A look at corporate, personal and, where relevant, partnership insolvency proceedings in Portugal, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.
Processo Especial de Revitalização (PER)
Special revitalisation procedure
- A court-supervised procedure to restructure debtors in financial difficulty or at imminent risk of insolvency via the approval by creditors of a recovery plan.
- Initiated by petition evidencing the debtor’s financial difficulties/imminent insolvency, after which the court appoints a Provisory Judicial Administrator (Administrador Judicial Provisório).
- It is possible to attach several PER proceedings together when they relate to entities within the same group of businesses and to appoint a common Provisory Judicial Administrator to all the proceedings.
- During this revitalisation procedure, in contrast to insolvency proceedings, the debtor's management remains in office and is only required to seek permission from the Provisory Judicial Administrator in order to perform "particularly relevant acts."
- An initial negotiation phase must be concluded within two months and may be extended only once for one month, on agreement between the debtor and the Provisory Judicial Administrator.
- During the negotiation period, any pending judicial proceedings directed at the recovery of debts will be suspended and no new proceedings with a similar purpose may be initiated. Any pending insolvency proceedings, where the insolvency of the company has not yet been declared, will also be stayed during the revitalisation procedure.
- Once the recovery plan is approved and registered, the debtor's debts will be deemed to have been discharged, subject only to the terms and conditions of the plan.
- If the recovery plan is not approved, the law sets out two alternatives: (i) if the debtor is insolvent, the Provisory Judicial Administrator must file a petition of insolvency; or (ii) if the debtor is not insolvent, the Provisory Judicial Administrator applies to terminate the PER.
Regime Extrajudicial de Recuperação de Empresas (RERE)
Extrajudicial company recovery proceeding
- Created to substitute the previous Sistema de Recuperação de Empresas por Via Extrajudicial (SIREVE), which was revoked.
- An out-of-court restructuring tool conducted by the Institute of Assistance to Small and Medium sized Companies and Innovation (IAPMEI) that grants a debtor (companies and sole traders) in economic and financial distress permission to engage in negotiations with its creditors to reach a voluntary, bespoke and confidential agreement.
- If certain legal requirements are met, the extrajudicial agreement may have the same effect as if it was approved in the context of a Processo Especial de Revitalização (PER).
- The restructuring agreement immediately suspends all enforcement proceedings for debt collection and insolvency applications against the debtor.
- The debtor remains in control of the company and its assets.
- A RERE restructuring agreement only binds creditors who have participated in and signed the agreement.
Processo de Insolvência
- A company is deemed insolvent when it is unable to pay overdue debts and when its liabilities materially exceed its assets.
- If the court decides to declare that the debtor is insolvent, it will appoint an Insolvency Administrator (Administrador de Insolvência), establish a deadline for filing creditor claims and schedule a general meeting of creditors.
- If proceedings are initiated by the debtor, the petition may ask for its management to retain control of its assets, provided there is a committed intention to present an Insolvency Plan (for restructuring or controlled liquidation), which must be approved by the court.
- A judicial declaration of insolvency: (i) transfers the power to manage and dispose of assets to an Insolvency Administrator (unless the debtor's management retains control – as above); (ii) prevents the commencement or continuation of any enforcement action; (iii) joins to the insolvency procedure any judicial action that may affect the value of the debtor’s assets; and (iv) accelerates the debtor’s obligations to maturity except for obligations subject to conditions precedent.
- Creditors are required to assess the company's financial viability and decide jointly, in a court assembly, whether recovery or liquidation is appropriate, and under which terms and conditions.
- An insolvency plan proposes either: (i) a restructuring and recovery of the debtor or (ii) its liquidation. The insolvency plan reflects the majority of creditors' preferences, as discussed and approved at a creditors' meeting and then ratified by the Court of Law.
- Alternatively, when a company is declared insolvent, the creditors' general meeting can vote for its liquidation instead of its recovery.
Processo Especial para Acordo de Pagamento (PEAC)
Special procedure for a payment agreement
- A procedure analogous to special revitalisation proceedings for companies but created specifically for natural persons.
- Most of the key features of Processo Especial de Revitalização (PER) apply, but with the following additional features:
- during PEAC negotiations, the provision of certain essential public services cannot be suspended (e.g. water, power and gas, electronic communications and postal services); and
- if the debtor brings an end to the proceedings, they cannot invoke PEAC for a period of two years.
Processo de Insolvência
- A natural person is deemed insolvent when they are unable to pay their debts when they fall due and when their liabilities materially exceed their assets.
- The insolvency procedure of a natural person is similar to the Processo de Insolvência for companies, but with the following particular features:
- if the insolvency procedure is initiated by the debtor himself, the petition may also include a proposed payment plan which must be approved by their creditors and the court, with the insolvency procedure suspended until approval is granted; or
- the administration of the insolvency estate is mandatorily transferred to an Insolvency Administrator and no insolvency plan can be presented.
- "Fresh Start": under certain circumstances, the law permits a debtor to apply for a special regime called Exoneração do Passivo Restante, with a view to obtaining a judicial pardon in respect of debts that were not paid as an integral part of the insolvency procedure or in the five years after its termination (except some specific types of debts, e.g. tax and social security debts). If this is approved by the debtor's creditors and the court, it establishes a five-year period in which all of the debtor's income must be paid to the Insolvency Administrator (or a fiduciary) so that they can pay whatever amount is possible within that time frame. During this period, enforcement proceedings and requests to initiate insolvency proceedings against the debtor are suspended.
- Before a creditor can judicially initiate an enforcement procedure, they must have an EOC (enforcement order certificate, which in Portuguese corresponds to Título Executivo). An EOC may be, inter alia, a court order directing the debtor to pay the creditor; or an agreement certified by a notary or lawyer, where the debtor recognises an obligation to pay the debtor.
- With an EOC, a creditor may immediately apply to court to foreclose the collateral.
- After its seizure by an Enforcement Agent, the collateral may be sold by:
- Adjudication: the creditor may apply to the court to acquire the collateral but its offer may not be lower than 85% of the base value of the collateral.
- Sale in regulated markets (if the secured assets are listed in a regulated market).
- Electronic auction: if none of the above apply, this is the preferred method of sale.
- Public auction: when agreed upon by the creditor and the debtor or if the court determines it is appropriate in view of the nature of the secured assets.
- Sealed first-price auction: the starting point of the sale price corresponds to 85% of the base value of the collateral.
- Public deposit: this only arises if the court determines that the collateral (only movable assets) should be moved to a public deposit.
- Private sale: applicable when other methods fail, if the sale must be effected urgently or if agreed between the debtor and the creditor.
- Public creditors (tax authority and social security) and other creditors holding security over the same asset (e.g. a second ranking mortgage) will be notified by the appointed Enforcement Agent to bring their claims within the course of the main enforcement procedure. Payments will be made after the asset has been sold, in accordance with the legal hierarchy of creditors and after the court's ruling on such claims (if any).
Anticipated changes in the next two years
The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States' restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.
Notable features required to be included in Member States’ national laws include:
- An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
- A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
- An ability to cram down dissenting classes of creditors.
- Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
- Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.
Contact: Nuno Azevedo Neves
1 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.