Three rulings by the STJ affect security interests in judicial reorganisation, the requirement of tax clearance certificates and the freezing of cash.
The Superior Tribunal de Justiça (STJ, Brazil’s highest court for non-constitutional matters) has decided three issues affecting security interests in judicial reorganisation, the company’s tax compliance status and the freezing of funds in tax enforcement proceedings. In practice, a creditor’s silence does not extinguish a mortgage, the company must prove its tax standing, and essential cash may be granted protection.
Does a creditor’s silence cancel the mortgage?
No. According to the ruling, a secured creditor does not lose its mortgage merely because it remained silent in the face of a plan approved without objections. In order to release, suspend or replace that security, the plan requires the express consent of the holder of the security interest. Without such consent, the clause is not enforceable against that creditor.
For this reason, a creditor that disagrees with a clause releasing security interests must record its disagreement clearly. Likewise, a company intending to release assets must obtain written consent.
May tax clearance certificates be waived?
As a rule, no. The court confirmed that, since Law No. 14,112/2020 (which amended the Brazilian Bankruptcy and Reorganisation Act), the granting of judicial reorganisation depends on tax clearance certificates. On that basis, it quashed a decision of the Tribunal de Justiça do Rio de Janeiro (Rio de Janeiro State Court of Appeals) that had waived them.
For state and municipal debts, the picture changes somewhat. The requirement only applies if the relevant public entity has its own instalment payment legislation, on terms similar to the federal regime. The case was remitted to the court of origin to verify whether Rio de Janeiro had such legislation at the time.
Our understanding is that a company in distress must address its tax liabilities from the outset of the petition. After all, the absence of the certificates may lead to the suspension of the reorganisation, even where the plan has been approved. Individual enforcement actions and bankruptcy petitions may then resume.
Can cash on hand be an essential asset?
Yes, in certain cases. The STJ rejected the National Treasury’s argument that money is never an essential asset. Funds that are indispensable to operations may receive such protection.
Nevertheless, the judge in the tax enforcement proceedings may still order the freeze. The reorganisation judge only overrides it afterwards, if it is demonstrated in the specific case that the measure renders the plan unfeasible.
Creditors holding secured claims should therefore review the plan and place their objections on record. The company under reorganisation, in turn, should gather the certificates and document the use of its cash.
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