Member Article

GOVERNMENT PUBLISHED PROPOSAL TO CHANGE THE INSOLVENCY REGIME


Insolvency proceedings are currently governed by the Insolvency and Corporate Recovery Code approved by Decree-Law 53/04 of 18 March (referred to here by its Portuguese initials ‘CIRE’).

From its entry into force to date, this legislation has been subject to five legislative amendments. The first essentially dealt with corrections of mistakes and typographical errors and with clarification of its literal content so as to make sure that the entry into force of the sweeping changes to the failing system of rules that this new piece of legislation introduced was not in any way prejudiced by any doubts that might be raised in respect of the legal drafting1.

The material relevant to insolvency assumes particular importance in respect of economic and social development. In fact, a fast and effective resolution of differences in respect of the assets of the debtor takes on great relevance for the economic and business fabric of a country.

For this reason and in face of the current difficult economic situation and the commitments made upon signing the memorandum with the Troika, the Portuguese Government planned to review the current insolvency regime, essentially focusing on changes that (i) speed up the process (ii) encourage clear and unequivocal answers to the problems that arise in this area, (iii) create adequate conditions to allow the recovery of companies that are still capable of carrying on their activity and (iv) ensure the effective and speedy satisfaction of the creditors. Thus, the Portuguese Government proposes:

Reduction in time limits

With the proposal to amend the CIRE, the Government seeks to reduce the legal period within which the debtor must present itself for insolvency. Currently, the debtor is under a legal obligation to present itself for insolvency within 60 days of becoming aware of the insolvency situation and the Government wished to reduce this period to 30 days, so as to give greater protection to creditors by limiting the existence in the economic market of economic agents in an insolvency situation.

The time limit to launch post credit claims is reduced by half, from one year to six months. The period for the action to be brought to an end on the basis of a negligent failure to act on the part of the petitioner is also reduced from three months to 30 days.

Simplification

To speed up and simplify the process of confirming and ranking of credits, the Government proposes making the attempt at conciliation optional, whereas the current law makes it mandatory. This gives the judge full discretion to decide on whether or not this is appropriate to the case and to dispense with it if he considers it to be unnecessary.

Besides this, the government seeks to make sweeping changes to the rules and procedure for the process of classifying the insolvency. This process now depends on one requirement – the existence of indications that the insolvency situation was created by the fault of the debtor or by one if its managers.

It should be noted that, currently, the act of classification is declared at the moment the declaration of insolvency is made, and only after the opening of the same, and as part of this process, is the evaluation carried out to establish whether or not there were facts that amounted to guilty insolvency.

In this way, the measure proposed seeks to put an end to this inevitability, as practice shows that the opening of a process is not always justified when the insolvency of an agent is declared. On the contrary, this process is only justified when there are indications of fault on the part of the agent in the insolvency situation.

There is also a proposal to simplify the procedure for publishing that is used now. Publication of acts in the Diário da República (official gazette) is to be substituted by publication on the Portal Citius (site of the court system). The traditional publication of a notice is also to be substituted by an electronic notice in actions brought for post credit claims.

Strengthening of the powers of the judge

Despite the fact that the reform of insolvency legislation through the CIRE was informed by a desire to take matters out of the hands of the courts, at the moment, the Government considers it necessary to strengthen the powers of the judge on specific matters.

In particular, there is a proposal to increase the powers of the judge to manage the process in terms of suspending creditors’ meetings, making the rules on this issue more flexible to make it possible for the meeting to be suspended as many times as may be necessary to reach an agreement and to make it possible to extend the maximum period for suspension.

There is also a proposal to increase the powers of the judge over the question of maintenance for minors who depend on the insolvent, by allowing the judge to set the level of maintenance for minors in order to guarantee the protection of the rights of children and the effective supervision of these rights.

Connection with enforcement proceedings

So as to use the public list of enforcement proceedings to its best advantage, the Government proposes that, in defence of the legality and regularity of judicial business, the Public Prosecutor will have the express duty to begin insolvency proceedings for all those who, not having assets that may be seized or attached, are included on the said list.

Promotion of the out-of-court conciliation process

The out-of-court conciliation process is of great importance in a strategy of recovering and making viable companies in economic difficulties. Given the flexibility and efficiency of this process, given its capacity for speeding up resolutions and raising company recovery rates, given the reduction in losses by creditors with this approach, as well as the positive social and economic impact of the process when compared to the liquidation of a company and also given its contribution to greater efficiency and speed in the judicial system, the Government aims to promote the use of this process.

For this purpose, it proposes to establish rules that any negotiations that take place between the debtor and the entities that provide it with outside capital with a view to helping it in its recovery, in the context of an out-of-court conciliation process are safeguarded against this capital becoming part of the insolvent estate. This safeguard will allow potential investors that wish to seek solutions for debtors in a difficult economic situation not to see their deals set aside in favour of the insolvent estate if such debtors are declared insolvent. This measure will bring dynamism and greater ease to investment in entities that need financing and make this investment safer for potential investors.

Furthermore, to try to ensure that all the advantages of this mechanism are realised, the Ministry of Justice in cooperation with the Ministry of the Economy and Employment, the Ministry of Finance, the Ministry of Social Security and the Bank of Portugal, have prepared a set of guiding principles for out-of-court recovery of debtors, to be followed by the parties to these proceedings.

Also with a view to promoting this process, as well as a policy of recovery of companies in a difficult situation, the Government is proposing the establishment of a judicial procedure for approval of restructuring plans negotiated between creditors and the debtor outside the courts. The aim of this procedure is that, in the event of an agreement for the recovery of the debtor signed by the debtor and a significant group of creditors, not necessarily all of them, the debtor may seek the approval of the agreement by a judge, through a procedure that is necessarily fast and, by this means, guarantee that all creditors are bound by the agreement, including those that were not party to it. This makes the mechanism of the out-of-court conciliation procedure much more attractive.

Final comments

In summary, the changes set out here go right to the heart of the two main concerns of the Troika and which pervade the Memorandum of Understanding insofar as it relates to insolvency - the slowness of insolvency proceedings and the difficulty of recovering companies in financial difficulties.

In this respect, alongside measures aimed at promoting recovery mechanisms, giving greater security to investors that opt to invest in a company that is in a difficult economic situation, the law includes measures that speed up insolvency proceedings by reducing time limits and simplifying the procedure.