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Effects of Insolvency Under Portuguese law

The Insolvency Proceeding

I. The modifications introduced in Portuguese insolvency legislation by the above- mentioned Insolvency and Recovery Code (CIRE) aimed to implement a more correct perspective of the purpose and the structure of insolvency proceedings.[1]

The principal purpose of insolvency proceedings is the satisfaction in a more efficient way of the creditors’ rights. As the assets of the debtor represent the general security of the credits, it is incumbent to the creditors to decide about the effectiveness of that security. Using the wording of the normative act that approved the CIRE, this will be the better way to protect “public interest in good functioning of the market”.

When the insolvency includes a business enterprise which did not create the necessary income to comply with its obligations, the better solution for creditors may either be the closure of the enterprise or the continuity of its exploration. But the option for the continuity of business must depend on the valuation of the creditors. That valuation will always represent the better way to protect the public interest in good functioning of the market, by maintaining viable enterprises and eliminating those which are not feasible.

In conclusion - and repeating the preamble of the CIRE -, insolvency law must regulate the elimination or the financial reorganisation of the enterprise, in accordance with a market approach, by assigning the central role to the creditors (converted, by virtue of the insolvency, in “economic owners of the enterprise”).

II. The CIRE intended to unify the various proceedings in a unique proceeding of insolvency, based on the liquidation of the assets of the debtor, but granting the creditors the possibility of approving a special plan outside this regime, either providing for the liquidation in different terms, or providing for the reorganisation of the enterprise, whether or not in the ownership of the insolvent debtor.

Indeed, Article 1 CIRE in its original version stated: “The insolvency proceeding is an executive universal proceeding which has as purpose the liquidation of the assets of the insolvent debtor and the distribution among the creditors of the sum obtained, or the payment to the creditors according to an insolvency plan based, in particular, on the recovery of the business enterprise included in the insolvency”.

In consistency with that approach, Article 192(1) CIRE fixed: “The payment of the credits over the insolvency, the liquidation of the assets of the insolvency and its distribution among the owners of those credits and the debtor, as well as the responsibility of the debtor after the conclusion of the insolvency proceeding, may be regulated within an insolvency plan, by derogation of the rules of the present Code”.

The abolition in the CIRE of the dichotomy “recovery/bankruptcy” and the approach based on the insolvency as the only objective foundation of the procedure determined the change of terminology and the characterisation of the procedure as an “insolvency proceeding”. In this context, “insolvency” is different from “bankruptcy”: the impossibility of compliance with the obligations (the basis of “insolvency”) does not imply inevitably the impossibility of the financial reorganisation of the enterprise (the basis of “bankruptcy”).

III. As a general rule, upon the declaration of insolvency the debtor is immediately deprived of the administration and disposition powers concerning the assets belonging to him; those powers shall be exercised by the insolvency administrator (Article 81(1) CIRE).[2]

Nevertheless, in the decision declaring the insolvency of an enterprise, the judge may determine that the administration of the insolvency is assigned to the debtor, if: (a) the debtor has claimed for the administration of the insolvency; (b) the debtor has presented, or commits himself to present within a period of 30 days after the decision declaring the insolvency, a plan for the continuity of the exploration of the enterprise; (c) there is no reason to fear delays in the proceeding or other disadvantages to creditors; (d) the applicant for the insolvency, who is not the debtor, agrees on that solution (Article 224(1) and (2) CIRE).[3]

IV. The rationale of insolvency proceedings is the principle of par conditio cre- ditorum: all the creditors of the same debtor must exercise their credit claims in the scope of the same proceeding and according to the same conditions. Each creditor only has the privileges and the security interests recognised by insolvency law and within the limits recognised thereby.

As a result, Article 90 CIRE determines that creditors of the insolvency may only exercise their rights according to the provisions of the Code, during the insolvency proceedings. They have no recourse to the courts to initiate or to continue independent actions outside the insolvency proceedings.

Furthermore, the declaration of insolvency determines the maturity of all the obligations of the debtor, which are not subject to a condition precedent (Article 91(1) CIRE).

After the declaration of insolvency, set-off between credits and debts of the insolvency is not permitted except in very strict conditions (Article 99 CIRE).

