Court rules that agricultural cooperatives are not entitled to judicial restructuring

Legal background

Under the old Decree Law 7661/1945, cooperatives could not file for bankruptcy or have it filed against them. According to the decree law, bankruptcy related to the business framework of a company’s activity (ie, its business and commercial relationships), and merchants would be declared bankrupt if they failed to make timely payments on their obligations without a relevant lawful reason.
Due to the unusual corporate set-up of a cooperative, Article 4 of Law 5764/1971 expressly excluded cooperatives from the bankruptcy regime. Instead, the legislature established a specific regime for cooperatives, under which a declaration of insolvency mandated the liquidation of the association (Article 63ff of Law 5764).
Thus, the Brazilian judiciary proceeded to deny all requests for bankruptcy submitted by cooperatives, asserting that a declaration of bankruptcy was a legal impossibility.(1) The Superior Court of Justice also ruled that under Decree Law 7661, cooperatives could not declare bankruptcy or any analogous protected status in order to avoid fines and interest charges derived from default.(2)
On February 9 2005 Law 11.101 was enacted, providing a timely update of the Brazilian bankruptcy regime and introducing the concept of ‘company reorganisation’. Once again, it was believed that such concept did not apply to cooperatives, and that legal professionals could not challenge this fact since Article 1 of the new law states that its rules apply exclusively to businesspersons and business corporations. Article 2 further provides that the legal concepts of reorganisation and bankruptcy do not apply to cooperatives because they are subject to specific regimes.
Since a legal provision already existed which expressly excluded cooperatives from the bankruptcy regime, the new law narrowed its scope of application to businesspersons. Thus, unless an individual farmer is registered as a businessperson with the Registry Board of Trade and meets other requirements specified by the law and Article 971of the Civil Code,(3) he or she may not avail of the institutions of bankruptcy or judicial reorganisation.
Facts

In the belief that no legal provisions existed to prevent an agricultural cooperative from availing of judicial reorganisation, an agricultural cooperative in the state of Rio Grande do Sul filed for judicial reorganisation. The cooperative argued that Law 5764 dealt not with the concept of judicial reorganisation, but only with the the inability of an agricultural cooperative to avail of the bankruptcy regime. It further argued that Law 11.101 applies only to credit cooperatives, not agricultural cooperatives.
One of the cooperative’s creditors that was affected by the forced moratorium appealed to the Court of Rio Grande do Sul. It argued that it was legally impossible for an agricultural cooperative to avail of the institution of judicial reorganisation, either under the prohibition provided in Law 5764 or under the limited applicability of Law 11.101.
Decision
The court decided that, as was the case before the enactment of Law 11.101, cooperatives cannot avail of judicial reoganisation:
“Law 11.101/05, which regulates the procedure for Judicial Reorganization of companies, expressly excludes its application to credit cooperatives and other legally equivalent institutions. The request was legally impossible, allowing for the termination of the deed, pursuant to Article 267, VI, procedural records. The interlocutory appeal was granted. By unanimous votes.”(4)
As noted by Judge Arthur Arnildo Ludwig, the unanimous understanding of the state court was that, as was the case under Decree Law 7661, Law 11.101 has a limited scope of application: it is intended only for businesspersons and business corporations. Agricultural cooperatives have a civil nature and are specifically regulated by Law 5764.
Comment
With due respect and observance to the opposing view, the court was right to recognise that it is impossible to apply Law 11.101 to an agricultural cooperative, since both laws (Laws 5764 and 11.101) unquestionably create obstacles to this application.

Barring any new unforeseen claims before the judiciary seeking analogous application in similar cases, Brazilian doctrine has settled any doubts about the impossibility of applying Law 11.101 to agricultural cooperatives.
According to Manoel Justino Bezerra Filho, although some doubts existed when the concept of bankruptcy was first instituted, there is now no doubt that bankruptcy laws apply only to businesspersons and business corporations, and that legal entities which do not classify as such cannot rely on Law 11.101:
“Unlike what occurred in the early years of the bankruptcy laws, currently only the ‘businessman’, whether a Business Company or an individual Businessman, is subject to the institute of bankruptcy – and now, also to judicial and out-of-court reorganization. Civil corporations (which no longer exist since the enactment of the Civil Code of 2002), simple corporations (art. 997 subsequent dispositions of the Civil Code in force) and individuals, that is, those who are not businessmen or business companies, cannot have their bankruptcy declared nor their judicial reorganization granted.”(5)
Accordingly, Article 48 of Law 11.101 applies only to those debtors that are constituted and organised as businesspersons within the precise terms of Articles 966, 967 and 985 of the Civil Code, and that have conducted their business activity for at least two years.
Finally, Fabio Ulhoa Coelho has stated that cooperatives:
“by express provision of the legislature, which dates from at least 1971, are not subject to the legal-corporate regime. In other words, they are not subject to bankruptcy and cannot plead judicial reorganization. [A cooperative] is always a simple corporation and never a business corporation.”(6)
The Court of Rio Grande do Sul has established the first paradigm pertaining to the impossibility of agricultural cooperatives availing of the institution of judicial reorganisation under Law 11.101. Given the serious consequences of the global financial crisis, which in particular devastated the agribusiness market, the agricultural cooperative from Rio Grande do Sul was not the only cooperative to file an application for reorganisation before the judiciary. It is now the responsibility of legal professionals to engage in discussions on this matter and develop a cooperative system which aims to modify Law 5764 without losing its real legal intent.
For further information on this topic please contact Ricardo Tosto de Oliveira Carvalho, Charles Isidoro Gruenberg or Alexandre Paranhos Tacla Abbruzzini at Leite Tosto E Barros Advogados by telephone (+55 11 3847 3939), fax (+55 11 3847 3800) or email (ricardotoc@tostoadv.com, charlesig@tostoadv.com or alexandrepta@tostoadv.com).

