Restructuring and insolvency law in Portugal

The primary legislation is the Portuguese Insolvency Law (Código de Insolvência e Recuperação de Empresas or “CIRE”) and Law no. 8/2018 of March 2, 2018 (Regime Extrajudicial de Recuperação de Empresas or “RERE”).

Besides insolvency proceedings, under which an insolvency plan may be approved for the purposes of recovery, the following restructuring tools are available:

• Extrajudicial restructuring mechanism or RERE
• Revitalisation proceedings (processo especial de revitalização or “PER”)
• Recovery plan approved in an insolvency procedure.

RERE is initiated by the debtor and creditors representing at least 15% of the total non-subordinated credits signing up for a negotiation protocol. A certified accountant or statutory auditor verifies that the creditors meet such requirements.

PER is initiated by the debtor and at least one of its creditors representing at least 10% of the non-subordinated credits submitting an application to the court of intent to negotiate a recovery plan. A certified accountant or statutory auditor has to verify that the debtor is not insolvent under the CIRE.

After the insolvency is declared, a Recovery plan may be approved within the insolvency proceeding (see the Insolvency section below). The Recovery plan proposal may be presented by the insolvency administrator, the debtor, any person legally liable for the insolvency debts and any creditor or group of creditors whose claims represent at least 20% of the total non-subordinated claims.

RERE is an out-of-court mechanism and its main characteristics are the following:

• It is aimed at companies in a difficult financial situation that are unable to meet their obligations on time, due to lack of liquidity or credit, or at companies in an imminent insolvency situation that foresee that they will not meet their future obligations, susceptible to recovery in either case
• The negotiations and the protocol are confidential unless the parties unanimously agree to publicise them in whole or in part
• The period of negotiations may not exceed 3 months from the date of the deposit of the protocol with the Commercial Registry
• Creditors may not withdraw from the protocol before the end of the maximum period foreseen for the negotiations
• The tax authorities, social security, employees and organisations representing the latter are mandatory participants in the negotiation.
• From the protocol deposit date, the following effects are produced:
  • The debtor is prevented from carrying out acts of particular relevance, i.e. acts that jeopardise the company’s equity situation such as sales of assets or shareholdings and acquisition of real estate, among others; except if duly authorised by the creditors
  • Suspension of enforcement proceedings pending in court filed by creditors taking part in RERE
  • Utility service providers (such as water, electricity, natural gas, telecommunications, etc.) may not suspend the supply of services on grounds of non-payment by the debtor prior to the deposit, even if they are not taking part in the protocol
  • If the debtor becomes insolvent, the time limit to fulfil the duty to file for insolvency starts only after the end of the negotiation period.
• In case a restructuring agreement is approved, it must be deposited with the Commercial Registry to produce the following effects:
  • Extinction of lawsuits relating to debts included in the restructuring agreement filed by a creditor that is a party to the restructuring agreement
  • Debtor’s collaterals may only be modified under the restructuring agreement with their beneficiaries’ consent
  • Legal transactions involving the provision to the debtor of fresh money, including the deferred payment and the provision by the debtor of guarantees in that respect, cannot be subject to clawback, provided that either the restructuring agreement or the negotiation protocol spells out such transactions. For this purpose, a declaration from a statutory auditor is required certifying that the restructuring agreement compromises credits amounting to at least 30% of the total non-subordinated credits, that the debtor’s financial situation is more balanced by increasing the ratio of assets over liabilities and that the debtor’s equity exceeds the share capital.

