Ten reasons for the surge in judicial recoveries in Brazil – 03/18/2024 – What tax is this

The recent surge in requests for judicial recovery in Brazil, marking an increase of almost 70% in the year 2023 compared to 2022, signals a storm that has been affecting hundreds of businesses in Brazil.

More than 1,400 companies from different sectors and sizes followed the path of giants such as Americanas, 123 Milhas and SouthRock, owner of brands such as Starbucks, Subway and Brazil Airport Restaurants.

This substantial increase in requests for judicial recovery reflects the recent economic situation, heightened by internal and external challenges faced by companies and with the Covid-19 pandemic as a factor that exacerbated existing structural and liquidity problems.

We are facing a scenario that requires more agile and strategic internal management on the part of companies and also a more facilitative approach on the part of the government and regulators. Simplifying the regulatory environment, developing more efficient extrajudicial recovery mechanisms and providing fiscal support are fundamental steps.

The recovery of Brazilian companies in difficulty goes beyond the issue of business survival. Finding alternatives is essential for economic stability and job creation in the country.

Obviously judicial recovery is an important instrument for the restructuring and survival of companies, but it is not a magic solution. The success of judicial recovery depends on a solid plan and the company’s ability to reinvent itself and adapt to the new economic scenario.

That’s why it’s so important to stop to analyze and understand some of the reasons for last year’s wave of orders so that we can look for alternatives in 2024.

Below I will seek to uncover some of the causes behind this alarming trend and reflect on possible ways forward.

1. Exacerbated debt: Many companies, as happened with Americanas and 123 Milhas, for example, saw their debt grow unsustainably during the pandemic. The search for financing to cover daily operations, in a context of falling revenues, led to a vicious cycle of debt.

2. Changes in consumer behavior: Accelerated digitalization and changes in consumer habits represent an additional challenge. Many companies found themselves unable to quickly adapt to these changes, negatively impacting their results.

3. High operating costs: Inflation and rising operating costs, especially with logistics and inputs, put pressure on profit margins. Companies with heavy structures, like SouthRock, faced difficulties in maintaining competitiveness.

4. Legal and regulatory issues: The Brazilian regulatory environment is a complicating factor. Complexity and legal uncertainty increase risks and costs for companies, especially affecting those in an already delicate financial situation.

5. Failures in management and planning: Strategic failures and failures in the execution of business plans are crucial causes for the current situation. The lack of robust planning to face crises can lead to wrong decisions, worsening financial problems.

6. Protracted litigation and legal costs: Protracted legal disputes can drain companies’ financial resources. The costs associated with defending litigation, whether commercial, labor or otherwise, can be substantial, affecting the company’s cash flow and, sometimes, leading to the need for judicial recovery as a way of restructuring liabilities.

7. Difficulties in renegotiating debts: Current legislation and market practices may limit companies’ ability to renegotiate their debts effectively. Often, existing debt structures, together with the lack of flexibility on the part of creditors and the rigidity of legal provisions, can impede efficient negotiation, forcing companies to seek judicial recovery as a last resort.

8. Challenges in executing guarantees: The difficulty in executing guarantees, both for creditors and debtors, is another important point. The slowness and complexity of the judicial process for the execution of guarantees can worsen the financial situation of companies, limiting their recovery options outside the judicial sphere.

9. Lack of extrajudicial recovery instruments: The lack of effectiveness of the extrajudicial recovery mechanisms available in the Brazilian legal system is relevant. Although there are legal provisions for extrajudicial recovery, in practice adherence to these mechanisms is low due to several factors, including distrust between the parties and the lack of legal incentives for negotiation.

10. End of tax benefits and tax installments: With the start of the pandemic, the government implemented a series of measures to alleviate the financial pressure on companies, including tax benefits, tax installments, and even exemptions in some cases. Although these measures were essential for the survival of many companies during the most critical moments, their withdrawal coincided with the still fragile recovery of the economy. The suspension of these benefits, while many companies were still struggling to recover from the impacts of the pandemic, created a financial chasm. Suddenly, companies found themselves forced to deal with accumulated tax obligations at a time when cash flow had not yet normalized.

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