“It is important to remember that the Brazilian agricultural sector has faced liquidity crises before…”
Adauto Kaneyuki is a partner-owner at J. Ercílio de Oliveira Advogados, an office specializing in agribusiness, graduated in law from the Faculty of Law of São Bernardo do Campo.
Kaneyuki is an expert in barter operations, civil litigation, and a lawyer for creditors in Bankruptcy Protection (similar to USA’s Chapter 11) cases, etc.
Adauto Kaneyuki, partner-owner at J. Ercílio de Oliveira Advogados
AgriBrasilis – What is the main reason for the increase in Bankruptcy Protection cases?
Adauto Kaneyuki – Bankruptcy Protection (called “Judicial Recovery” in Brazil) is the specific judicial remedy to try to resolve a serious economic and financial crisis for a company or farmer.
The increase in cases of Bankruptcy Protection is the result of two major factors: high debt in the agricultural sector, especially in the case of grain farmers, and the low profitability of the last two harvests.
It is important to remember that we have already had moments of liquidity crisis in the agricultural sector on other occasions, but we are facing the first major liquidity crisis after the inclusion of § 2 and 3 of article No. 48 of the Bankruptcy Protection Law which, since January of 2021, has admitted the possibility of the farmers filing a request for Bankruptcy Protection [prior to this, it was only possible for companies].
AgriBrasilis – Why do you consider that most Bankruptcy Protection plans have been “totally unreasonable”?
Adauto Kaneyuki – In general, the Bankruptcy Protection plan is prepared by a financial company hired by the Recovering Party, which, after a detailed analysis of annual productivity and production expenses, prepares a payment flow to the bankruptcy creditors. The cash flow analysis must also take into account other debts that the Recovering Party has with extra-bankruptcy creditors, and, in the end, the planned plan seeks to fulfill all obligations and still generate a profit for the Recovering Party. Otherwise, the legal option to be adopted would be self-bankruptcy.
Based on this premise, we can say that, in most cases, the presentation of “unreasonable” Bankruptcy Protection plans in the agricultural sector is the result of poorly planned, or flawed, credit distribution by Creditors, that is, it has a direct link to an imbalance between the volume of credit granted and the profitability capacity. Not to mention the inadequate assessment of available assets subject to seizure, both by the farmers and the distributors of agricultural inputs. We have seen, for example, requests for Bankruptcy Protection from farmers who, in the end, are unable to present a minimally reasonable plan, given their low profitability per harvest.
There are cases, however, in which the Recovering Party would be able to present a Bankruptcy Protection plan that is closer to what is reasonable in the interests of the Creditors. These cases include some farmers who have assets well above the value of their debts, and the result from the sale of one of their farms would be enough to pay all creditors, without affecting the viability of their activity. However, even with the ability to generate resources to propose a payment plan to Creditors, such Debtors present extended Bankruptcy Protection plans with extremely high discounts.
In these cases, in which the Recovering Party owns assets subject to liquidation, but does nothing other than propose a plan based only on the current financial liquidity, I understand that the bankruptcy Creditors lack combativeness and creativity during the process. Despite the existence of a legal provision for the creation of a committee of Creditors to come together and force the Recovering Party to present plans that are more advantageous to the Creditors’ interests, this has not occurred in practice. The lack of pressure from Creditors is one of the reasons that justify the presentation of plans below market expectations.
The Judicial Recovery plan is presented by the Recovering Party within the process and the Creditors decide whether to approve or disapprove the plan. Recovering parties and creditors have, in different proportions, their share of “fault” in the current scenario of approved plans with lack of payment, high discounts and, often, more than a decade to make payments.
AgriBrasilis – What should Creditors observe when granting credit?
Adauto Kaneyuki – Granting credit in agriculture is a strategic measure: on one hand, we have a sector with a lot of opportunities with annual expansion, caused by the world’s dependence on our food, while on the other hand there are several risk factors involved. Therefore, it is clear that the financial analysis of the credit beneficiary is still the main pillar of investigation by the agricultural credit operator.
In recent seasons we have seen many farmers and distributors of inputs that were financially leveraged, but continued to be financed by banks, manufacturing companies and distributors of agricultural inputs.
The credit operator must take into account the particularities of his client’s operational structure. It is interesting and of great importance to observe, before granting credit, how the client – farmer – usually locks in the price of the agricultural commodity, whether they use insurance against crop failure or whether they have a capable structure to conduct farming. Likewise, it is necessary to analyze in more depth the financial and credit management of the input distribution company.
The requirement for adequate guarantees to make your credit extra-competitive in the event of a request for Bankruptcy Protection is a fundamental point, thus not leaving the Creditor subject to the effects of these “diabolical” plans currently presented by farmers and which end up being approved.
AgriBrasilis – What are the steps and how long does a Bankruptcy Protection process take?
Adauto Kaneyuki – In theory, the Bankruptcy Protection procedure is quite simple.
Initially, the Recovering Party, as long as it has been in activity for more than two years, must convince the judge that it is in an economic-financial crisis and that it is fully capable of remaining in its activity, subject to the approval of a plan that will be presented throughout the process. Basically, it is based on this analysis and with proof through certificates (tax debts) and documents (balance sheet, cash book, time of activity) that the judge will grant or not the request for Bankruptcy Protection.
Once the processing of Bankruptcy Protection is approved, there is a suspension of appointments and executions of bankruptcy credits in the face of the Recovering Party, known as the shielding period or “stay period”, when capital assets that are considered essential by the judge for the maintenance of the Recovering activity cannot be removed from the Recovering Party’s domain. The law provides that this shielding period lasts 180 days, and may, with well-founded reasons and evidence, be extended for another 180. However, the majority of cases have admitted the extension until the general meeting of Creditors takes place.