PER is a court proceeding whose main characteristics are:

• It is aimed at companies in a difficult economic situation that are unable to meet their obligations on time, due to lack of liquidity or credit, or at companies in an imminent insolvency situation that foresee that they will not meet their future obligations, susceptible to recovery in either case
• There are two modalities:
  • agreement is reached during court proceedings (which is the most common)
  • agreement is reached out of court and is subsequently submitted to the court for validation
  • The court appoints a Provisional Judicial Administrator
• The period to conclude the negotiations is 2 months, which may be extended by 1 month by prior written agreement between the Provisional Judicial Administrator and the company
• From the date of the appointment of the Provisional Judicial Administrator, the following effects are produced:
  • The debtor company is prevented from carrying out acts of particular relevance without the prior authorisation of the Provisional Judicial Administrator, i.e. acts that jeopardise the company’s equity situation such as sales of assets or shareholdings and acquisition of real estate, among others
  • Suspension of enforcement measures, preventing the initiation of any enforcement proceedings against the company for the recovery of credits for a maximum period of 4 months and suspension, for the same period, of any ongoing proceedings for the same purpose (except in case of claims arising from an employment contract, its breach or termination)
  • Suspension of the insolvency proceedings (if insolvency has not yet been declared)
  • Suspension of statute of limitation
  • During the period of the suspension of enforcement measures, the creditors may not refuse to comply with, to terminate, unilaterally anticipate or amend ongoing contracts required to the continuity of the company’s activity, including any contracts for the supply of goods or services whose suspension would lead to the stoppage of the company’s activity
  • Creditors have to present to the Provisional Judicial Administrator a proof of debt and the latter will produce a provisional list of credits, which will become final in case it is not challenged
•  The recovery plan must be voted by creditors representing at least one third of the total credits and it must be approved by more than two thirds of all votes issued with more than 50% of the favourable votes corresponding to non-subordinated credits
• The recovery plan must be approved by the court; and in case it considers that the plan does not comply with the applicable procedural or content rules, or in case a creditor submits an application requesting the court not to validate the plan on justified grounds, such as the fact that with the approval of the plan the creditor will be in a worse off, the court may refuse to validate the recovery plan
• In case the recovery plan is approved by the creditors and validated by the court, it will apply to all creditors, including those which did not vote for the plan
• Legal transactions entered into under the PER, with the aim of providing the debtor with sufficient financial means to enable its recovery, cannot be subject to clawback
• The guarantees agreed between the company and its creditors during the PER proceedings, with the aim of providing the company with the necessary financial means for the development of its activity, are maintained even if, at the end of the process, its insolvency is declared within 2 years
• If the recovery plan is not approved, the Provisional Judicial Administrator will issue its opinion on the insolvency situation of the company and in case it considers that the company is not insolvent, the file will be closed; otherwise, the company will be notified and in case of no opposition of the latter, insolvency will be declared in the following 3 working days.

The different types of creditors reflect the type of credits that they hold as follows:

• Specific preferential credits: preferential credits that are specifically related to an asset (e.g. employees who have a preferential credit over their working facility)
• Secured credits: credits guaranteed by mortgages or pledges among other rights in rem
• General preferential credits: preferential credits that are not specifically related to an asset (e.g. the credits related to social security or taxes)
• Common credits: all the credits not included in other types
• Subordinated credits:
  • credits subject to equitable subordination
  • interests maturing over post-insolvency non-subordinated credits
  • credits subject to contractual subordination
  • interests maturing over subordinated post-insolvency credits.

The board of directors has a duty to file for insolvency within 30 days after the date on which it becomes aware that the company is insolvent or the date on which it should have become aware of that fact.

In case the insolvency is qualified as culpable, the court shall impose sanctions, namely to the directors, de facto or de jure, determining the degree of fault. The sanctions that the court shall impose include disqualification for a certain period of the persons affected from managing third-party assets or the disqualification of such persons from exercising commercial activities, as well as from holding any position as a board member of a commercial or civil company, private economic activity association or foundation, public company or cooperative, the forfeiture of any claims on the insolvency or the insolvency estate held by such persons and an order that they return the assets or rights already received in payment of such claims, and the condemnation to pay a compensation to the creditors up to the amount of their unpaid credits.

The insolvency of a company is qualified as culpable when the insolvency situation was created or aggravated as the result of wilful misconduct or serious misconduct of its directors, de facto or de jure, in the 3 years prior to the starting of the insolvency proceedings.

CIRE presumes the existence of serious misconduct whenever the directors, de facto or de jure, fail to comply with their duty to file for insolvency.

