourself unnecessary friction with creditors and the market.

Identifying the Crisis Early

Monitoring financial indicators, cash flow, debt levels and profitability is essential to catching a crisis before it becomes insolvency. Acting early widens your options and lets you negotiate from a stronger position.

The sooner a company reacts, the better its chances of renegotiating debts on favorable terms and protecting jobs, business relationships and strategic assets. Warning signs such as rising defaults, a sudden drop in revenue and difficulty renewing credit should never be ignored.

Hiring specialized financial and legal advisors at the first sign of trouble significantly reduces the risk that things get worse. Experts in corporate restructuring can more precisely identify the nature of the crisis, whether it is cyclical or structural, and recommend the right tools for each situation.

Negotiating Directly with Creditors

Negotiating directly with banks, suppliers and the tax authorities is the first step. Many institutions offer a grace period, installment plans and lower interest rates to avoid a formal default, because recovering the debt this way is usually more advantageous than suing to collect it.

Refis (Brazil’s tax debt installment program), special installment plans and programs run by the Office of the Attorney General for the National Treasury are options for tax debts. These programs can substantially reduce the amount of tax liability, restoring financial balance without costly, drawn-out litigation.

A renegotiation proposal should rest on realistic financial projections and come with documents that show the company’s ability to pay. Institutional creditors rarely accept proposals unsupported by hard data, and such proposals can damage the debtor’s credibility in later negotiations.

In most cases, combining renegotiation with internal restructuring is the most effective approach. Cutting expenses while seeking longer payment terms gives cash flow room to normalize, without the reputational burden of a court proceeding.

Judicial reorganization is a powerful tool, but it is expensive, slow and damaging to a company’s reputation.

Business Mediation and Arbitration

Business mediation makes it possible to reach consensual solutions with key creditors, avoiding litigation and preserving long-term commercial relationships. Arbitration can be useful for shareholder disputes that make the financial crisis worse.

Mediation centers and arbitration chambers offer faster procedures than the court system, with greater confidentiality, which protects the company’s image during the restructuring. Confidentiality matters especially for companies whose business depends on their market reputation.

Mediation before filing for judicial reorganization can reduce the amount of debt that must be restructured in court, making the plan more feasible and improving its chances of approval by creditors. Creditors who took part in the mediation tend to be more receptive to the terms proposed in the plan, since they already know the company’s real situation.

Operational Restructuring

Cost cutting, contract review, planned layoffs, the sale of non-strategic assets and internal reorganization are measures to weigh before any court proceeding. A well-planned restructuring can bring the company back into balance without exposing its weakness to the market.

Reviewing existing contracts is one of the richest sources of savings. Renegotiating leases, supplier services and the terms of long-term contracts can free up substantial funds without compromising the core operation of the business.

Selling non-strategic assets, such as real estate that could be replaced by a lease, equity interests in other companies and idle machinery, generates immediate liquidity to pay priority obligations. A careful appraisal of the assets should come first, to avoid sales below market value that could be challenged later.

Out-of-Court Reorganization

Out-of-court reorganization, provided for in Law No. 11.101/2005, lets a company negotiate with some of its creditors through a plan approved by a court. It is less costly and faster than judicial reorganization, and it suits companies whose crisis is concentrated in certain categories of debt.

It requires the agreement of creditors representing a minimum share of the debts, and it does not cover labor and tax claims. Negotiating beforehand with the most significant creditors is a practical condition for the plan’s success, because the law requires certain majorities to be reached before a court will approve it.

The out-of-court reorganization procedure is confidential until the request for court approval is filed with the competent court, which allows the debtor to negotiate in a private setting. This sets it apart from judicial reorganization, which is public from the initial petition and can expose the company’s difficulties to the market too early.

Liability of Company Managers

One aspect often overlooked in a crisis is the managers’ personal liability. Acts that exceed their authority or violate the law or the company’s articles of organization can make officers and managing partners liable, in both civil and criminal matters.

When a company operates while insolvent for a long period without restructuring or seeking court protection, its managers can be held liable for reckless management. Documenting the decisions made, the reasons behind them and the alternatives considered is essential to show good faith in later investigations and to rebut presumptions of intent or gross negligence in running the business.

When to File for Judicial Reorganization

If out-of-court alternatives are not enough, judicial reorganization provides a suspension of enforcement actions during the stay period, protection against seizure of assets, and the possibility of approving a plan that binds all creditors subject to the proceeding, including those who did not agree voluntarily.

