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Under Portuguese law, “insolvency” is defined as a debtor’s inability to meet his commitments as they fall due.
Legal persons, and autonomous groups of assets and liabilities where no individual has unlimited personal liability for the debts, are also considered to be insolvent when their liabilities clearly exceed their assets.
Potential insolvency becomes actual insolvency in cases where the debtor applies to the court for a declaration of insolvency.
The law offers an extra-judicial conciliation process to permit the rehabilitation of companies facing insolvency or experiencing financial difficulties. This process is conducted by a public entity, the Institute for Support to Small- and Medium-sized Enterprises and Investment (IAPMEI).
The aim of this procedure is to reach an agreement between the company and all or some of its creditors that will pave the way for a viable recovery.
The fact that judicial insolvency proceedings are pending is no bar to the conciliation procedure. In that case, if insolvency has not yet been declared, the legal process can be suspended at the request of the company or of any interested party.
The agreement reached in the conciliation procedure must be set out in writing, and a public deed is legally required in certain cases.
The Insolvency and Corporate Recovery Code (Código da Insolvência e da Recuperação de Empresas) provides for a single type of proceedings without distinction between corporate recovery and insolvency. Creditors are required to assess the company’s financial viability and decide jointly whether recovery or liquidation is appropriate, and in what terms. The law also provides for a further process to liquidate the debtor’s assets and grants creditors the option to approve a plan which does not involve liquidation.
There is only one type of insolvency proceedings.
To initiate these proceedings, it has to be shown that the debtor is unable to meet liabilities as they fall due or, where legal persons and autonomous groups of assets are concerned, that the liabilities are clearly higher than the assets.
Insolvency proceedings can be initiated when any of the following events occurs:
The insolvency procedure must be initiated in the court of the debtor’s head office or domicile or, in the case of the insolvency of an unclaimed deceased estate, at the court of the deceased’s domicile at the time of death.
Application for a declaration of insolvency may also be made to the court in the location of the debtor's principal interests – this being defined as the place where he normally administers his affairs and which is recognisable as such by third parties.
The court assumes the key role of ensuring compliance with the legal rules governing the insolvency proceedings, with particular responsibility for making an initial evaluation of the insolvency petition and an assessment of whether the insolvency and payment plans approved by creditors are legal and can be ratified.
It is also required to assess a debtor’s alleged insolvency in the light of the facts emerging during the proceedings and, if it considers that the facts justify it, to issue a declaration of insolvency – although without the need to give an opinion on the company's potential for recovery.
The judge is responsible for ruling on the proof of debts and their ranking, and may also appoint a trustee for persons lacking legal capacity, and order suspension of the liquidation of the assets and the distribution of proceeds among the creditors.
Similarly, it is the court which orders closure of the proceedings.
The administrator is appointed by the judge who, when making the appointment, is required to take note of suggestions made by the debtor or by the creditors’ committee, where one has been formed. However, a creditors’ meeting may vote to replace the administrator appointed.
The administrator’s responsibilities, with the cooperation of, and subject to examination by the creditors’ committee, are as follows:
This is an optional body, whose existence and makeup are dependent on the wishes of the creditors’ meeting. The meeting may dispense with the committee nominated by the judge or may appoint one if he has failed to do so, and, in either case, may alter its makeup.
The court may refrain from appointing a committee where it considers this is justified in view of the limited size of the assets, the straightforward nature of the liquidation or the small number of creditors.
Where a committee exists, its agreement is required for legal acts of particular significance for the procedure.
The debtor is required to apply for a declaration of insolvency within sixty days from the date on which he becomes aware of his insolvency, or on the date by which he should have become aware of it, except in the case of an individual who, on the date when insolvency occurs, is not the owner of a company.
If the debtor is the owner of a company, there is a legal presumption of awareness of the situation of insolvency three months after a general failure to meet its tax or social security obligations or its obligations arising under employment or rental contracts.
During the proceedings, the insolvent debtor is required:
The creditor is the leading figure in the insolvency process.
He is entitled to request that the debtor be declared insolvent, and may also withdraw the application or abandon the proceedings, until such time as the final decision is made.
If the court rejects the insolvency petition, he may (provided he is the petitioner) appeal against the decision.
He may participate in the creditors’ meeting at which he has the power to decide, with absolute discretion in terms of the future of the company, whether it should be rehabilitated or liquidated, and in what terms.
He may accept or reject the payment programme where the debtor submits one.
He has the right to have the court-appointed administrator replaced, and may exercise the above-mentioned powers through the creditors’ meeting.
