By: Vitor Ferrari and Ivan Kubala

Created by American Law and present in Chapter 11 of the USC, the Cram Down is an institution that grants the judge responsible for the judicial recovery process powers to approve the judicial recovery plan prepared by the recovering party, even if some of the creditors oppose the proposed guidelines.. Hence the name Cram Down, literally translated as “down the throat”, since the judge simply pushes the plan onto the disagreeing creditors, forcing them to adhere to the plan.

Since the Brazilian Bankruptcy and Judicial Reorganization Law originated from the American Law, several institutes were implemented in the national procedural rite, albeit with their particularities. Cram Down is one of them. 

Its main function is to effectively ensure the occurrence of the judicial recovery process through the approval of the judicial recovery plan. Under Brazilian law, the company undergoing recovery has, by law, a non-extendable 60 days to prepare and present a judicial recovery plan to its creditors, in which it must explain in detail how and when it will fulfill its obligations, committing to do so in accordance with the terms of the proposed plan.

If all classes of creditors accept the proposed terms, the judge will approve the judicial recovery plan, which will begin to be implemented immediately.

Still, If the creditors do not agree on the proposed terms and the classes of creditors do not vote in favor, the court will convert the judicial recovery into bankruptcy; that is, the process whose purpose is to revive the company and maintain its business activity as well as its social function is simply replaced by one whose purpose is to liquidate the company and its assets in the hope of paying the creditors.

In order to prevent the conversion of judicial recovery into bankruptcy due to a simple disagreement regarding the judicial recovery plan to be followed, the Brazilian legislator decided to import the Cram Down institute from American law, giving the judge the power to force dissenting creditors to adhere to the plan approved in court.

However, for this to occur, the judge's will is not enough: a series of assumptions must be present, especially regarding a minimum quorum of creditors who have accepted the plan.

At the same creditors' meeting, 3 classes must agree to the proposed plan. If there are only 3 classes, at least two must approve; if there are only 2, 1 must approve, and approval by a class requires 2/3 of the votes. Furthermore, as for the dissenting class, at least 1/3 of the voters must agree to the proposed plan.

Furthermore, it is important to emphasize that the judicial recovery plan will only be approved under such terms if it does not promote differentiated treatment for the class that has rejected it.

In other words, even if there is such a possibility, it is very difficult for approval to come via Cram Down. Therefore, it is extremely important that companies wishing to file for judicial recovery have a team of lawyers who are experts in the subject and have experience in this market, since failure to approve the plan will lead to the bankruptcy of the company under recovery.

With the collaboration of Luis Felipe Simão