The decision to file for judicial reorganization should be made with careful planning, because the timing of the petition directly affects the plan’s chances of approval. Companies that wait too long to seek protection have fewer assets to offer, less liquidity and creditors who are less willing to negotiate reasonable payment terms.

Once the court allows the reorganization to proceed, lawsuits and enforcement actions filed against the company are suspended for 180 days, a period known as the stay period. Use this time to prepare the reorganization plan responsibly and transparently, presenting realistic financial projections that show the business is economically viable to the creditors’ committee.

The Role of Corporate Planning in Preventing Crises

A company built on sound corporate planning has more effective tools to weather turbulent periods. Setting up asset-holding companies, keeping the partners’ personal assets separate from business assets, and periodically reviewing the articles of organization or bylaws are measures that create layers of protection before any sign of crisis appears.

A well-drafted shareholders’ agreement is one of the most underrated tools in day-to-day business. When a financial crisis coincides with disagreements among partners over how to run the company, the absence of a clear agreement multiplies conflicts and slows the company’s response to its difficulties. Agreements that provide for exit mechanisms, deadlock resolution and decision-making in extraordinary situations allow the company to respond cohesively even in adverse conditions.

Reviewing the type of corporate entity also deserves attention. Limited liability companies and corporations have different liability regimes and different ways of raising funds. In some cases, converting the entity type can open the door to new investors or make it easier to issue debt instruments that finance the recovery without court proceedings.

Raising Funds and Attracting Strategic Investors

An alternative that struggling companies often overlook is opening up the company’s capital to strategic investors. Bringing in a partner with financial strength and complementary operations can supply the funds needed to overcome the crisis without the added debt that installment plans usually create.

Private equity funds and angel investors specializing in corporate restructuring regularly evaluate opportunities in companies with manageable debt and operations that have recovery potential. To attract this kind of investor, the company must present a credible business plan, up-to-date audited financials and complete transparency about the makeup of its debt and the causes of the crisis.

Issuing debentures and other private debt instruments is another option for midsize companies that already have an operating track record and credibility with the financial market. These instruments let a company raise funds on costs and terms negotiated directly with investors, free of the conditions attached to traditional bank loans.

Assigning receivables is a more accessible option for companies with a base of paying customers. Advancing future revenue through a fiduciary assignment to the creditor provides immediate liquidity and can be structured without court approval. This approach is especially useful for service and retail companies that have medium- and long-term contracts with creditworthy customers.

Tax Aspects of Corporate Restructuring

A financial crisis often carries a significant tax component. Debts owed to the federal, state and municipal tax authorities can undermine an operational recovery if they are not handled in a structured way. Special installment programs, when available, offer reductions in penalties and interest that make tax liabilities more manageable.

Tax compliance is a prerequisite for many restructuring transactions. Companies with outstanding tax issues cannot take part in public bidding, obtain the clearance certificates required for government contracts, or put up collateral for bank financing. Treating tax debt as a strategic priority, and not merely as a payment obligation, is a shift in perspective that widens the possibilities for recovery.

Reorganizing the books and aligning the tax regime with the company’s actual volume of operations during the crisis are also measures with an immediate impact. Companies that stay under Lucro Real (the actual profit tax regime) when Lucro Presumido (the presumed profit regime) would be more favorable, or that did not revisit their tax classification after a significant drop in revenue, pay more tax than they are required to. A careful tax review during the restructuring can free up a meaningful amount of cash without any need to negotiate with outside creditors.

Frequently Asked Questions

Should every company in crisis file for judicial reorganization?

No. Many crises can be overcome through direct renegotiation, operational restructuring or out-of-court reorganization, which cost less and do less damage to the company’s image. Judicial reorganization should be the last resort before bankruptcy, reserved for situations in which the other alternatives have been exhausted without a satisfactory result.

Does out-of-court reorganization protect against enforcement actions?

Partially. The protection depends on court approval and reaches only the creditors who joined the plan or who are bound by the court’s decision, under the rules set out in Law No. 11.101/2005. Labor and tax creditors are not covered by this mechanism.

Is it possible to negotiate labor debts outside of a reorganization?

Yes, through individual or collective agreements, as long as they respect the worker’s non-waivable rights and the union’s participation where the law requires it. Approval by the Labor Courts gives the agreement certainty and prevents later challenges to its validity.

As informações deste artigo são de caráter informativo e não substituem a consulta a um advogado especializado. Cada caso possui particularidades que exigem análise individualizada.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.