Restructuring & Insolvency Overview
Portuguese Insolvency Measures in Response to COVID-19 Pandemic
At the end of 2019, after a slow and costly recovery, Portugal was gradually correcting some of its economic and social weaknesses, which had been exacerbated by the 2008 subprime financial crisis. Among the benchmarks, we highlight that, for the first time in the last 50 years, the Budget Balance was positive, the Public Debt, although high, followed a clearly declining trend and the GDP recorded its 25th quarter of uninterrupted growth. The unemployment rate stood at 6.5%, the lowest since 2002, and wages had grown approximately 2% in 2019. The banking sector revealed improvements, considering non-performing loans were 6.5% in 2019, while by 2015 they had reached 15.5%.
On 30 January 2020, this positive cycle was disturbed following the declaration by the World Health Organization of a public health emergency of international concern caused by COVID-19, and later on, by the pandemic declaration dated 11 March 2020.
In Portugal the pandemic was felt relatively later than in the countries geographically closer. When the first two cases of COVID-19 were declared on 2 March 2020 in Portugal, in neighbouring Spain there were already 192 cases, in France 178 and in Italy the impressive figure of 2033.
The state of emergency was declared in Portugal on March 19, two days following France, five days following Spain and nine days following Italy.
The pandemic (and the uncertainty about its outcome) caused a rapid disruption in international supply chains, consequently affecting companies’ productive capacity and an unimaginable plunge in the consumer and business confidence. This led to a drastic reduction in private consumption and in turnover, forcing businesses to shut down and causing thousands of unemployed.
Faced with the deterioration of the macroeconomic scenario, and like several other countries, following March 2020 and throughout the remaining of 2020, Portugal put together an unparalleled package of specific measures to help stabilise the economy, support businesses and mitigate the financial impact of COVID-19, such as postponement of rent payments, supply of credit facilities or simplified lay-off.
Even though these Government measures were essential, notably from a health and security perspective, they caused a powerful economical backlash and pushed a considerable number of companies into a one-off insolvency situation which would not face any solvency problems otherwise.
Specifically with regard to insolvency or restructuring legislation adopted to help businesses cope with the economic crisis, Law 4-A of 6 April 2020 (as amended), came into force after being fast-tracked through Parliament.
Even though it does not modify the very grounds for insolvency, Article 6-A of Law 1-A/2020 (which was introduced by Law 16/2020, of 29 May), suspended the 30-day deadline for debtors to file for voluntary insolvency, provided for in Article 18 no. 1 of the Portuguese Insolvency and Recovery Code (CIRE), with effects from 7 April 2020.
Since it established a mere suspension, the aforementioned 30-day deadline will not start afresh, but will continue as soon as the law is revoked (when the states of emergency or pandemic are recalled). It is important to highlight that Article 18 no. 1 CIRE specifically establishes that when a company is unable to meet its past due obligations, the board of directors (and each of its members) have the duty to file for insolvency within 30 days from the date of knowledge of the situation (or the date on which it should have been known), failing which serious misconduct may be presumed for the purpose of classifying the insolvency as culpable, with all the consequences that this may entail, notably, on the responsibility of such directors. Consequently this measure allows the board of directors of a debtor company to duly consider (and not to rush) filing for insolvency when a company is unable, for conjunctural reasons, to meet its due obligations.
Nonetheless, this suspension of the debtor's deadline to apply for voluntary insolvency does not prevent any creditor from applying for a declaration of insolvency of the debtor company, as long as at least one of the requirements laid down in Article 20 of CIRE are fulfilled.
In such a situation, the stigma usually associated with such type of proceedings, alongside with its impact on a company valuation, cannot be avoided, even if a recovery plan is approved at the insolvency proceedings or even if the insolvency is not ultimately declared.
Consequently, a company which is unable to meet its due obligations is not obliged to file for insolvency, nevertheless is prevented from having recourse to the pre-insolvency mechanisms established in CIRE to enable its recovery, such as PER (Special Revitalisation Process) or RERE (Extrajudicial Companies Recovery Regime), as these only apply to companies which are in a difficult economic situation or in imminent insolvency, and not to companies which are already currently insolvent.
On 27 November 2020 there was also passed Law 75/2020 of 27 November, which not only established an Extraordinary Procedure For Companies’ Viability (PEVE), but also fine-tuned the pre-existent mechanisms for economic recovery (such as PER’s and RERE’s), as well as the insolvency proceeding to the challenging obstacles faced by companies as a result of the economic crisis triggered by COVID-19, in order to try to avoid the liquidation of businesses facing critical situations. It will be in force until 31 December 2021; however the Government may extend PEVE’s duration.
The main and most important measures are:
1. The establishment of PEVE, which may apply to companies which are in a difficult economic situation or in an imminent or present state of insolvency triggered by COVID-19; This measure provides companies already insolvent – which, for that reason, do not have the chance to engage in a PER – an opportunity to engage in an “upgraded PER”, which binds only the creditors indicated by the company protection, provides tax advantages similar to the ones stipulated in insolvency procedures and protects the company's internal financing, as long as they prove that their poor economic situation resulted from the COVID-19 pandemic and that they are still susceptible to be viable.
The aim is to judicially certify the extra-judicial agreement concerning the restructuring of liabilities obtained between the company and its creditors, in order to legally reinforce it. Alongside with such purpose, it also intends to guarantee temporarily to the company:
(i) the maintenance of essential public services (e.g. water, electric power, electronic communications, postal services, waste management services);
(ii) the suspension of legal proceedings (including insolvency proceedings); and
(iii) protection to the judicially homologated agreement, notably in the event of a subsequently declared insolvency.
2. The establishment of a credit privilege to partners, shareholders or any other specially related persons of the company, who finance its activity during a PER, identical to the one established in CIRE to other creditors;
This measure is bound to incentivise shareholders or any other specially related persons of the company to come to the company's aid and remedy the lack of liquidity by granting loans and/or providing the necessary guarantees to obtain financing, since these credits will no longer qualify as subordinated in a future insolvency. In addition, there is no longer the risk that such business between them and the insolvent company in the two years preceding the declaration of insolvency (where the bad faith of the partners was presumed with all the consequences), being terminated for the benefit of the insolvent estate.
3. The definition of an exceptional and temporary regime for the extension of the deadline for the conclusion of the negotiations initiated with a view to the approval of a recovery plan or payment agreement, as well as for the granting of a deadline for the adaptation of the proposed insolvency plan, in the framework of the COVID-19 pandemic;
4. Provides for the application of RERE to companies which are currently insolvent as a result of COVID-19;
5. It lays down the obligation to carry out partial assessments in all pending insolvency proceedings in which liquidation proceeds are deposited in excess of EUR10,000;
6. Provides for priority to be given to the processing of applications for the release of securities or guarantees provided under insolvency proceedings, special revitalisation proceedings or special proceedings for settlement of payments.
Despite a few amendments that could be made, the aforementioned measures may well be the oxygen balloon that companies in economic difficulties due to COVID-19 may need to engage to survive in such uncertain times.