August 2024

Is a Judicial Deposit Effective in Protecting the Debtor from Accruing Interest due to Payment Delays?

It is commonly believed that making a judicial deposit in dispute resolution shields the debtor from additional charges incurred by payment delays. This belief was supported by judicial precedents that had been prevailing until the end of 2022.

However, in the review of the Theme 677/STJ, the Higher Body of Superior Court of Justice established a new precedent overruling that previous understanding. It is now understood that if a judicial deposit is made not to settle the debt but to contest it, the debtor remains liable for interest and monetary adjustments if the dispute is unsuccessful. In such instances, it would be only necessary to deduct the already in the judicial account from the updated value, although that one is typically adjusted at significantly lower rates than other types of investments.

In practice, this change is substantial due to the massive differences between criteria for monetary adjustments in the Judiciary and those applied to judicial accounts. In other words, as the lawsuit progresses, the due amount tends to increase exponentially, at a rate much steeper than that applied to judicially deposited funds. Therefore, this can lead to a significative outstanding balance in the end of the process.

Given the profound impact of overruling previous rulings, it was expected that the Superior Court of Justice would give prospective effects to this decision, meaning it would affect only judicial deposits made after its publication. However, the Court recently decided to uphold the retroactive effects of the precedent, a decision that has faced considerably criticism within the legal community and that has already been challenged before the Brazilian Supreme Court. Thus, the discussion about the issue has not yet been finished, though the new precedent must currently be followed.

Although not explicitly mentioned in the precedent, it is expected that this new interpretation will not apply to the judicial deposits made to contest tax debts, as the Tax Code has specific legal provisions for such cases, and it is believed that the former understanding will continue to apply. Likewise, it is believed that the former rulings will continue to apply to deposits made in the form of payment into court, particularly considering the express caveat included in the new ruling. Lastly, the new precedent is also expected not to apply to labor debts, which are governed by specific rules and are not subject to the Superior Court of Justice precedents.

However, considering the ongoing controversies surrounding the new precedent, it is crucial to count with an expert legal advice before undertaking any judicial actions, in order to fully understand the risks associated with judicial deposits made to contest debts.

When a company declares bankruptcy, its assets are liquidated and the proceeds are used to pay off creditors. But who gets paid first?

In Brazil, there is a priority order for these payments, defined by legislation, with special attention to tax credits.

Tax credits (the company’s tax debts) hold a high priority in this order. This means that, after credits derived from labor legislation, limited to 150 minimum wages per creditor, and those arising from work-related accidents, which are not subject to any limit, creditors with specific guarantees (such as mortgages) are next in line, followed by the taxes owed to the government.

The key point here is the position of tax credits, which occupy third place in the order of preference, right after labor credits and credits with real guarantees.

However, a relevant aspect to analyze is the issue of tax credits arising during the course of bankruptcy. These credits are referred to as extraconcursal, as provided in Article 84, Section VI, of Law 11.101/2005, which states:

“Art. 84. Extraconcursal credits shall be considered and paid in precedence over the credits mentioned in Art. 83 of this Law: VI – the taxes related to taxable events occurring after the bankruptcy declaration.”

Therefore, extraconcursal credits, by their nature, must be paid in advance, even before the distribution of the collected amounts among concursal creditors. Thus, taxes arising after the bankruptcy declaration take precedence over all other credits, including labor and real guarantee credits.

Imagine a bankrupt company still carrying out some activities and generating taxes. These taxes are paid first to ensure that the company does not incur further debt with the government.

This legal provision aims to ensure that the bankrupt estate can continue operating, albeit in a limited capacity, during the liquidation process, fulfilling its tax obligations and avoiding the accumulation of new tax debts that could compromise and aggravate the financial situation of the bankrupt estate.

Understanding the priority of tax credits in bankruptcy, especially extraconcursal credits, is crucial to ensure fairness in the liquidation process and the effectiveness of tax collection. This approach also highlights the need for responsible financial management by companies and legal advisory that complies with the legislation, emphasizing the importance of tax compliance.

Finally, understanding the dynamics of extraconcursal credits is essential, not only for lawyers and managers but for all those involved in the bankruptcy process. Strict adherence to these rules contributes to a fairer and more efficient liquidation, favoring economic recovery and the stability of the business environment in Brazil.

Last week, the Senate approved a substitute to Complementary Law no. 252/2023, which establishes the Convertible Investment Contract into Social Capital (CICC), aiming to stimulate the startup sector.

In the approved proposal, the CICC becomes part of the list of contracts provided for in Article 5 of the Startup Legal Framework. This list enumerates contracts that allow investments in startups without being considered part of the company’s social capital.

The new model is inspired by SAFE, a convertible participation contract widely adopted in the foreign market, especially in the Venture Capital sector.

One of its differences from the convertible loan (the most used model in Brazil today) is that the CICC does not assume the nature of debt. The objective, in this type of contract, is for the amounts invested in startups to be converted into equity participation in the future.

For some years, RUCR Law has already been using, in some investment operations it coordinates, its own contract based on SAFE. The RUCR Law model was developed and modulated by the firm to fully comply with Brazilian legislation, without losing the advantages provided by SAFE.

