Judicial Guarantee Insurance Gives Companies Breathing Room for Cash Flow

The world is facing an unprecedented crisis. And the magnitude of the economic impacts, which are still difficult to predict, is proving to be extremely challenging for Brazilian companies.

In this context, creating liquidity for the economy to keep it operating and attenuate the effects of the pandemic seems to be the solution most parties agree on. These sorts of measures, like the reduction of the benchmark interest rate and tax deferral, have been widely adopted around the world, and especially in Brazil.

Among all the different ways of facilitating access to additional capital so economic agents can deal with the situation caused by the pandemic, one stands out as a highly valuable solution for companies, together with the principle of least burden: the replacement of judicial guarantees.

Judicial guarantee insurance is a type of security used in court to guarantee the debtor’s payment obligations; it is an alternative to a deposit in court, while legal discussions around the debt are ongoing. When this insurance is purchased, companies can maintain their liquidity since there is no need to pay out the total amount under discussion; this situation is faced when the type of security employed is the extremely burdensome deposit in court.

With the onset of the COVID-19 pandemic, companies’ immediate need for funds to keep up their activities and their employees became evident, so the issue of replacing the deposits already offered as remedies with insurance policies gained further plausibility and relevance.

With the onset of the COVID-19 pandemic, companies’ immediate need for funds to keep up their activities and their employees became evident.

However, the fact is that the possibility of replacing deposits with policies is not yet settled in the eyes of the courts, seeing as the tax authorities, and especially the Office of the General Counsel for the Federal Treasury, are still showing some resistance to acceptance. In general, their objections are based on a preference for levies of execution, which is provided for in Art. 11 of Statute no. 6,830/801 (the Tax Foreclosure Act); this is a device that, it should be said, was published around 40 years ago, i.e., in an economic, social, and legal setting that is completely different to the one Brazil is living currently.

Notwithstanding the ongoing legal debate, a new and important chapter in this topic began on March 27, 2020, when the National Justice Council (CNJ) confirmed an injunction issued in February 2019, which suspended the validity of some articles from Joint Decision no. 1, issued by the Superior Court of Justice in 2019, that barred these replacements in suits that were already underway.

With this decision, the authorization for the use of guarantee insurance was approved, and, consequently, so was the withdrawal of the sums deposited specifically in labor-related court cases. Currently, approximately BRL 65 billion (USD 12.55 billion) has been estimated just for these cases.

”With this decision, the authorization for the use of guarantee insurance was approved, and, consequently, so was the withdrawal of the sums deposited specifically in labor-related court cases

It should be noted that the deciding vote for the CNJ’s decision was based precisely on the current economic context of crisis and on the possible benefits that would result from the immediate cashflow generated by the withdrawal of deposits, such as, for example, the upholding of employment contracts and fulfilment of supplier contracts.

While the topic is still being settled in the area of labor law, there is still a need to consider a broader view, for example, discussions in terms of taxation, wherein the sums involved are generally more significant and whose withdrawal would therefore be even more vital to companies.

Besides the fact that the grounds cited in the decision by the CNJ are fully applicable to taxation-related cases — especially in terms of the increased demand for liquidity due to the current economic situation — the fact is that applicable taxation rules support this position.

Article 15, item I of the Tax Collection Act2 sets out that the approval of the replacement of the guarantee with a deposit, bank guarantee, or insurance policy could happen at any time, which is in line with the provisions in Art. 9, Par. 3 of the same legal document3, which assigns the same validity to the three types of guarantees.

Based on the analysis of the above-mentioned legal devices, it is clear that there is a lack of differentiation between judicial guarantee insurance and a deposit in court. Corroborating this understanding, Article 535, Paragraph 2 of the New Code of Civil Procedure sets out that “for the purposes of replacing a levy of execution, bank guarantees and judicial guarantee insurance have the same validity as cash (…)”.

1. VIII -rights and actions.
2. Art. 15. In any phase of the proceeding, the following shall be approved by the Court: I – for the judgment debtor, the replacement of the levy of execution with a deposit made in cash, bank guarantee, or guarantee insurance (…)
3. Art. 9. In a performance bond, for the amount of the debt, plus interest, late fees, and charges specified in the overdue liabilities certificate, the judgment debtor may: (…) Par. 3. The performance bond, through a deposit made in cash, a bank guarantee, or guarantee insurance, has the same effect as a levy of execution.

Equally, in an evident contradiction to the very objections made by the Office of the General Counsel for the Federal Treasury (PGFN) in concrete cases wherein it is asked to give an opinion on the requests for the replacement of deposits with insurance policies, for some time now it has been accepting an insurance policy as a method for guaranteeing tax debt, as can be observed in Art. 1 of PGFN Ordinance no. 164 of February 27, 2014.

It should also be pointed out that the request for the replacement of a deposit with a guarantee insurance policy is covered under Art. 8055 of the Code of Civil Procedure, which affirms the principle of least burden, according to which the court should always pursue the option that is least burdensome to the judgment debtor.

With respect to degree of burden, in light of the current economic slowdown caused by COVID-19, which has a direct impact on Brazilian companies’ difficulty in keeping up their activities, upholding the requirement for deposits in court has meant an even more burdensome means of guarantee, since it greatly impacts cashflow, leading to severe undercapitalization.

A solution to the burden inherent to deposits made in court is judicial guarantee insurance, which is a type of security that has been duly allowed and regulated under the applicable legislation, and whose characteristics allow for the preservation of cashflow, which is essential to judgment debtors and does not impact the liquidity sought by the judgment creditor.

For these reasons, and considering the grave crisis we are currently experiencing, the attempt to release funds held up in court cases and its replacement with guarantee insurance is not only completely applicable from a legal perspective, but it is even more significant when seeking cashflow breathing room, which is essential to upholding regular business operations and, as a result, jobs and consumption — in other words, the entire economic/social cycle.

4. Art. 1. Guarantee insurance for court-ordered tax payment and guarantee insurance for a tax instalment plan, in the scope of the Office of the General Counsel for the Federal Treasury, aim at guaranteeing the payment of debts appearing on the delinquent taxpayers’ list, whether in tax foreclosure or in an instalment plan, under the terms set out in this ordinance. 5. Art. 805. When the judgment creditor has an option for means of enforcement, the court shall order that it be done by the least burdensome method to the judgment debtor. Par. 1. If the judgment debtor alleges that the enforcement measure is too burdensome, he must indicate other more effective and less burdensome means, under penalty of having the original executive orders upheld.