IPSO de facto clauses and judicial recovery

The bankruptcy filing by Grupo Casas Bahia, which involves liabilities of R$ 17.3 billion, has once again brought to the forefront a relevant discussion in Business Law: the scope of ipso facto clauses.

Ipso facto clauses are contractual provisions that allow one party to anticipate the maturity of an obligation, rescind or terminate the contract when a specific event related to the other party's financial situation occurs, such as filing for judicial reorganization or bankruptcy.

The problem arises when the automatic application of these provisions can compromise the very activity of the company seeking to recover.

It was precisely this issue that came under analysis by the 2nd Bankruptcy and Judicial Reorganization Court of São Paulo in the Casas Bahia case.

In their initial petition, the companies undergoing judicial reorganization requested, among other measures, that the early maturity and termination of contracts based solely on the filing for judicial reorganization, on ipso facto clauses, cross-default clauses, or on the breach of non-financial obligations be prevented. They also requested the maintenance of contracts considered essential to their operation.

Even before deciding to proceed with the judicial reorganization, the Court partially granted the preliminary injunction to preserve the status quo of the contractual relationships.

In practice, early payment warrants based solely on the filing for bankruptcy protection were temporarily suspended.

Casas Bahia's decision reinforces an important trend: judicial reorganization does not necessarily invalidate the clause ipso facto , but it can limit its effectiveness when its application compromises the preservation of the company.

The discussion, therefore, should not be limited to the existence or not of the clause in the contract. It will be necessary to analyze which contract is involved, which obligation was breached, whether there is actual non-compliance, the essential nature of the relationship, and what consequences would result from its termination or early maturity.

By Rafaela Bialas