By: Vitor Ferrari and Ivan Kubala

Upon having its judicial recovery granted by the competent Court, the Company Under Reorganization must present its Judicial Recovery Plan to the creditors qualified in the process. This document will contain the means and tactics to be used by the debtor so that the credits are paid within the process., which can range from the sale of properties belonging to the company or even allocating part of its monthly revenue to paying off credits. The possibilities that the recovering company has to pay off its debts are so broad that they even include debt forgiveness by creditors., whether in part or in whole: the so-called Haircut.

Although extremely inviting at first glance for the recovering party, since its debts would simply be extinguished, it should be emphasized that the simple proposition of Haircut does not guarantee its approval. In order for debt reduction to be granted by such mechanism It is necessary that a certain portion of the creditors approved in the process agree with the plan and that the responsible Court approves it.

 Therefore, the first question that is usually asked after such information is “Why would creditors accept a reduction in the value of their credits?”. Well, first of all It is essential to explain that there is no single reason for this, in view of the complexity of a judicial recovery due to the multiplicity of credits listed, making it possible for there to be the incidence of various reasons that lead to the acceptance of Haircut. 

Among the most common reasons for accepting Haircut It is the exhaustion of the recovering company's registration: it occurs when the company's net cash flow in a certain period, added to its assets that can be sold, amounts to an amount lower than the total debt. In other words, the amount that the company can allocate to paying off the credits is insufficient to settle them.

Another reason that leads to haircut is excess credit. When the debtor company understands that the credits contained in the judicial recovery are higher than the amount actually due, there is a possibility of applying the institute. The most common example of abusiveness in the amount charged arises from abusiveness in the interest charged by creditors and which make up the credit subject to recovery. The excess may objectively be reflected in the amount of interest charged, generally in the case of banks and suppliers; in the costs incurred in the reciprocity required, or even in the practice of not granting the debtor the same discount given to other competitors.

The possible bankruptcy of the recovering company is also a factor that leads creditors and judges to accept judicial recovery plans with Haircut. The imminence of bankruptcy means that the creditor prefers to receive the amounts as quickly as possible, even if the amount is less than that approved in the plan., since, once bankruptcy is declared, in addition to the process extending for a few more years, the creditor will most likely not receive the full amount.

Factors external to the judicial recovery also influence the acceptance of a haircut, especially the so-called “opportunity cost”. It is possible that at the time of acceptance of the judicial recovery plan there are good investments that can make the value of the credit received profitable, even if there is a discount. To do this, the creditor calculates how long the chosen investment would take to recover the amount haircut to the value originally provided for in the plan, and compare it with the time that the entire judicial recovery process would take if there were discussion of the presented plan. If it understands that the terms are worth it, the creditor tends to accept the agreement with a discount aiming to recover the lost value in less time than the time required for the process.

It is important to inform that, regardless of the reason why the creditor accepted the judicial recovery plan with haircut, There will be tax benefits, a way to encourage the acceptance of credit quickly so that the process itself can be completed more quickly.

Regarding the recovering party, the haircut does not allow the company to simply exempt itself from its responsibilities related to the discounted amounts, since when analyzing the institute from a tax perspective, the company received an increase in equity, since it will not have to spend such an amount. In this way, the national Judiciary has already understood that such an increase in assets is taxable, with IRPJ, CSLL, PIS and COFINS being levied., since the accounting entry in this case is an operating revenue credit.

Therefore, the proposal for a discount must be made rationally and within plausible possibilities, both for the collection of taxes and for acceptance by creditors and the Court responsible for the process.

This specificity makes the judicial recovery process laborious and meticulous, requiring lawyers to have full knowledge and expertise on the subject.

With the collaboration of Luis Felipe Simão