Preliminary Remarks

Pursuant to Portuguese Insolvency and Corporate Restructuring Code, approved by Decree-Law No. 53/2004, of March 18, which came into force on 15 September 2004 (“CIRE”), there is a single form of insolvency proceedings. Therefore, further to Annex B of the Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceeding (the “Regulation”), the corresponding Portuguese winding-up procedure is also the insolvency procedure.

Relevant creditors (gathered in a creditors’ meeting) choose between one of two possible outcomes:

  • The liquidation of the insolvent’s assets and the subsequent distribution to the creditors; or
  • The company’s restructure, through the approval of an insolvency plan (in the event the continuation of business is more likely than not).

Either outcome is triggered by the filing of an application before the relevant court, which is the court where the debtor’s centre of main interests (COMI) is located. The code assumes that the head office of the debtor corresponds to its COMI.

Winding-up proceedings

1. Conditions for opening

In Portugal, creditors and debtor are entitled to request the initiation of bankruptcy proceedings.

Voluntary bankruptcy proceedings

The debtor shall file the insolvency proceeding within 30 day from the moment he became aware of his insolvency state.

The debtor shall submit a reasoned application outlining the existing or imminent insolvency situation and provide the court with a significant set of documents, including:

  • The identification of the company’s directors and of its five major creditors;
  • The debtor’s commercial certificate issued by the commercial registry office;
  • The debtor’s civil certificate issued by the relevant civil registry office;
  • A list of all the known creditors and details of all pending lawsuits against the debtor;
  • A comprehensive explanation of the company’s activities over the previous three years, as well as all the debtor’s establishments;
  • Identification of all the debtor’s shareholders and associates and of those who may be liable for the company’s debts; a list of all the company’s assets and rights, regardless of their nature;
  • All the accounting books of the company;
  • A list of all the debtor’s employees; and
  • A document that demonstrates the representation powers of the directors, as well as the resolution that approved the insolvency proceedings.

After the filing of the application for voluntary liquidation, the opening of insolvency proceedings shall be declared within the three subsequent working days.

Then, the Creditors, at a General Creditors Meeting, choose to liquidate all the company’s assets, following the provisions regarding the sale of assets within enforcement proceedings. The liquidation is executed by an Insolvency Administrator appointed by the Court (even though it may be suggested by the Parties).

Involuntary bankruptcy proceedings

The opening of insolvency proceedings may be also triggered by any of the creditors (regardless of the nature of their credits); by any person who is liable for the debtor’s debts; or by the public prosecutor.

In order to demonstrate the insolvency situation of a particular debtor (the cash flow test or the balance sheet test), at least one of the following requirements should be met:
General default of the debtor on its payments and obligations;

The disappearance of the company’s directors or shareholders, or the abandonment of the debtor’s head office or main establishment, due to its liquidity problems and without an appropriate substitute being appointed;
Dissipation, abandonment, and rushed or ruinous liquidation of the company’s assets and fictitious constitution of credits; or
Debtor’s failure to pay, within six months of the filing of the involuntary insolvency, one or all of the following: tax liabilities; social security obligations; labour credit default; etc.

After the filing of the application for opening of involuntary bankruptcy, there will be a service of process of the Debtor and the latter may file an Opposition in order to evidence that it has enough assets or is able to generate enough cash flow to pay its debts.

After the hearing, the Court shall decide whether the insolvency must be opened. In the event of the opening of insolvency proceedings, the Creditors, at a General Creditors Meeting, choose to liquidate all the company’s assets, following the provisions regarding the sale of assets within enforcement proceedings.

2. Restructuring methods

Portuguese winding-up proceedings presupposes the entire liquidation of the company’s assets.

3. Success rate

In what refers to voluntary winding-up proceedings the success rate is almost 100%. As a matter of fact, unless the debtor fails to add to the case bundles the above mentioned set of documents, the insolvency shall be declared within the three subsequent working days.

On the other hand, concerning involuntary winding-up proceedings, the success rate of this triggering option depends on the evidence of one of the above mentioned tests (the cash flow test or the balance sheet test). In a conservative estimate, according to our experience, we would say that 80% of the involuntary winding-up proceedings filed by Creditors are successful.

4. Pros and cons

Pros: One of the advantages of voluntary winding-up proceedings for creditors is the possibility to recover VAT previously paid to Tax Authorities, as such proceedings presupposes that the Debtor does not have enough assets to distribute for its creditors.

Cons: One disadvantage for the debtor is the “stigma” of bankruptcy and the liabilities that may result from such proceedings to the Directors in the event bankruptcy is considered culpable, namely the suspension of activities for a certain period of time and the personal and joint liability for the payment of the credits.

Insolvency Proceedings

1. Conditions for opening

As mentioned above, there is a single form of insolvency proceeding in which the respective creditors choose between a liquidation of assets and the company’s reorganisation. Both proceedings start with the same formalities and requirements.

Moreover, with respect to the restructuring proceedings, while in a voluntary restructuring, the insolvency plan may be prepared and submitted by any creditor or group of creditors whose credits represent at least one-fifth of the total credits approved by the court or listed in the creditor’s provisional list; in a voluntary restructuring, such insolvency Plan shall be applied by the debtor itself and filed in the proceedings.