Endnotes
(1) For example, Court of Appeals of Rio Grande do Sul, Fifth Civil Court, Appeal 70032587446, Des Rep Jorge Luiz Lopes do Canto, December 16 2009, DOJ December 29 2009; Court of Appeals of Rio Grande do Sul, Fifth Civil Court, Appeal 70015702830, Rel Des Umberto Guaspari Sudbrack, August 8 2007, DOJ August 15 2007; Minas Gerais State Court of Justice, Sixth Civil Court, Ag reg 0833630-23.2010.8.13.0000, Rep Des Antônio Sérvulo, June 29 2010, DOJ, September 3 2010.
(2) In Appeal 999.134/PR (Superior Court of Justice – 1st Group, AgRg, August 18 2009, DJe September 21 2009), Reporting Minister Luiz Fux ruled as follows:
“Cooperatives are not subject to bankruptcy, because of their civil nature and the fact that their activity is not related to business, and therefore what must apply is the method of out-of-court liquidation provided by Law 5.764/71, which does not provide for the exclusion of fines for default, or sets limits to related interest charges after the date of the judicial liquidation, as long as the corporation’s assets show a positive balance.
The Bankruptcy Law in effect at the time – Decree-Law 7.661/45 – in its article 1, considered the merchant as the debtor of the bankruptcy, and the current Law 11.101/05, which revoked the previous law, imputed such condition to the businessmen and to the business corporations, which was ratified by articles 982 and 1.093 of the 2002 Civil Code, confirming the civil origin of the referred corporations, and, a fortiori, establishing the non applicability of the provisions of the Law of Insolvency for Cooperatives.
The special law shares the same provisions as the previous one, so its provisions do not solve conflicts.
Ancillary tax obligations cannot be created or dismissed by means of an analogous process.”
In Appeal 921.280/MG (Superior Court of Justice – 2nd Group, February 19 2009, DJe March 25 2009), Reporting Minister Eliana Calmon ruled as follows:
“This Court has decided that, based on the judicial liquidation of the credit cooperative mandated by applicable legislation (Law 5.764/71), and without any provisions for the exclusion of default charges, or the limitation of default interest after the due judicial liquidation date – there is no way that the Law of Bankruptcy could be applied by analogy.”
(3) Luis Felipe Salomão, March 10 2009, DJe April 27 2009; Superior Court of Justice – 3rd Group, Appeal 24.902⁄MG, Rep Min Waldemar Zveiter, 05⁄04⁄94, DJ 02⁄05⁄94 p 10005; Sao Paulo State Appeals Court – Bankruptcy and Judicial Reorganisation Chamber, AI 9031524-47.2009.8.26.0000, Rel Des Lino Machado, July 6 2010, reg July 29 2010; Sao Paulo State Appeals Court – Bankruptcy and Judicial Reorganisation Chamber, AI 9037963-74.2009.8.26.0000, Rep Des Pereira Calças, September 15 2009, reg September 21 2009; Sao Paulo State Appeals Court – Bankruptcy and Judicial Reorganisation Chamber, AI 0343412-93.2009.8.26.0000, Rep Des Pereira Calças, September 15 2009, reg September 21 2009.
(4) Rio Grande do Sul Court of Justice – Sixth Civil Court, UA 70039202056, Rel Des Arnildo Arthur Ludwig, January 27 2011, July 2 2011 DJ.
(5) Manoel Justino Bezerra Filho, “Lei de recuperação de empresas e falências comentada”, Fifth ed, Revista dos Tribunais, 2008, Sao Paulo p 55.
(6) Fábio Ulhôa Coelho, “Comentários à nova lei de falências e de recuperação de empresas”, second ed, Saraiva, 2005, Sao Paulo, p 18.

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