By Vitor Antony Ferrari and Ivan Kubala 

In the last months of 2018, Livraria Cultura S/A, one of the main and most renowned bookstores in Brazil, in order to safeguard the maintenance of its economic activity and its continuity in the market, filed for Judicial Recovery with the objective of financially readjusting itself by renegotiating the payment method of its debts with all its Creditors. The Judicial Recovery provided the necessary security so that the company would not suffer constraints on its assets, thus allowing for safer negotiations with its creditors holding no less than 400 million reais.

In April 2019, within the stay period, Livraria Cultura was successful in the approval of its Judicial Recovery Plan which, despite applying a significant discount to its creditors and suppliers of products and services, with an extended payment term, was less onerous than the declaration of its bankruptcy due to the non-approval of the Judicial Recovery Plan.

Apparently the judicial recovery procedure had had a positive effect on the bookstore, which began to recover its status with its suppliers, mainly publishers, which resumed operations by making new supplies of books and periodical materials, largely on consignment.

However, despite the apparent compliance with the provisions of the Judicial Recovery Plan, the Bookstore headed towards a spiral of new debts not covered by its restructuring plan, resulting in the non-fulfillment of several obligations with its suppliers who were already creditors of amounts subject to the effects of the successful Judicial Recovery.

With the accumulation of new debts and difficulties, the bookstore was forced to seek approval from its creditors for an addendum for the sale of goods and assets, specifically the electronic website for trading and selling books known as “Estante Virtual”, and accumulated tax credits. Livraria Cultura stated to all its creditors that the proceeds from the sale of such assets would be fully used to support its operations and to pay the obligations assumed after the Judicial Recovery.

Once again, creditors placed a vote of confidence in the Livraria's management and approved the addendum for the sale of assets, resulting in a cash increase of more than R$50 million at the end of 2019.

Despite the significant inflow of assets into the Bookstore's Cash, the fact is that many of the obligations signed were not duly settled, resulting in the accumulation of debts and new promises of fulfillment.

However, as we all know, in March 2020 the COVID-19 pandemic resulted in the interruption of activities of practically the entire retail sector in Brazil, causing a substantial worsening of the economic situation of Livraria Cultura, which, in mid-April of that year, requested the Judicial Reorganization Court to suspend compliance with the Plan approved by creditors and to hold a new Meeting to discuss a new addendum. The suspension of compliance with the Plan was not granted, but the appointment of the AGC to vote on the addendum by creditors was determined.

This AGC was held in September, which, unlike the others, resulted in the rejection of the proposed addendum, due to a minimal difference of creditors from Class IV, which includes Micro Enterprises and Small Businesses. The court, upon receiving the result of the vote, ruled out the application of the institute of cram down as it understood that there was differentiated treatment between Class IV creditors, and ordered Livraria Cultura to prove “within 05 (five) days, under penalty of conversion into bankruptcy, full compliance with the obligations established by the approved judicial recovery plan and due to date”.

The surprising decision was the subject of an Instrument of Appeal that was received by the Court of Justice of São Paulo with suspensive effect to prevent the bankruptcy of the appellants, until the assessment of the appeal claim by the collegiate.

As if facing the arduous trial of the aforementioned appeal were not enough, it is clear that the patience and confidence of the Creditors in the reestablishment of the activities of Livraria Cultura has been shaken, especially due to the accumulation of post-bankruptcy debts.

One of the country's main publishers, Editora Globo, proposed at the end of the month a new bankruptcy request, unrelated to the Judicial Recovery, which was based on a debt of R$544,519.25, incurred exactly during the processing of the recovery procedure, not linked to the plan approved and amended in 2019.

Once the debtor's bankruptcy has been requested by a creditor (hypothesis provided for in art. 97, item IV, of the Bankruptcy Law), whether the creditor holds extra or post-bankruptcy credit, the debtor will be summoned to present a defense within 10 (ten) days.

In the case in question, since Editora Globo's request consists of extrajudicial executive titles, duly protested for bankruptcy purposes (art. 94, I and §3, of the LRF), Livraria Cultura (debtor) may allege in its defense the causes excluding the declaration of bankruptcy listed in art. 96 of the Bankruptcy Law, with the obvious exception of the hypothesis provided for in item VII, which establishes that the presentation of a request for judicial recovery within the time limit for contestation prevents the declaration of bankruptcy, since it is already in the recovery process.

In addition, within the same period, the debtor may also deposit the amount corresponding to the credit, plus monetary correction, interest and attorney's fees, and in this case bankruptcy will be avoided, that is, it cannot be declared (sole paragraph of art. 98 of the LRF).

If the debtor simply deposits the amount, under the terms mentioned above, the creditor may withdraw the amount deposited and the bankruptcy petition will be immediately extinguished.

On the other hand, if the deposit is accompanied by the debtor's defense, it will serve as a guarantee in the event that the defense is not accepted. In any case, the bankruptcy decree will be jeopardized and the process will be converted into a judicial collection measure.

Therefore, considering that Livraria Cultura has not yet been named in the bankruptcy proceedings, the most imminent risk of bankruptcy being declared arises in the recovery process itself. However, creditors must be aware of the progress of both processes.