2. Restructuring methods

The debtor can apply to a company restructuring by filing an insolvency plan. Such plan may be defined in a very free and flexible way to allow the debtor to carry on business during the reorganisation without restrictions.

Moreover, the insolvency plan may implement:

  • Self-Administration (providing for the debtor to remain in possession in the event no facts are known that could give rise to the assumptions that creditors will be prejudiced);
  • A share capital increase of the insolvent company;
  • A moratorium;
  • Restructuring by asset-transfer (in the event the Insolvency Administrator is able to sell and transfer part or the entire business); or
  • The pardon or reduction of the credits over the insolvent company (whether principal or interest).

The insolvency plan should not violate the creditors’ equality of treatment principle.

The insolvency plan must be discussed and approved by two-thirds of the votes at the creditors’ general meeting, provided that the creditors’ general meeting is attended by creditors that represent one-third of the total voting rights.

Once approved, the insolvency plan is adopted by the court within 10 days of the assembly and will be effective with respect to all credits and creditors whether or not they have been claimed and approved and whether or not the creditor has approved the plan.

Thus, as long as such plan is accepted by the majority of the creditors and by the court, it will enter into force and bind all the insolvency creditors. Unless the approved plan clearly states otherwise, the creditors’ rights secured by guarantees in rem cannot be affected by it.

Once the process is approved and validated by the court and any possibility of appeal has been exhausted, the insolvency procedure ends unless the plan states otherwise. It is not common that in the event a restructuring is approved the debtor retains the sole administration of its assets. Usually it is defined in the plan that the debtor’s activity is supervised by the insolvency administrator appointed by the court and under supervision of the creditors’ committee. It is also common to stipulate that the debtor may not assume any obligation without the previous agreement of the insolvency administrator appointed with respect to acts out of the ordinary course of business.

Regarding acts in the ordinary course of business, it is usually stipulated that the debtor may act freely unless the insolvency administrator objects.

In order to protect the creditors who continue to supply goods and services after the insolvency plan is approved, the suppliers must ensure that the plan provides for such credits to be paid first if new insolvency proceedings are filed against the debtor before the plan is accomplished.

Notwithstanding, the insolvency plan ceases its effects in respect to a determined credit if the debtor fails to comply, with interest, 15 days after being challenged for it by the creditor, or in respect of all the credits if the debtor is declared insolvent in a new insolvency procedure. Creditors are classified as follows, in order of priority:

  • Specific preferential credits (only the preferential credits that are specifically related to an asset);
  • Secured credits (those that are guaranteed by mortgages, pledges, among others);
  • General preferential credits (the preferential credits that are not specifically related to an asset, e.g., the credits related to social security or tax debts);
  • Common credits (all the credits not included on other types);
  • Subordinated credits (which shall be graduated after all the remaining insolvency credits).

It is important to mention that the insolvency plan may release non-debtor parties from liability in the event the creditors agree to such provision during the creditors’ general meeting.

3. Success rate

The success rate of the approval of voluntary/ involuntary reorganisations is approximately 80%. However, the success rate of the compliance of the Insolvency Plan is just slightly above 20%.

4. Pros and cons

The entitlement to submit an Insolvency Plan allows the debtor to strive for its financial restructuring, thereby avoiding liquidation. Moreover, the Insolvency Plan with assignment of assets allows for a more flexible form of realization then regular bankruptcy.

Other restructuring techniques: Special reorganization proceedings

Special reorganization proceedings are the alternative to bankruptcy proceedings for companies which are in financial difficulties and cannot pay their debts, but which are not in an insolvency state and may be capable of being financially restructured. The aim of such composition proceedings is the preservation of remediable companies by helping them to (partially) settle their debts and avoid liquidation.

Special reorganization agreements shall be concluded under supervision of a Provisional Administrator appointed by the Court (even though it may be suggested by the Parties) and the agreement reached is binding on all creditors whose claims arose prior to the granting of the moratorium.

1. Opening of the proceedings

Special reorganization proceedings are jointly requested by a creditor and the debtor. Such request is to be filed with the composition court.

The Party shall request the composition proceedings by submitting a reasoned application outlining (i) the financial situation of the debtor and (ii) the creditors’ benefits arising from the proceedings. Moreover, the debtor must submit all documents referred to above in the voluntary winding-up proceedings.

After receipt of the request, the court shall appoint a Provisional Administrator and the Debtor shall summon all his Creditors to start the negotiations.

The reorganization shall be concluded within two months’ time.

2. Restructuring methods

The Special reorganization proceedings may foresee all the restructuring methods available for an Insolvency Plan, and as described above.

3. Success rate

The success of composition agreements seems to be limited, given that such agreements are usually triggered by companies which are already in an insolvency state. Notwithstanding, such agreements are commonly used to restructure large corporate debtors with success.

4. Pros and cons of those proceedings

Pros: In contrast to regular bankruptcy proceedings, an agreement reached within these proceedings allows the debtor to regain full authority to dispose and to continue his business. Moreover, it provides a more expedited manner of distributing the debtor’s assets.

Cons: Notwithstanding, it may be used by debtors with the sole purpose to suspend the enforcement proceedings that have been previously filed by creditors.