Financial difficulties do not necessarily lead to insolvency. The Portuguese Insolvency and Corporate Recovery Code (CIRE) provides procedures that allow the debtor to negotiate a plan with creditors to settle its debts, with the protection of the court during the negotiations. These tools have one requirement in common, however: they can only be used before the situation becomes irreversible. Acting in time is therefore decisive.

Choosing between the PER, the PEAP and insolvency is not just a matter of the type of debtor. It is necessary to assess economic viability, the make-up of the liabilities, the guarantees given and the position of the main creditors.

Three different situations

  • Difficult economic situation: the debtor has serious difficulty in meeting its obligations on time, because of a lack of liquidity or because it cannot obtain credit.
  • Imminent insolvency: there is not yet a general failure to pay, but it is foreseeable in the short term.
  • Current insolvency: the debtor is unable to meet its obligations that have fallen due (Article 3 of the CIRE). For legal persons, there is also insolvency when liabilities clearly exceed assets.

The PER and the PEAP are intended for the first two situations. In the third, the route is insolvency proceedings.

PER: Special Revitalisation Proceedings

The PER (Articles 17-A et seq. of the CIRE) is intended for companies in a difficult economic situation or facing imminent insolvency that are still capable of recovery. The process starts in court, at the company's request, with a written declaration from one or more creditors who are not specially related to the company and who hold at least 10% of the non-subordinated claims, together with the documents showing the company's situation.

Once the process is admitted, an provisional judicial administrator is appointed and a negotiation period begins, as a rule of two months, extendable by one more. During the negotiations, and within the terms and limits provided by law, enforcement actions to recover claims against the company are stayed, for a maximum period of four months, extendable by one month, which allows the company to keep operating while it negotiates.

If the recovery plan is approved by the creditors, with the legal majorities, and approved by the court, it binds all creditors, including those who voted against or did not take part. Since the reform introduced by Law no. 9/2022 of 11 January, voting may take place by classes of creditors.

For those who prefer a confidential negotiation without the involvement of the court, there is also the Out-of-Court Business Recovery Regime (RERE), approved by Law no. 8/2018 of 2 March.

PEAP: Special Payment Agreement Proceedings

The PEAP (Articles 222-A et seq. of the CIRE) follows a similar logic, but is intended for debtors that are not businesses, such as individuals and households. Here too there is a negotiation with creditors overseen by an provisional judicial administrator and, once the agreement is approved by the creditors and the court, it binds all creditors.

When insolvency already exists

Companies have a duty to file for insolvency within 30 days of the date on which they become aware, or should have become aware, of that situation (Article 18 of the CIRE). Failure to comply with this duty gives rise to a presumption of gross negligence on the part of the directors when the insolvency is classified (Article 186(3) of the CIRE), with personal consequences for those who managed the company. Individuals who do not own a business are exempt from this duty.

Insolvency does not necessarily mean closure: an insolvency plan (Articles 192 et seq. of the CIRE) may provide for the recovery of the company. For individuals, the discharge of remaining liabilities (Articles 235 et seq. of the CIRE) makes it possible, if the legal requirements are met, to obtain the cancellation of the debts left unpaid at the end of an income assignment period, which is currently three years. In certain circumstances, however, the assignment period may be extended by up to three further years (Article 242-A of the CIRE).

Frequently asked questions

Can a company that is already insolvent use the PER?

No. The PER requires the company to be in a difficult economic situation or facing imminent insolvency. Where insolvency already exists, the appropriate route is insolvency proceedings, in which a recovery plan can still be submitted.

Are creditors obliged to accept the plan?

No creditor is obliged to vote in favour. But if the plan is approved by the majorities required by law and approved by the court, it also applies to the creditors who voted against it.

Are guarantors and sureties protected by the plan?

As a rule, no. The plan approved in the PER or the PEAP governs the debtor's debts, but does not automatically remove the liability of those who personally guaranteed those debts, unless the plan so provides with the agreement of the creditors concerned.

Final note

These matters fall within the Insolvency and Restructuring practice of ME&JBA — Advogados, in Lisbon, which also includes legal advice to insolvency estates.*

João Brazete de Almeida
Lawyer

* An artificial intelligence tool was used in preparing this article as an aid to structuring and drafting the text and to its linguistic review. The legal analysis, the selection and verification of the legal grounds and the final review of the content are the responsibility of the author.