The qualification of the insolvency as culpable does not limit or preclude any possible liability, civil or criminal, of the directors, assessed outside the insolvency proceedings.

There are no particular duties.

There are no particular duties.

The Portuguese Insolvency Law or CIRE is the primary legislation governing insolvency proceedings.

The insolvency proceedings are initiated through the filing of an insolvency claim by:

• the insolvent debtor
• those who are legally responsible for the company’s debts
• any creditor, or
• the Public Prosecutor (in representation of entities whose interests are entrusted).

CIRE defines the insolvency situation of the debtor as the impossibility/incapacity to fulfil obligations that have already fallen due. This implies an assessment based on one of two criteria:

• the cash flow criteria: when the debtor becomes unable to pay the debts when they fall due, irrespective of whether the assets exceed the liabilities
• alternative criteria for legal entities: when the debtor’s liabilities are higher than the value of its assets, according to the relevant accounting standards.

In addition, in case of insolvency proceedings initiated at the request of those who are legally responsible for the company’s debts, by any creditor or by the Public Prosecutor, CIRE foresees several circumstances that leads to the presumption of insolvency such as: the general suspension of payment of debts due; failure to comply with one or more obligations which, by virtue of their size or of the circumstances of the failure, demonstrate that the debtor is generally unable to meet their obligations as they fall due; and the general failure, during the previous 6 months, to meet debts regarding tax or social security contributions, among others.

There is only one type of insolvency proceedings. Its aim is the repayment of the debtor’s creditors. For that purpose, an insolvency plan called a Recovery Plan can be approved by the creditors with a view to recovery; or the debtor’s assets can be liquidated and the creditors repaid with the distribution of the proceeds in accordance with the ranking of their credits.

The court’s intervention is limited mainly to the declaration of the insolvency and the validation of the insolvency plan, together with determination of the ranking of the creditors’ credits (see Q4 under Restructuring).

With the declaration of insolvency, the powers of the directors of the debtor are removed and the power to manage the assets belonging to the insolvency estate is transferred to the insolvency administrator appointed by the court. The court may rule that the management bodies are to be kept in place provided that the debtor has expressly requested this; the debtor has already presented an insolvency plan or commits to providing an adequate restructuring plan; no disadvantage is expected for the creditors or for the insolvency proceedings; and the party that initiated the insolvency proceedings does not oppose to it.

The insolvency administrator assesses and suggests whether the debtor should enter into liquidation or whether an insolvency plan should be proposed, although the final decision rests with the creditors.

The insolvency plan is voted on at the creditors’ general meeting. A quorum of one third of the total credits with voting rights is needed and approval requires more than 50% of the votes, provided that at least half of the votes correspond to non-subordinated credits.

The insolvency plan has to be validated by the court, and in case it considers that the plan does not comply with the applicable procedural or content rules, or in case a creditor submits an application requesting the court not to validate the plan on justified grounds, such as the fact that with the approval of the plan the creditor will be in a worse off, the court may refuse to validate the recovery plan.

Once the insolvency plan is validated by the court, it will bind all creditors.

The rules regarding the effects of the declaration of insolvency over the pending contracts are mandatory.

As a general rule, contracts entered into between the debtor and a creditor that have not yet been completely performed are suspended until the insolvency administrator decides on their performance or non-performance. However, there are special rules applicable to some contracts, such as sale with reservation of title and similar contracts, sale without delivery, promissory contracts, forward transactions, leases, mandates and management contracts.

After the declaration of insolvency, creditors can set-off their credits against debts over the insolvency estate if one of the following requirements is fulfilled:

• verification of the legal assumptions of the set-off are met prior to the insolvency declaration
• credit over the insolvency must fulfil, before the counter-credit of the insolvent estate, the legal assumptions laid down in the Portuguese Civil Code (i.e. the credit is judicially enforceable, and the credit and counter-credit have the same nature).