After the list of bankruptcy creditors has been adjusted by the judicial administrator and the judge, it is up to the Recovering Party to present a payment plan that, as a rule, will be voted on at a general meeting of Creditors. When voting on the plan, there is a division of four classes among Creditors, which are classified according to the credit characteristic: I – Labor, II – Real guarantee, III – Non-preferential and IV – Micro and Small Business. Class III – Non-preferential is considered the “residual class of Creditors”, since this includes Creditors who do not fit into the other classes.
For the Bankruptcy Protection process to be approved, there must be a majority vote in favor of the plan in the Labor class and Micro and Small Businesses. In the classes of Real guarantee and Non-preferential Creditors, there must be a majority of votes per head and per credit in each class. If approval occurs in all classes within the mentioned criteria, the plan will be approved. On the contrary, bankruptcy may be declared due to rejection of the plan.
After the vote, the process is forwarded to the judge who, finally, checks whether there were any irregularities during the meeting and whether there is any abuse or illegality in the Bankruptcy Protection plan approved at the meeting. Once the analysis has been carried out, the plan will be approved, and the Recovering Party will be responsible for complying with what was proposed in the plan to the bankruptcy Creditors.
It is worth mentioning that the legislator, when creating the Bankruptcy Protection process, determined that the deadline for completing the process would be a maximum of 6 months. However, in practice, this has not occurred. On average, a Bankruptcy Protection process, without taking into account compliance with the Bankruptcy Protection plan – between the request for Bankruptcy Protection and approval of the plan – lasts from 18 to 24 months. The speed of the process depends on a series of factors, such as the court that received the process, the skill of the judicial administrator appointed by the judge, the number of bankruptcy creditors and the number of revaluations during the process.
AgriBrasilis – In general, what alternatives are offered to Creditors during the Bankruptcy Protection process?
Adauto Kaneyuki – It is rare when the Recovering Party presents a Bankruptcy Protection plan that contemplates the partial sale of its assets to meet obligations with bankruptcy creditors. In general, the plans presented call for an extended period with a considerable discount and a grace period of approximately two years.
However, in almost all plans, the figure of the Creditor partner/developer/financier is created, which receives different treatment. This subclass normally receives the entire value of the credit in a much shorter period of time than other bankruptcy creditors, this is because this Creditor grants new credits (financing or supply) to the Recovering Party.
The Bankruptcy Protection law provides for the application of the principle of equality between Creditors, so that all of the same class must be treated equally. However, the provision of a Partner Creditor clause breaks this general rule and is accepted by law, as it privileges the form of receipt from that Creditor who continued to believe in the company, as when granting new credit, it provides the breathing room that the company normally needs in Bankruptcy Protection. It is a kind of legal award for that Creditor who continued to believe in the economic viability of the company.
AgriBrasilis – What is the difference between concursal and extra-concursal creditors?
Adauto Kaneyuki – The bankruptcy Creditor (“concursal”) is subject to the effects and conditions of the plan presented by the Recovering Party and approved by the majority of Creditors. Even if the bankruptcy Creditor votes against the plan, if it is approved by the majority, the Creditor will be restricted to the conditions set out in the plan, and will not be able to seek others means to get paid.
The extra-bankruptcy Creditor (“extra-concursal”) enjoys the benefit of being able to legally demand payment from the Recovering Party in parallel to the Bankruptcy Protection process. These encompass, for example, all sales made after the request for Bankruptcy Protection, credits guaranteed by fiduciary sale of assets and, specifically in agriculture, credits backed by Rural Producer Certificates – regardless of the type of guarantee – used in operations of barter or advance purchase of rural products.
AgriBrasilis – Is Bankruptcy Protection becoming a business?
Adauto Kaneyuki – Bankruptcy Protection is an important and necessary judicial remedy to preserve companies and farmers. There is no irregularity on the part of those who request it, much less on the part of the Debtors’ lawyers who offer their services to preserve their clients’ rights.
Even so, it is necessary to separate Debtors who really depend on this protection from those that are trying to enjoy the benefits just to try to gain a financial advantage. For this second profile, the Judiciary should better analyze whether there really is an economic-financial crisis worthy of judicial protection. It is possible to curb this practice, as long as the judge conducting Bankruptcy Protection demands a more in-depth evaluation prior to approving the Protection process. In practice, this does not happen, especially because the current understanding is contrary to the judge’s intervention in the economic issues of the Recovery case. In my opinion, there is an interpretative mistake on the part of the Judiciary, since the legislation points out that the interests of Creditors must also be preserved, so they should not simply seek to maintain the Recovering Party’s activity at all costs.
As requests for Bankruptcy Protection are granted by judges without any restrictions and as the vast majority of plans are approved with discounts of 70% or 80%, with almost 20 years to pay, naturally there is a growing interest from the indebted farmers or businessmen. More than that, farmers who are asking for Bankruptcy Protection often continue to enjoy credit availability in the market!
The credit and agricultural input suppliers are, in a certain way, helping to encourage the proliferation of Bankruptcy Protection requests. After all, they are the ones who vote, most of the time, in favor of the Recovery plan and they are the ones who continue to grant credit to the farmers.
Given this scenario of liquidity crisis in agriculture and the ease with which Debtors can protect themselves through Bankruptcy Protection, it is up to the Creditor to carry out a more strategic and conservative credit management to not suffer greater losses in the future.
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