Right of appeal is limited to one level – i.e. appeal is only possible to the Court of Appeal. The only exception to this is in situations involving appeals against judgements in areas for which there is currently no uniform jurisprudence.
Unless stipulated otherwise, the estate of an insolvent party comprises all the debtor's assets on the date of declaration of insolvency by the court, together with assets and rights acquired by the debtor while proceedings are pending.
Non-attachable assets only form part of the estate if the debtor proffers them voluntarily and if their non-attachable quality is not absolute.
The law draws a distinction between the insolvency debts and the debts of the estate.
The former are claims on the insolvent party which arose prior to the declaration of insolvency. Claims which the creditor can prove to have arisen during the procedure are treated in the same way.
Debts of the estate are those created during the process, and include, for example, costs of the proceedings and the administrator’s remuneration.
As regards the debtor’s assets, the effect of the declaration of insolvency is to deprive the debtor immediately – either directly or through his directors – of the power to administer and dispose of the assets making up the estate. With effect from that moment, those powers are vested in the administrator, who takes over the role of debtor’s representative for all matters of a financial nature relating to the insolvency.
As a rule, acts undertaken by the insolvent party in breach of these arrangements are ineffectual.
The declaration of insolvency causes all the obligations of the insolvent party which are not subject to a condition precedent to become due for settlement.
Four categories of claim exist in the insolvency proceedings: secured, preferential, subordinated and unsecured.
Secured claims are those with security in rem over assets in the estate, up to the value of such assets. They also include special creditors’ preferential claims. This category not only covers the claims but also the interest on them.
Preferential debts are general creditors’ preferential claims over assets in the estate, up to the value of the assets over which such preferential claims exist, and where the claims are not extinguished as a consequence of the declaration of insolvency
Subordinated claims are those which will be settled only when the unsecured creditors have been paid in full.
The following claims are subordinated, except where they carry general or special creditors’ preferential rights, or are secured by legal mortgages which are not extinguished as a result of the declaration of insolvency:
Unsecured claims are all those not covered by the above categories.
Where there are justified fears of maladministration, the judge, on his own initiative or at the petitioner’s request, may order the protective measures necessary or appropriate to prevent any worsening of the debtor’s financial situation until such time as the declaration is made.
These measures may include, for instance, the appointment of a temporary judicial administrator with exclusive powers to administer the debtor’s assets, or to assist the debtor in administering them.
With the declaration of insolvency, the following claims are extinguished:
The law stipulates that, as a general rule, all acts within four years prior to the onset of insolvency proceedings may be avoided if they diminish, frustrate, hinder, threaten or delay the settlement of creditors' claims.
As a rule, avoidance presupposes bad faith by the third party, which is presumed in the case of acts undertaken or omitted within two years prior to the onset of insolvency proceedings and involving a person in a special relationship with the insolvent party, or from which such a person benefited, even if the special relationship did not exist at the time in question.
Once acts prejudicial to the estate have been avoided – with retroactive effect – the situation which would have existed if the action or omission had not occurred has to be reinstated.
In the insolvency declaration a period of up to thirty days is set during which creditors must apply for their claims to be admitted. As far as known creditors are concerned, this period begins from the date of service or notification of the creditor. For other creditors, the deadline is extended by five days and the period starts on the date of publication of the last notice in the Portuguese Official Gazette, or in a wide-circulation national newspaper.
Under Portuguese rules, creditors have to decide whether payment of their claims will be achieved by a full liquidation of the debtor's assets, or by restructuring the company and keeping it in business, either under the ownership of the debtor or of third parties. Their views must be set out in an insolvency plan approved in the creditors’ meeting.
If they opt for recovery, the creditors are at liberty to choose the most appropriate measures to achieve it.
In the creditors’ meeting called to assess the administrator’s report produced following the declaration of insolvency, a decision is also taken on whether the debtor’s establishment or establishments forming part of the assets of the estate must be kept going or closed down.
However, where authorised by the creditors’ committee, or where not so authorised but where the debtor does not object, or where the debtor objects but the judge authorises it, the administrator may close down the debtor's establishments prior to the date of the meeting called to assess the report.
If the creditors’ meeting instructs the administrator to prepare an insolvency plan, it may order suspension of the liquidation and distribution of the assets. This suspension ceases if the plan is not submitted within the following sixty days or if it is not approved.
Insolvency proceedings may be closed immediately with the declaration of insolvency where there are indications that the company’s assets are insufficient to pay the costs of the proceedings and the expected debts of the insolvent estate.
Further help can be obtained via the following websites:
Last update: 27-09-2006