However, set-off is acceptable when:

• the debt to the insolvency estate was constituted after the declaration of insolvency
• the credit was acquired from another person/entity after the date of the declaration of insolvency
• the insolvent estate is not responsible for the debts of the insolvent
• the credit is subordinated.

According to CIRE, the credits over the insolvency shall be ranked respecting the following order of priority:

• Specific preferential credits
• Secured credits
• General preferential credits
• Common credits
• Subordinated credits.

See Q4 under Restructuring.

No.

Portuguese law does not foresee the right for a lender to supervise and/or monitor the financial situation of the debtor company. However, loan agreements governed by Portuguese law often include information rights for the benefit of the lender, and the breach of rights may be an event of default that entitles the lender to terminate the loan agreement. The appointment of a person to monitor the activities of the borrower and to advise the company is not advisable because it may incur in shadow management personal liability.

Transactions occurring within the 2 years prior to the filing of the insolvency proceedings have the risk of voidance or clawback if they are detrimental to the insolvent estate.

In general, transactions may be subject to clawback if they qualify as detrimental to the insolvency estate, endangering the ability to meet creditors’ claims, provided they were executed in bad faith and in the 2 years prior to the filing of insolvency proceedings.

CIRE sets out as bad faith from the third parties’ knowledge that:

• the debtor was insolvent, or
• the effect of the transaction was detrimental and insolvency was imminent, or
• that insolvency proceedings had already been initiated.

Portuguese law also sets out unconditional clawbacks for certain actions without the need for any additional requirements and that do not allow proof to the contrary (assumptions iuris et de iure), as is the case of security in rem granted or replaced/increased by the insolvent in relation to pre-existing or novated obligations within 6 months prior to the filing of insolvency proceedings, and security in rem granted to secure new debt within a period of 60 days prior to the filing of insolvency proceedings.

Loans are usually sold by way of an assignment of the lender’s contractual position, an assignment of lender’s credit rights or a novation.

The assignment of the lender’s contractual position requires the consent of the borrower. Usually, financing agreements governed by Portuguese law expressly foresee the right of the creditor to assign the contractual position in the loan to a third party, or at least to another financial institution.

In case the consent is prior to the assignment, the borrower must be notified of the assignment to avoid obtaining discharge by payment to the assignor.

The assignment of lender’s credit rights does not require the consent of the borrower unless there is a contractual provision to the contrary. In this case, the borrower must also be notified of the assignment to avoid obtaining discharge by payment to the assignor.

In case of novation, securities and guarantees granted in respect of the previous obligations are cancelled, unless there is an express provision establishing that they remain.

As regards formal requirements, it depends on the nature of the receivables. In case of transfer of mortgage loan receivables, it must be executed by way of a public deed or an authenticated document and registered with the relevant Real Estate Registry Office.

If a credit agreement under Portuguese law prohibits transfer or assignment of the loan, there might still be ways for a lender to transfer the economic risk and/or benefit associated with the loan, such as:

• Participation agreements: whereby the lender retains the legal ownership of the loan but shares with a third party the economic benefits and risks associated with the loan
• Sub-participation agreements: similar to a participation agreement, but in this case the third party does not have a direct relationship with the borrower and the lender is the primary responsible for the loan

Note: participation agreements are not standard practice in Portugal, but neither are they legally inadmissible according to the general principle of contractual freedom.

• Securitisation: a bundling of multiple loans into a financial instrument or ‘securitisation vehicle’. The securitisation vehicle will issue securities based on the cash flows of the loans, which will be sold to investors.
• Synthetic securitisation: the lender can enter into derivative contracts that replicate the cash flows of the loan, transferring the economic risks and benefits to a third party without selling the loan itself.

Portuguese law does not require a licence or prior authorisation for the purchase, sale and/or transfer of a non-performing loan.

However, the non-performing loans directive must be transposed by the end of 2023. In accordance with the directive, EU credit servicers will have to obtain an authorisation in their home Member State and EU credit purchasers will have to appoint a credit institution or a credit servicer to perform credit servicing activities regarding consumers.

To date the directive has not been transposed to Portuguese Law.