On March 11th, the World Health Organization (WHO) officially classified Covid-19 as a pandemic, marking the start of an unprecedented global crisis. Now, over three months later, as Brazil and many other countries begin a gradual return to normality, one of the greatest challenges will be alleviating the economic impacts suffered by companies due to the crisis, so that the process of economic recovery may begin.
Experts in Brazil predict an incoming wave of judicial restructuring procedures that will surpass the country’s all-time high in 2016, when 1,863 new requests were filed, with an estimated 2,500 new proceedings expected over the next 12 months, according to leading management consulting firm Alvarez & Marsal.
Eduardo Seixas, managing director and head of restructuring for Alvarez & Marsal in Brazil, stated: “The Covid-19 crisis is much bigger than any crisis we’ve had before – 2008, 2012 or 2016 – because it affects a great deal of sectors and drastically reduces the revenue generated by companies. This crisis does not represent a 20% or 30% drop in revenue, but a 90% to 100% drop, as establishments are being shut down. It is an unprecedented crisis, so the impact is violent. We carried out a study projecting around 2,500 new judicial restructuring procedures over the next 12 months, however, now I believe the number could be even higher, as the economy hasn’t returned to normal.”
With an impact primarily on the retail, tourism, hospitality and aviation industries, the majority of filings are likely to hail from those sectors, with losses expected to exceed the hundred billion real mark in Brazil, according to the National Confederation of Trade in Goods, Services and Tourism (CNC).
“I believe the greatest demand in the number of proceedings will come from companies operating in the middle-market. Mid-sized enterprises are the ones which have suffered the most, as they have less cashflow to absorb this sudden loss of business and revenue. Small companies, however, are shutting down informally, as these days, they don’t even have the means to hire an attorney,” affirmed Clara Moreira Azzoni, insolvency and restructuring partner at full-service law firm Felsberg Advogados.
“Another sector which I predict will be deeply impacted is the education sector, especially small schools. We are seeing parents taking their kids out of school or being unable to afford monthly fees, so I believe we will see a lot of schools closing, which is very sad,” Ms. Azzoni added.
With this in mind, on April 21st, the Chamber of Deputies extraordinarily approved the draft of Bill 1.397/2020, which “institutes emergency measures destined to prevent the economic and financial crisis of economic agents,” such as the 60-day suspension of all judicial or extrajudicial billings of debts overdue after May 20th, when the Federal Government declared a state of public calamity in the country, as well as the possibility of preventive collective negotiations.
“This bill is extremely important to regulate the critical stage of emergency which the country is going through, especially as we have several forums throughout Brazil, thus we need to provide standardized guidelines for judges to substantiate their decisions. If we do not provide judges with a legal framework, we will end up with different decisions in different places, so Bill 1.397/2020 is thoroughly valid and of great importance,” noted Mr. Seixas. He added: “With the passing of this bill, the economy should enjoy an additional four months of breathing space. Thus, supposing the bill is approved in June or the beginning of July, and that around October we finish negotiation rounds, we should be seeing a major rise in filings around November, December and in the beginning of 2021.”
With the bill still awaiting the Senate’s approval and presidential sanction, it has generated mixed opinions, given the adverse interests which are at stake – that of creditors and debtors. Interestingly, most major companies find themselves on both sides of the table, as they have insolvent commercial partners and can also be insolvent partners themselves.
“I don’t see this antagonism of creditors versus debtors, as both parties are suffering and need assistance. Currently, what we have to prioritize is ensuring companies are operational, because if we don't, we’ll have an unprecedented systemic crisis,” observed Ms. Azzoni. “Presently, some parties are being very tough with one side or the other, but I don’t think it's the time for that. This is the time to be supportive and generous, not only financially, and to understand that these are challenging times for creditors, debtors and judges.”