The express provision of the CICC, as approved by the Senate, represents an advancement in legislation, which becomes more adherent to market practices and ensures greater legal security for investors and invested companies. In addition, it allows for easier negotiation between Brazilian startups and foreign investors.

The text was approved in the Senate Plenary with 71 votes in favor and only one abstention. Now, the project moves on to voting in the Chamber of Deputies.

The new Resolution from the Federal Council of Medicine, which brings some modifications on the regulation of medical advertising, came into force on March 11st, 2024. On the same day, CODAME (a Commission responsible for spreading medical affairs’ information) published the “Medical Advertising’s Manual”, which provides better clarification about its interpretation and enforcement.

This Resolution brings significative amendments in the regulation of the theme and was a result of various claims from the medical community to modernize ethical standards.

Among these innovations, the following can be highlighted:

• the permission to make “before and after” announces and to repost other patients’ statements, as long as it respects some requirements in order to avoid leading the impression of “guarantee of success” and, also, so it doesn’t configurate sensationalism or unfair competition.
• the permission to share divulgate the physician’s office details (such as parking, safety, localization etc.) and, also, the service portfolio (health plans and insurances covered).
• the permission to announce appointment’s price, means of payment accepted, as well as doing some reductions or promotions, provided that it does not configurates tying, awards or draws.
• the permission to publicize an equipment or a technological resource used for the service, along the lines of its portfolio approved by ANVISA (government’s agency similar to the FDA), as long as it is not done in a way that gives an impression of “privileged capability”.
• the permission to announce postgraduation’s titles, provided it follows some requirements.

However, although it may have brought some significative innovations, the new Resolution still has many prohibitions and restrictions, especially to preserve medicine’s image as a “support-activity” and to maintain medical advertising’s main purpose: to inform and educate. In other words, even though it may have allowed some behaviours previously taken as unethical, the Federal Council of Medicine imposed various requirements that must be respected in other to those be regarded as legitimate.

Therefore, it is still essential to keep caution, as an attempt to avoid ethical problems regarding irregular advertising, considering that the new Resolution does not allow everything. Thus, it remains of huge importance to count on a qualified legal counsel in order to have previous knowledge about the permissions and prohibitions regarding medical advertising.

The dissociation is a common event in the business world. In order to assess the company and stipulate the amount owed to the shareholder, different valuation methodologies can be used. Respecting private autonomy, the articles of association can define the form of valuation. Examples of valuation methodologies are: discounted cash flow; market multiples; equity value; and market value, which is used especially when concrete references are available, as is the case with companies with shares traded on the stock exchange or recently sold on the private market. To these methods can be added parameters, criteria, metrics, scenarios, among other aspects that help tailor the valuation to the partners’ vision of the value of the business.

Often, articles of association and shareholder agreements do not stipulate a detailed method for valuing the company. In this situation, the criterion defined by current law is the so-called “determination balance sheet “. Unfortunately, the law on the matter can be quite confusing and it is common for the parties’ lawyers to disagree on what should be taken into account during the negotiation. Most of the time, an understanding can be reached. On other occasions, however, it is necessary to go to court to resolve the issue.

The understanding of the Brazilian Supreme Court of Justice that the assessment by the determination balance sheet should not be restricted to the accounting and tax dimension of the company seems to be dominant today. An example of this is the opinion of Judge Cesar Ciampolini (São Paulo Court of Justice; Civil Appeal 1058804-37.2020.8.26.0100), according to which the determination balance sheet should not follow accounting rules, since the criterion seeks to ascertain the effective value of the enterprise according to market criteria. Despite this, it is common for lawyers and even judges to restrict the assessment to the company’s net worth. It is true that the calculation of shareholders’ equity includes intangible aspects of the business, such as the company’s brand and intellectual property, but this alone is often not enough to arrive at the company’s fair value.

The most common methods used by the market in company valuations seek to fill the gap left by the mere valuation of shareholders’ worth, adding, explicitly or implicitly, other aspects that can be taken as a reference for the value of the business. Some important aspects, which are sometimes left out, are: (a) the company’s projected growth in turnover and profitability, based on the market positioning built up to the time of the valuation; (b) the risks inherent in the business and the forecast of future market behavior; (c) the cost of available capital and the opportunity cost of investing or maintaining investment in the company; among others.

A possible and simple approach to solving this problem is to add goodwill to the value of the company’s tangible assets. Goodwill is an intangible asset that represents reputation, customer loyalty, brand recognition and other aspects that contribute to a company’s value, in addition to its tangible assets and financial metrics. It is notable that part of the scope of Goodwill overlaps with the intangible scope taken into account in the valuation of shareholders’ equity. This is not a problem, since, as has been said, in the valuation of Goodwill it is added to tangible equity, but it does help to realize how important it is to master the tools so as not to end up creating redundancies in the valuation.

To avoid any mistakes when applying these methodologies, it is important to always work with experienced lawyers and financial advisors. Different evaluation instruments can be used or combined for each case. An experienced professional will be able to help the client find those that best suit their business and substantially reduce friction in the negotiation, thereby also reducing the risk of the matter ending up in court.

By: Julia Finelli.