Veto on judicial recovery of foundations avoids distortions and unfair competition

The Superior Court of Justice's veto on granting judicial reorganization to foundations and non-profit institutions avoids legal distortions and removes the risk of unfair competition in the Brazilian market.

This assessment was made by lawyers consulted by the electronic magazine Consultor Jurídico. With some reservations, they agreed with the restrictive interpretation offered by the 3rd Panel of the STJ in the judgment concluded last Tuesday (October 1).

It is based on the text of article 1 of the Judicial Recovery and Bankruptcy Law (Law 11.101/2005). The provision states that the rule applies to entrepreneurs and companies.

Article 2 lists a series of entities to which the law does not apply, but does not include non-profit foundations - public companies, financial institutions and health plan operators, for example, appear on the list.

The four appeals judged together by the STJ panel deal with educational institutions in financial crisis. Despite their importance to society, the court concluded that it was not appropriate to authorize judicial recovery.

This is because foundations and non-profit institutions are subject to a different legal regime, with registration, corporate and tax obligations that do not apply to business companies and are, as a rule, more beneficial.

Reporting on the appeals, Justice Ricardo Villas Bôas Cueva argued that giving these institutions the possibility of judicial reorganization would generate undesirable competitive and tax repercussions, as well as distorting this legal model.

It's not just judicial recovery

The discussion about the judicial reorganization of non-profit entities leaves several questions hanging in the air: in the event that creditors approve the reorganization plan, would it be possible to include clauses that violate the foundation's bylaws? Should the Public Prosecutor's Office, responsible for curating foundations, intervene in the process? Would it be possible to change the foundation's form of administration, since this definition is required by article 62 of the Civil Code? Would it be possible to grant the reorganization even though article 51, item V of the law requires the debtor to have a certificate of good standing with the Public Registry of Companies? If the reorganization plan is rejected by the creditors, would it be possible to decree the foundation or non-profit institution bankrupt, a possibility that is also not provided for in the law?

For Marcelo Godke, a partner at Godke Advogados, it would only be fair to give non-profit organizations the possibility of judicial reorganization if they were fully subject to all the effects of Law 11.101/2005.

"If the regime of the Judicial Reorganization and Bankruptcy Law were fully applied to non-business entities, there would be no problem. But you can't just apply one part of the law, you can't do what's called cherry picking."

According to Godke, the market would be affected because a party, when contracting with another party, takes into account the existing legal regime. "A bank, when granting credit, takes this into account. So does a supplier. Even employees do. But then they can't rely on what the law says."

The lawyer also challenges judicial reorganization as a way to save foundations and institutions, even if they provide important services to society.

"It is not by applying the judicial reorganization regime to hospitals, educational institutions and even sports entities that the success of these institutions will be achieved. Success comes from good management. Judicial reorganization is merely an instrument to be used for entities experiencing temporary difficulties. If the difficulties are permanent, the entity should be liquidated and its assets, contracts, etc. should be placed in the hands of others who can manage them more efficiently. This will lead to success."

Change in the law

Vera Chaves de Azevedo, of Chaves de Azevedo Advogados Associados, believes that the biggest obstacle to giving foundations and non-profit institutions the possibility of judicial reorganization lies precisely in the competitive and economic impact that such a measure could generate.

"Allowing these entities to adhere to judicial reorganization without adjusting these other rules would create a distortion in the market, putting them at an undue competitive advantage over regular companies."

She sees some possible solutions to this impasse. One of them is the creation of a specific regime for the judicial recovery of non-profit organizations, with counterparts in terms of transparency, governance and tax responsibility.

Another, simpler option, is to create criteria to limit access to these benefits to institutions that carry out activities of public interest or social impact, such as hospitals, universities and social welfare organizations.

In short, according to the lawyer, any expansion of benefits for non-profit organizations needs to take into account both the social damage caused by the closure of these institutions in crisis and the competitive imbalances.

"The most prudent solution would be a legislative adaptation that preserves the social function of these entities and, at the same time, ensures fair and balanced treatment in the face of market demands."

Relevant impact

In the view of Paulo de Maria, of Barcellos Tucunduva Advogados (BTLAW), it would be challenging to defend the extensive interpretation of Law 11.101/2005 without a legislative change, given that foundations enjoy different treatment from that which the law gives to companies.

"Allowing them to benefit from an institute designed for entrepreneurs, without the necessary legislative adaptation, could cause distortions in the market. The issue would be difficult to overcome without a legislative reform that establishes specific conditions and requirements for these entities, in order to preserve equality and competitiveness."

Barbara Pommê Gama, from Dalazen, Pessoa & Bresciani Sociedade de Advogados, thinks differently. She sees the scenario faced by these institutions as justification for them to approve judicial recovery plans.

"If, even with all the economic and tax benefits, these foundations still have difficulties, there is no reason to prevent them from carrying out this process of recovery. If we don't think so, we'll be assuming that there has been mismanagement or bad faith. And that can't be assumed."

In the lawyer's opinion, the law's limitation can be circumvented because, even though these institutions are non-profit, they do make a profit, which is not accumulated or shared among partners, but used for the work or project itself.

"These foundations and institutions have the same accounting and financial procedures as other types of companies and a significant portion of our society depends on them. That's why there seems to be an error in the STJ's interpretation."

REsp 2.155.284
REsp 2.038.048
REsp 2.036.410
REsp 2.026.250

Source: Conjur