This article was originally published in the Litigation-Brazil Newsletter of the International Law Office – www.lexology.com/commentary.
In late June 2022, Brazil’s Superior Court of Justice (STJ) issued a ruling on the reorganisation requirements for Brazilian farmers under the Brazilian Bankruptcy and Reorganisation Act.(1)
Although the latest update of the Brazilian Bankruptcy and Reorganisation Act was made in 2020, with Law No. 14,112/20, the previous legislation only allowed the reorganisation of farmers(2) that met specific requirements, such as having their farming activity registered under the Department of Commerce two years before filing for reorganisation.
With the ruling, the STJ established that the two-year requirement was related to the farming activity and not to the registration of the farmer at the Department of Commerce, which granted reorganisation to a considerably larger number of farmers.
Brazil’s farming industry has thrived over the past 20 years and has continuously migrated from small, family and/or informal organisations to major economic and business-oriented entities. The reflection of such changes can be seen both in economic and legal terms, in the sense that the reorganisation of Brazilian farmers seemed remote a few years ago, in a business that was historically distant from the latest practices of major capitals.
Nevertheless, the Brazilian Bankruptcy and Reorganisation Act allowed farmers to file for reorganisation if, under its section 48, they were registered under the Department of Commerce two years before filing for reorganisation.
Section 48 was reviewed differently in the state courts. The courts have variously stated that the two-year term relates to:
- registration at the Department of Commerce; and
- the farming activity itself (in which case the farmer should submit adequate evidence of the farming activity), not its registration.(3)
Many farmer’s reorganisations have been challenged in the courts in the past few years, as farmers have increasingly sought help due to the economic crisis.
Matter No. 1,145, ruled on by the second section of the STJ, began with special appeals No. 1,905,573 and No. 1,747,011, which originated respectively in the states of Mato Grosso and Paraná, widely known for their strong agricultural economies.
Both special appeals dealt with the question of whether farmers should be registered at the Department of Commerce two years before filing for reorganisation.
The review began in 2021. STJ’s justice, Paulo de Tarso Sanseverino, acting as president of the commission for case law and class actions, stated that the matter was legally significant due to the fact that related judgments had been issued in 11 special appeals and 225 related decisions at the STJ. Therefore, the high quantity of discussion allowed the STJ to standardise the interpretation of the issue. With this ruling, both cases were assigned to Justice Luis Felipe Salomão and began trial in September 2021.
The first ruling by Salomão was issued in May 2022. The judgment recognised that the issue had indeed been discussed in a series of special appeals, and the two special appeals reviewed met the requirements for ruling on their merits and should not be admitted.
Salomão ruled that the matter was very relevant. Consequently, the Brazilian Bankruptcy and Reorganisation Act had been updated by Law No. 14,112/2020, with the insertion of section 70-A. This section specifically stated that farmers could present a special plan for their reorganisation when their debts did not exceed 4,800,000 reais.(4)
Therefore, the STJ established that the matter under review was whether farmers who had clearly worked for more than two years could file for reorganisation even if they had been registered in the Department of Commerce for less time. The trial of this matter began in May 2022 and ended in August 2022.
Salomão rendered his decision in August 2022. He reviewed the case law related to the requirement of farmers not organised as companies or business entities and the opinions filed by the amicus curiae entities that asked to participate in the case.
Although the state courts had ruled previously that farmers who had been registered less than two years before filing were not entitled to reorganisation, Salomão held as follows:
- Though the law required two years of farming activity, that could be proved by means other than registration.
- Previous rulings of the STJ within its third and fourth chamber diverged from the state courts’ understanding of the matter, since the condition established by Law No. 11,101/05 was two years of farming activity.
- Reorganisation is a relevant instrument to can be used to overcome instability and to promote the values of the Brazilian Constitution.
- If the law intends to protect farmers and entitle them to reorganisation, the requirement of registration with the Department of Commerce cannot prevent a farmer from filing for reorganisation if their farms have been registered for more than two years, as required by Law No. 11,101/05.
Therefore, Salomão ruled that a farmer which organised its activities as a “business entity” for more than two years may file for reorganisation, as long as it is registered before the Department of Commerce (with no time limitation regarding such registration).
This ruling was followed unanimously by the other STJ’s justices. On 3 August 2022, it was concluded that the two-year registration period was no longer required for the reorganisation of farmers.
According to the Brazilian Statistics Institute, in 2017, only 975,000 out of 5 million rural producers in Brazil were registered with the Ministry of Finance. The STJ ruling is therefore a major incentive to bring such producers closer to professional practices, organisation and economic inclusion. The increase of professional practices, organisation and economic inclusion will lead these farmers to further access better markets, financing and development.
On the other hand, the decision also brings legal certainty to those who intend to enter into business with producers, allowing them to better assess the risks and legal possibilities that may arise if someone files for reorganisation. The Brazilian market of distressed assets is currently blooming with opportunities with the reorganisation of farmers who filed before the changes made to Law No. 11,101/05 by Law No. 14,112/20. The STJ ruling brings further certainty to those who are interested in acquiring assets within the reorganisation, winding up long discussions about the admittance of the reorganisation and certainty of the acquisition.
For further information on this topic please contact Paulo Guilherme de Mendonça Lopes or Alexandre Paranhos Tacla Abbruzzini at Leite Tosto E Barros Advogados Associados by telephone (+55 11 3847 3939) or email (firstname.lastname@example.org or email@example.com). The Leite Tosto E Barros Advogados Associados website can be accessed at www.tostoadv.com.