This content is from: Portugal

Portugal amends insolvency route through recovery plan

Nuno Gundar da Cruz, Catarina Martins Morão and Luís Possolo of Morais Leitão consider how Portugal has legislated to resume its economic growth and reinforce the objective of convergence with Europe

Since March 2020, the Covid-19 pandemic has led to several political decisions being taken, which – although necessary to tackle the transmission of the virus – has resulted in a general downturn in economic activity with harmful economic and social consequences worldwide.

Due to the serious impacts of the pandemic, a strategic community instrument was created to promote economic convergence and the resilience of the EU’s economies, thus mitigating the economic and social impacts of the crisis. The temporary recovery instrument designed by the European Council is the ‘Next Generation EU’, which has helped frame the Portuguese Recovery and Resilience Plan (PRR).

The Portuguese Recovery and Resilience Plan

The PRR is a programme with an execution period until 2026 that aims to implement a set of reforms and investments that is expected to enable Portugal to resume sustained economic growth, reinforcing the objective of convergence with Europe throughout the next decade.

One of the components of the PRR – Component C18 – which concerns the area of economic justice and business environment, focuses on countering difficulties caused by the pandemic and its stemming recession, such as the potential increase of legal proceedings or of debt collection procedures. This seeks to ensure an effective protection of both creditors and debtors so as to lessen the entropies that may be felt within the judicial system, namely in terms of the length of judicial proceedings, especially in the areas of enforcement and insolvency proceedings.

Considering the constraints identified, it was thought by the Portuguese government to be of vital importance to expedite and redefine the insolvency proceeding, in order to contribute for a more effective and resilient judicial system to the benefit of micro, small and medium-sized companies and national investors.

Implementation of the measures

The Portuguese Draft Law No.115/XIV/3, which is yet to be approved by the Portuguese parliament, embodies the goals referred to above by offering a normative body to a set of guidelines provided for under Component C18 of the PRR.

The following innovations introduced by Portuguese Draft Law No.115/XIV/3 are worth mentioning here:

Reduction of restrictions imposed upon the exercise of the office of judicial administrator by eliminating the mandatory setting of a defined number of candidates to the internship in each recruitment procedure;

  • Simplification of the procedure of the incident of verification of credits and ranking of claims in insolvency proceedings, by the attribution to the insolvency administrator of the responsibility of submitting, together with the list of recognised claims, a proposal for their ranking, enabling the judge, in the event of agreement and in the absence of any oppositions, to simply homologate both documents, thus allowing for a more agile procedure;
  • Entrusting the insolvency administrator with the task of drawing up a liquidation plan, with time-definite milestones, to sell the assets comprising the insolvent estate; and
  • Establishing mandatory partial payments to creditors whenever the insolvent estate includes proceeds of liquidation of assets with a value equal to or greater than €10,000 (approximately $11,572) which destination is not disputed within the insolvency proceedings.

Portuguese Draft Law No.115/XIV/3 also includes other relevant legislative developments, such as the reinforcement of the transparency of the procedures to be adopted by the judicial administrators regarding collections for the insolvent estate, the attribution to the former of the duty to present a proposal for the final distribution of payments to creditors, which already corresponds to the judicial practice, or the possibility of the submission of accounts occurring within 10 days of the date of the liquidation’s closure.

In addition to this, it is also relevant to note that the Portuguese Draft Law No.115/XIV/3 settles the case law and scholar debate around the exhaustive nature of the catalogue of subordinated claims and of the catalogue of specially related persons.

Finally, the draft law is also responsible:

  • For the transformation of compensatory claims arising from the termination of employment contracts by the insolvency administrator after the debtor’s declaration of insolvency into claims over the insolvency,
  • For the softening of the majority requirements needed for the approval of the insolvency plan; and
  • For the lowering of the amount of the deposit that secured creditors need to pay in order to submit a proposal for the acquisition of the secured asset.

In conclusion, the PRR defined general guidelines to streamline insolvency proceedings which are now on the verge of being implemented by concrete measures contained in the Portuguese Draft Law No.115/XIV/3.

Nuno Gundar da Cruz
Senior lawyer, Morais Leitão
Catarina Martins Morão
Associate, Morais Leitão
Luís Possolo
Trainee, Morais Leitão

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