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Date: October 30, 2020
Posted by: CPDMA Team

Cram down: alternative method for approving the judicial reorganization plan

Law 11,101/2005 brought specific requirements for the approval of the judicial reorganization plan, seeking balance between creditors and protection of social interest. According to the legal provision, the plan may be approved if there is no objection from the creditors, or when approved by the majority at a general meeting of creditors pursuant to art. 45 of the LRF. However, if approval is not achieved in any of the first two stages, it may still be imposed on creditors by the system known as cram down.

The cram down (down the throat) is an imposition of the public power on creditors to protect the interest of the mass of creditors, the social interest and protect viable companies. Coming from US legislation, more specifically in Section 1129 (b) of Chapter 11 of Bankruptcy Code, the Brazilian system is criticized by the doctrine for being known as a closed system much more rigorous than that of “Uncle Sam”.

This is because the national system only sought an alternative way of approving the recovery plan, reducing the necessary quorum and changing objective criteria, while the cram down American, looks at broader issues such as the prohibition of unjustified discrimination - does not discriminate unfairly- and that, necessarily, the plan is fair and equitable - fair and equitable.

In our system, the cram down may occur when the restructuring plan is approved by at least half of the creditor classes (labor, collateral, unsecured or ME/EPP) and, cumulatively, there must be approval of more than half of all credits participating in the general meeting of creditors . 

Law 11,101/2005 also brings two other requirements: the first requires that the class that rejects the plan has at least 1/3 favorable votes (calculated per head and/or per credit, depending on the class) and the second, and last , requires that this class not be treated differently among creditors. Once the four requirements are met, the judge in the case must consider the approved recovery plan.

However, in some cases, this quorum will be impossible to reach. This occurs, for example, when there are only one or two creditors in the class, which makes it impossible to have a simple quorum (per head) of 1/3 or, when one of the creditors holds more than 70% of the claims, which makes it impossible to reach 1/3 of the value of the credits.

In these cases, for the most part, the jurisprudence has been disqualifying the negative vote to the plan, that is, under the argument of abuse of the right or, even, simply by applying the principle of preservation of the company, the negative vote is removed from the calculation, leaving on the basis of sufficient votes to reach a quorum for the cram down.

Source: Wagner Luís Machado, attorney at Cesar Peres Dulac Müller, specializes in Business Law.

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