In an October 2018 decision, the Superior Court of Justice confirmed the jurisdiction of an arbitral tribunal constituted before the Market Arbitration Chamber (CAM), an arbitral institution linked to the Sao Paulo stock exchange, to render a decision connected to a company that had filed a lawsuit regarding a recovery plan before the competent court of law.
The controversy arose out of recovery plan proceedings launched by Oi SA, one of the largest Brazilian telecoms companies. This bankruptcy covered aprproximately $18 billion in debts and 55,000 creditors. It is the biggest proceeding of its kind in the country to date.
Recovery request Oi filed for reorganisation on 20 June 2016 before the 7th Corporate Court of Rio de Janeiro.
Once the judge approved the recovery plan process, Oi had 60 days to present a plan of judicial recovery, as required by Article 53 of the Law on Recovery and Bankruptcy (Law 11.101/2005).
When the judge ratified Oi's plan, it contained, among other measures, plans to increase capital and convert debts in Oi's stocks, according to Article 50 of the Bankruptcy Law.
Lawsuit before bankruptcy judge Some of Oi's minor stockholders, led by Bratel BV, requested that the bankruptcy judge reconsider the plan – in particular, the measures to increase Oi's capital and convert debts in Oi's stocks. These minor shareholders alleged that such measures required authorisation from Oi's board of directors and could not be included by the sole deliberation of the company's president.
Further, the shareholders called for another general assembly of creditors to be held in order to deliberate on the plan again.
The judge denied Bratel's request, holding that the assembly was independent and an absolute majority of voters had approved the plan. He also ruled that Oi's president had a right to negotiate with the creditors and declared that any assembly deliberation regarding a new discussion of the plan would be illegal.
Notwithstanding such decision, the minority voters participated in a new assembly and launched a lawsuit against Oi's president, based on Article 159 of the Law on Stock Companies (Law 6.404/1976).
Following this, Oi requested an injunction before the bankruptcy judge, which suspended the assembly's decisions. The company then called for an extraordinary meeting of its board of directors in order to determine how to fulfil the plan.
In response to Oi's injunction, Bratel initiated arbitral proceedings before the CAM based on an arbitration agreement contained in Oi's bylaws.
The arbitral proceedings sought to determine whether Oi's CEO could be held liable under the Law on Stock Companies.
Further, Bratel requested an injunction in order to prevent Oi's board of directors from deciding on the measures to enact the plan. The arbitral tribunal granted the injunction and suspended any further deliberations by the board of directors.
This case is unique as it resulted in two distinct jurisdictional bodies, each considering itself to be the appropriate forum to hear the case based on different normative bases:
- On the one hand, the bankruptcy judge had universal jurisdiction.
- On the other hand, the arbitral tribunal had jurisdiction based on the arbitration agreement in Oi's bylaws.
In such circumstances, the Procedural Code suggests that an upper jurisdictional body should rule on which entity has jurisdiction.
Conflict over venue involving arbitral tribunals It has long been debated in Brazilian literature and case law whether such a conflict between a court and an arbitral tribunal can even exist.
In short, those in favour of the possibility of such a conflict consider that, as the Arbitration Act sets out the jurisdictional nature of arbitration, there is no hierarchy between an arbitrator and a judge; therefore, an upper jurisdictional body (ie, the Superior Court of Justice) should decide the conflict.
Those that do not believe such a conflict can exist base their argument on the doctrine of competence-competence, which is also contained in the Arbitration Act. They support the French approach, which gives priority to arbitrators and maintains that they alone should decide on their competence. According to this approach, judges should not intervene in such a decision and can issue rulings in this regard only following annulment proceedings.
Supreme Court of Justice case law has confirmed that such a conflict can exist.(1)
Superior Court of Justice ruling
The Superior Court of Justice ultimately ruled that even though the arbitral tribunal has priority to rule on its own competence, the jurisdiction nature of arbitration sustains the possibility of a conflict of competence between the tribunal and the court.
According to the decision, the arbitral tribunal had competence to rule on the question of proper consent during the deliberation of the plan and thus the liability of Oi's CEO. While the Law on Stock Companies granted the minority shareholders the right to participate in the deliberations regarding the company, the observance of that right was at the heart of the arbitral proceedings.
Based on these findings, the Superior Court of Justice ruled that the arbitral tribunal was competent to decide on the minority shareholders' request.
The Superior Court of Justice was right to separate the matters at hand and recognise that the arbitral tribunal had its own case on which to rule. In fact, there is a clear separation between:
- the possible liability of a company's CEO and its board of director, which should be considered by an arbitral tribunal; and
- the validity of a reorganisation plan, which should be considered by the bankruptcy judge.
In addition to taking a pro-arbitral stance on an important national case, this decision has reinforced the jurisdictional nature of arbitration and solidified case law on conflicts of competence.
For further information please contact Luciano Timm at Carvalho, Machado & Timm Advogados (+55 11 2872 4760) or email ([email protected]r). The Carvalho, Machado & Timm Advogados website can be accessed at www.cmtlaw.com.br.
Endnotes
(1) CC 111.230-DF, CC 139.519-RJ and CC 148.932-RJ.
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