Key elements of the new company insolvency and recovery code

UNFORTUNATELY, IN times of economic crisis, insolvency and recovery of companies is a subject that takes on greater importance.

Until now, in Portugal, a company that found itself in a difficult situation would have to face a very slow process in order to be liquidated: this process focused mainly on the recovery of the company, which was contrary to the trend throughout Europe. The main idea behind most European systems was that, when a company reaches such a stage, the most important element is to pay the company’s creditors.

The new Company Insolvency and Recovery Code has, therefore, created a simpler and more flexible process for a company that finds itself in such a situation. This new process is faster and requires less intervention from the court, because a more important role is given to a creditor’s commission and to the insolvency administrator. There has also been an increase in the liability of the directors and administrators of the insolvent company.

When the creditors have not agreed on an insolvency plan, the process to be followed can be broken down in to the following steps.

Step 1

The first step is instigated by the actual company, which has an obligation of commencing insolvency proceedings within 60 days of its insolvency. The public prosecutor, or any creditor, may also commence these proceedings.

Step 2

The judge will analyse the request presented as well as any irregularities, in an attempt to settle these and allow the process to continue. If the judge validates the request, the company can be immediately declared insolvent. The judge will also order that measures be taken in order to prevent the company’s assets from being defrauded or reduced due to bad management decisions.

Step 3

At this stage, therefore, the judge issues an order whereby the company is declared to be insolvent. This order is of great importance as it determines if the company should continue administrating its assets, or if these assets should be apprehended. It will also set out the date and location of the creditors meeting, whether the company’s assets are sufficient to pay the court costs and debts etc.

Step 4

This decision is then notified to the five biggest creditors and published in a newspaper. It might seem that this contradicts the idea that the judges have less intervention because the most important role is seemingly still theirs, but the judge’s decision can now be contested, for a number of reasons, and this will suspend the liquidation process. The most important consequence of this court order is the transfer of the powers of administration and disposal of assets, from the company to the insolvency administrator.

Step 5

The court will then order all of the company’s assets to be seized, and the insolvency administrator and the creditors’ committee are appointed as receivers. The insolvency administrator will have to draw up an inventory of all the assets, and this inventory, as well as a list of all the creditors, is part of the report that the insolvency administrator has to attach to the court proceedings.

Step 6

This is a crucial stage where an appraisal is made of the company’s economic situation: the report fully details the accounts of the company, the possibility of maintaining the company, the need to draw up an insolvency plan and the consequences for the creditors in each of the scenarios presented.

Step 7

Bearing in mind the possibility of the existence of more creditors, in addition to those expressly mentioned in the insolvency administrator’s report, there is a subsequent 30-day period during which any person can claim his credits from the insolvent company.

Step 8

The fate of the company lies in the hands of the creditors, when the creditors’ meeting is held to examine the insolvency administrators’ report. The final decision will be one of two:

1. to allow the continuation of the company through the implementation of an insolvency plan to be drawn by the insolvency administrator; or

2. to liquidate all its assets in order to allow payment of the acknowledged credits in the same order as established by a further decision, which graduates all the credits.

Step 9

One of the major novelties of this new code is the Qualification Incident. The goal of this step is to unveil the causes which led to the insolvency situation. As a result, the administrator(s) may be considered liable for the insolvency, in which case they can be prohibited from undertaking any commercial activity during a period of two to ten years. In addition, they lose any credits they may have over the company’s assets, and are under obligation to return any assets received as payment of said credits. This means that a reckless or intentionally disastrous administration of the company is severely punished.

The legislator therefore intended to implement a more straightforward and just process, affording the specialist knowledge of the insolvency administrator (which the courts themselves do not have) and making administrators who recklessly or intentionally inflict losses on the company, liable for their actions.

In order to grow, the Portuguese economy needs straightforward, fair and reliable methods and tools, and this new Company Insolvency and Recovery Code seems to be a step in the right direction.

Inês Mendes Oliveira – ioliveira@ndr.pt

João Cunha Vaz – jcvaz@ndr.pt