Additionally, the decision declaring the insolvency determines that all limitation periods that operate to the advantage of the debtor don’t run during the insolvency proceedings (Article 100 CIRE).

V. All the creditors of the insolvent at the time of the declaration of insolvency are considered insolvency creditors, whichever may be their nationality or domicile.

Some of the credits over the insolvency are “secured credits”, since they benefit from security interests in rem (Article 47(a) CIRE).

However, the declaration of insolvency implies the extinction of certain security interests. Article 97 CIRE states the extinction, inter alia, of security interests in rem concerning immovable property or movable property subject to registration, which are already created, but at the time of the declaration of insolvency are neither registered nor object of an application for registration.

“Secured credits” are paid after deduction of the amounts necessary to satisfy the debts of the insolvency (Article 172(1) CIRE). The payment to the “secured creditors” is effected immediately after the corresponding liquidation - before any “common creditor” -, and following the correspondent priority (Article 174(1) CIRE).

VI. Regarding ongoing business, the law assigns to the insolvency administrator a right of option between the performance of the contract and the refusal to comply (see the “general principle” in Article 102 CIRE, with the conditions of its exercise, the “waiting period” and the exceptions to the “general principle”).[4]

This right of option assigned to the insolvency administrator is the consequence of the basis of insolvency. Indeed, the insolvency-related event is the cessation of payments and if the insolvent were complied to the performance of ongoing contracts, such payments would represent an advantage to some creditors in detriment of the others. So, as the performance of some contracts may be useful for the insolvency, the insolvency administrator has the possibility to opt between the performance of the contract and the refusal to comply, as the case may be.

VII. In cases of title reservation agreement or of financial leasing agreement, Article 104(1) and (2) CIRE state that the insolvency of the conditional seller or of the lessor does not affect the possibility of the buyer or of the lessee to claim for the performance of the contract, if the asset has been delivered to him at the time of the declaration of insolvency.

This solution intends to protect the expectations of the buyer or of the lessee to acquire the property right over the asset and complies with Council Regulation (EC) 1346/2000 of 29 May 2000 on insolvency proceedings (see its Article 7(2)).

VIII. If the insolvent is the buyer or the lessee and if the asset remains in his possession, Article 104(3) CIRE determines the applicability of the right of option of the insolvency administrator, as laid down in Article 102, with a special provision concerning the “waiting period”.

The title reservation agreement, in contracts of sale of a certain asset, when the insolvent is the buyer, is only opposable to the insolvency if it were agreed in writing before the delivery of the asset (Article 104(4) CIRE). This rule does not exist for leasing agreement.

IX. After the Court hearing - where the insolvency administrator and the commission of the creditors may provide their statements -, the judge takes the decision about the verification and graduation of the credits.

The graduation is universal regarding the assets of the insolvency and it is specific for the assets that are object of a security right (Article 140(1) and (2) CIRE).

X. The insolvency administrator must provide for conservation of insolvent’s rights and for continuity of the exploration of the enterprise, preventing, when possible, the deterioration of its economic situation (Article 55(1)(b) CIRE).

When the decision declaring the insolvency is res judicata, the insolvency administrator must sell all the assets included in insolvency; however, he is required to provide for the anticipated sale of the assets which may not be preserved because they are subject to deterioration or depreciation. The insolvency administrator shall notify the debtor, the commission of the creditors and the judge about this situation (Article 158 CIRE).

  • [1] For developments about insolvency in Portuguese law: Novo Direito da Insolvencia, Themis,special edition, 2005; C. Serra, O Regime Portugues da Insolvencia, 5th ed., Coimbra, 2012;L.M. Leitao, Direito da insolvencia, 5th ed., Coimbra, 2013.
  • [2] R.P. Duarte, “Efeitos da declaragao de insolvencia quanto a pessoa do devedor”, Themis, specialedition, 2005, p. 131 ff.
  • [3] The administration of the insolvency is also assigned to the debtor if the creditors so agree in theassembly where the report was examined, in the conditions laid down in Article 224(3) CIRE.
  • [4] J. Oliveira Ascensao, “Insolvencia: efeitos sobre os negocios em curso”, Themis, special edition, 2005, p. 105 ff.
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