One of the biggest controversies under the Company Judicial Reorganization Act (LRE) is the limit on the Judiciary's role in controlling the legality of the judicial reorganization plan. Recently, this discussion has gained another chapter. In deciding Special Appeal No. 1.630.932/SP, filed by a São Paulo company in judicial reorganization, the Superior Court of Justice (STJ) ruled that the Referential Rate (TR) is valid as a criterion for correction of bankruptcy claims, if so approved by the creditors.

With this, the STJ modified a decision by the São Paulo Court of Appeals (TJSP), which had invalidated a provision in a judicial reorganization plan approved by the creditors, which provided for adjustment for inflation of the claim amounts based on the TR + 1% per year. The STJ considered that the most current case law limits judicial control over the reorganization plan to issues of the legality of the procedure, prohibiting the interference of the judge in the economic content of the provisions thereof.

Noting that the TR does not reflect the inflationary phenomenon (throughout 2018, the rate remained at 0%), the STJ argued that if the general meeting of creditors approves the use of the TR as an index for adjustment for inflation, it is not incumbent on the Judiciary, considering eminently economic content of the matter, to discuss the decision of the creditors. Regarding interest, the reporting judge, Justice Paulo Sanseverino, stressed that “there is no general rule in the Brazilian legal system that sets a minimum threshold, a floor, for the interest rate (whether default or remuneratory interest), nor is there a rule that prohibits annual frequency,” and so the 1% monthly adjustment ordered by the TJSP is not applicable.

With this precedent, the STJ is taking yet another step in consolidating case law involving judicial control of the provisions contained in judicial reorganization plans, conveying the message that the Judiciary is only allowed to review those issues that are strictly linked to the legality of the procedure and lawfulness of the content, such that what is approved by the meeting must control and drawing attention to the importance of negotiations and the dispute of forces preceding such approval.

This does not mean, however, the end of controversy in the context of judicial reorganizations. After all, since the concept of legality is open and elastic, there is always room for creditors to question points they consider to be of public order. Indeed, a brief analysis of case law shows that, until a few years ago, the TJSP, prompted by creditors, took the view that a discount over 80% proposed by the reorganization plans was illegal.[1]

Currently, however, the Judiciary clearly has not annulled[2] discounts even above the 80% mark, indicating a trend that judicial control in judicial reorganization plans should be limited to strictly public policy issues[3] and cogent rules, such as the supervision period provided for in article 61 of the LRE. In any case, the precedent of the STJ is an important step towards consolidation of matters of bankruptcy law, aiming to provide greater legal certainty to all stakeholders in the judicial reorganization process.

[1] TJSP. Interlocutory Appeal No. 055083-50.2013.8.26.0000. Reporting Judge Ricardo Negrão. Decided on July 25, 2014.

[2] TJSP. Interlocutory Appeal No. 2192960-22.2018.8.26.0000. Reporting Judge Cesar Ciampolini. Decided on February 28, 2018.

[3] TJSP. Interlocutory Appeal No. 2192960-22.2018.8.26.0000. Reporting Judge Grava Brazil. Decided on November 12, 2018.