Bankruptcy and receivership: What are the main differences?

The bankruptcy and judicial recovery procedures are provided for in the same legal diploma, in Law No. 11,101/2005, popularly known as the Judicial recovery and Bankruptcy Law. The joint forecast is justified by the fact that the situation giving rise to the bankruptcy procedure is the same as that giving rise to the judicial reorganization procedure: the insolvency of the entrepreneur or business partnership.

The state of insolvency is characterized when the liabilities of the entrepreneur or the business company are greater than their assets, that is, when the entrepreneur or the business company can no longer afford the obligations assumed, since it no longer has the conditions, especially financial, to do so. Usually the state of insolvency is linked to the periods of economic crisis faced by the country.

It is important to highlight, also as common characteristics to both procedures, that the Judicial reorganization and Bankruptcy Law applies only to those who exercise some type of entrepreneurial activity, and those who do not exercise entrepreneurial activity will not be able to apply for bankruptcy and judicial Reorganization Procedures.

According to Article 966 of the Civil Code, entrepreneurial activity is that economically organized for the production and circulation of goods or services. However, some activities, although they meet the aforementioned requirements, are excluded from such a concept, such as activities of a scientific nature or of an intellectual nature, such as the provision of legal services, for example.

Despite having several points in common, the procedures have different objectives. While the legal benefits brought by the judicial recovery procedure are used in order to restore the entrepreneur or the business company that claims them, the bankruptcy procedure only aims to pay the debts of the entrepreneur or the business company.

In this way, the requirements to claim each procedure are also different. In judicial reorganization, the entrepreneur or the business company must demonstrate that, despite being insolvent, it has the economic viability to resume its activities and, with that, return to fulfill its obligations. In the opposite sense, bankruptcy presupposes breakage and economic unfeasibility of the entrepreneur or the business company to fulfill the obligations previously assumed.

It can be said, thus, that judicial reorganization is a pre-bankruptcy moment, in which an entrepreneur or business society, in the last chance, tries to use legal mechanisms to survive the economic and financial crisis experienced.

The judicial reorganization procedure begins with a request from the entrepreneur or the business company, formalized through the procedural piece called the initial petition. In this petition, the facts that led to the insolvency must be narrated, as well as the economic viability to continue the exploitation of the activity must be demonstrated.

Before formally filing the application for judicial reorganization, it is important that the entrepreneur or the business company, if possible, seek its main creditors and, together with them, draw up a judicial reorganization plan that meets both the interests of both parties. This stage is not mandatory, nor is it provided for by the law on Judicial reorganization and bankruptcy, but it is recommended that the entrepreneur or business company observe it.

With the granting of the request for judicial recovery by the competent court, the entrepreneur or the business company will use benefits to try to recover. Among the possible benefits, we highlight the suspension of executions, the possibility of granting deadlines and special conditions for the payment of obligations, salary reduction, compensation of hours and reduction of working hours, by agreement or collective agreement, among others.

If the entrepreneur or the business company, even after granting the above benefits, fails to fulfill its obligations or fails to comply with the recovery plan, the judicial recovery procedure will be converted into bankruptcy, a situation in which, at the same time, the judicial recovery procedure is terminated, considering that the entrepreneur or the business company failed to recover, and the bankruptcy procedure is initiated.

The bankruptcy procedure also begins with a request, either the request for conversion of judicial reorganization into bankruptcy or, then, the bankruptcy application itself, which can be made by the entrepreneur or business company itself, the so-called self-bankruptcy, or by private creditors.

In this procedure, the administrator of the business company is removed, and a judicial administrator is appointed to take his place. The judicial administrator begins to carry out administrative activities, but not the administration of operations, but the administration of the assets and liabilities of the bankrupt business company, with the aim of liquidating the obligations contracted and not fulfilled.

It is up to the judicial administrator, in this sense, to verify the debts of the business company and list its creditors, framing them in the so-called classes of creditors, being them: labor class, class of creditors with collateral, class of tax credits and class of common creditors, also called chirographers.

The separation of creditors into classes is based on the order of preference for the payment of the debts of the business company, which is called competition of creditors. Creditors are paid in the order mentioned above, from the labor creditor to the chirograph creditor.

It is also up to the receiver to settle the assets of the business company, so that the payment of creditors is carried out. Thus, the payment of creditors is carried out with the sales of the property belonging to the business company.

Thus, In conclusion, bankruptcy and judicial Reorganization Procedures, although they have similar starting points, the main one being the economic-financial-patrimonial crisis experienced by the entrepreneur or business society, seek different purposes. While the judicial reorganization procedure aims that the entrepreneur or the business company, through the legal benefits granted, can fulfill its obligations and continue exercising its social function, which is, in short, to generate product and/or service, employment and income, the bankruptcy procedure is used when the entrepreneur or business company no longer presents economic-financial or patrimonial viability to overcome the state of insolvency.

Anna Paula Piovesan Pinheiro

Lawyer, graduated in law, with emphasis in Civil Law, from Universidade Presbiteriana Mackenzie, enrolled in the Brazilian Bar Association, São Paulo Section (OAB/SP) (2021). Author of articles. Lawyer at TM Associados.