PORTUGAL: An Introduction to Restructuring/Insolvency

In recent years, insolvency and – in particular – restructuring have been the focus of significant legislative measures aimed at achieving greater harmonisation of EU legislation and beyond to enhance the functioning of cross-border capital markets.

Changes in Portuguese Insolvency Law

Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 (the “Directive”) was transposed in Portugal in 2022 by Law No 9/2022 of 11 January (“Law No 9/2022”). This law primarily introduced changes to the so-called Special Revitalisation Process (Processo Especial de Revitalização, or PER). The PER, a court proceeding, remains the preferred restructuring tool for companies that are facing financial difficulties but which are not yet insolvent. The process enables companies to reach a restructuring agreement with the majority of their creditors (the agreement can be concluded before the PER – ie, out of court – or during the PER), with a view to revitalising the company. Once the court sanctions the agreement, it becomes binding on all creditors, even those not involved in the PER or that voted against the agreement.

The most significant changes brought in by Law No 9/2022 include:

• the option (or, in the case of large companies, obligation) to divide categories of creditors (secured, privileged, common, and subordinated creditors) into subcategories that share common interests – thereby facilitating the approval of restructuring agreements by the favourable vote of a majority of categories, which may not correspond to a majority of claims;
• establishment of court control over the viability of the restructuring agreement; and
• a number of measures were introduced to protect financing creditors and to encourage financing during the PER or during the term of the restructuring agreement, which notably include granting benefits – even if financing is provided by partners, shareholders or persons specially related to the company – connected to the prioritisation of payments, the unassailability of financing, and lender protection from civil liability on grounds that the financing was detrimental to creditors.

Impact

During the coming years, as was the case in 2024, it will be necessary to observe the practical implementation of these changes and to study their impact on companies and their recovery. It will also be necessary to see how the courts handle these changes.

As a result, a number of practices are likely to remain prevalent, as follows.

• Distressed companies will try to use subcategories of creditors to obtain approval for restructuring agreements that lack the support of a majority of creditors (but, ultimately, only a majority of subcategories). Recent experience demonstrates that distressed companies are increasingly using subcategories of creditors to combat dissent from credit institutions, which normally hold most credit claims – most of which are, furthermore, likely to be secured. This is expected to lead to a tug-of-war between credit institutions and distressed companies (and possibly with other creditors). This, in turn, will intensify legal debates on notions of claim classifications (especially what secured and unsecured claims are considered to entail) and basic principles such as creditor protection and “no creditor worse off”.
• Increased intervention by the courts regarding the viability of restructuring agreements approved by creditors will involve financial analysis and will have the following direct ramifications:
  • discouraging insolvent companies (or those with no real prospects of recovery) from resorting to the PER; and
  • an increased technical burden on the courts, which could possibly lead to greater delays in completing the procedure – to avoid judicial overload, it will be important for distressed companies and/or creditors to help the court by providing the necessary technical elements.
• Increasing the attractiveness of distressed companies to investors will encourage the revitalisation of more companies, thus triggering an upsurge in the use of the PER and a decline in insolvency cases. In order to enhance the PER’s prospects of success, it will also be necessary to consolidate in case law the understanding that interim financing benefits from protection even when a restructuring agreement is not ultimately approved.

Therefore, this period is one of adaptation to and encouragement of the use of the PER, with a view to saving as many economically viable companies as possible. Statistics from the Ministry of Justice for recent years show that, so far, these changes have not had a significant impact on the number of pending restructuring (PER) and insolvency cases. While the number of pending PERs has increased slightly, the number of insolvency proceedings has remained stable.

As regards the duration of proceedings, it is currently impossible to draw any conclusions as to the impact of the changes brought in by Law No 9/2022. PERs continue to be swift, lasting an average of five months. However, this period may increase slightly if a court has to conduct a more in-depth study to reach a conclusion on the viability of the restructuring agreement.

Challenges

As for insolvency proceedings, it will be necessary to observe how investors approach opportunities in negotiating and concluding asset deals and how insolvency practitioners and major creditors react to increasingly sophisticated players that are demanding security interests in relation to the assets they are acquiring.

The location and seizure of crypto-assets is another topic that is increasingly on the agenda, especially given the difficulty in locating and the complexity of seizing those assets.

One challenge that will remain is the need to shorten the duration of insolvency proceedings. Although it has no impact on the duration of the insolvency process itself, Law No 9/2022 did introduce an essential change for creditors. Partial apportionment is now mandatory – meaning that creditors will no longer have to wait for the sale of all the assets within the insolvent estate to be paid, even if only partially. Creditors have been increasingly active in demanding that insolvency practitioners make partial payment of the proceeds recovered.

Outlook

While Portugal is still in the process of adapting to recent legislative changes, the proposal for a new EU Directive (2022/0408/COD) is already on the horizon, suggesting significant changes in the field of insolvency proceedings – namely, regarding:

• rules on avoidance actions to prevent debtors from reducing the value that creditors can obtain following the insolvency of a company;
• the duty of a director to file for insolvency proceedings;
• new obligations on EU member states to produce a factsheet with practical information on the main features of their domestic laws on insolvency proceedings; and
• asset tracing.

The new EU Directive is still under discussion.

In this dynamic environment, this is above all a time of opportunity and incentive for the recovery of companies. This is of direct benefit to investors and workers, in particular, but also contributes to the preservation of the business sector and the economy overall.