Portugal’s single insolvency regime

Expressions such as the 'sub-prime
crisis' and 'credit crunch' have
become all too familiar in the last
10 months, with many leading
financial institutions collapsing, or having
to significantly increase their capital to
cover losses. Economists speculate that the
worst is yet to come. The Bank of England
recently said that fears of a financial
meltdown may become a self-fulfilling
prophecy. The worry is that, with banks
now wary of lending even to credit-worthy
borrowers, they may deprive consumers
and companies of much-needed financing.

Never has there been a greater need to
harmonise corporate restructuring and
rescue regimes. Most EU members have
restructuring procedures for companies in
financial difficulties as well as liquidation
regimes. Over the last five years, several
countries have proposed or adopted
statutory reforms to make it easier for an
insolvent company to restructure rather
than liquidate, noticeably in Italy, after the
collapse of Parmalat, and France, following
the 2003 multi-billion dollar Alstom rescue
plan. Both countries considered the debtorfriendly
and rehabilitation principles of US
Chapter 11 procedures when introducing
their new business restructuring laws. The
Enterprise Act 2002, which came into force
in the UK in September 2003, also placed
greater emphasis on rehabilitation.

The current insolvency and business
recovery legislation in Portugal was revised
in 2004 and is largely based on the 1994
German insolvency and restructuring
model. Germany adopted a new insolvency
code in 1999, partly modelled on US
Chapter 11.

One of the objectives of the Portuguese
reforms was to promote the recovery of
economically viable businesses whilst
ensuring that the new procedures were not
used to sustain unfair competition or
corporate mismanagement.

La legislación
portuguesa relacionada
con el concurso y la
recuperación de negocio
fue actualizada en 2004.
Uno de los objetivos de
estas reformas fue
promocionar la
recuperación de aquellos
negocios que continíºan
viables en términos
económicos y
asegurarse de que no se
utilizan los nuevos
procedimientos para
fomentar la competencia
desleal o una mala
corporativa. Los autores
del artí­culo, Claudia
Santos Cruz , socia, y
Susana Morgado,
letradas del despacho
Barrocas Sarmento
Neves, explican que el
régimen permite ofrecer
a los acreedores una
flexibilidad total para
decidir sobre el futuro
de la empresa. No
obstante, hay crí­ticos
que opinan que, dado
que no existe regulación
o supervisión alguna por
parte de los juzgados,
los acreedores tienen
demasiada libertad de

The legislation provides for a single
insolvency procedure, which replaces the
previously separate liquidation and
corporate restructuring procedures. In the
changing economic climate, the current
approach is inadequate since it effectively
eliminates the pure restructuring option.
This is because, with a single insolvency
process, it is only after the court has
declared the company insolvent that the
creditors are given an opportunity to
consider whether the company should be
wound up or restructured.

The criticism is that the company or
creditors should, where appropriate, be
able to select the recovery or restructuring
option at the outset of the procedure, and
not just at the tail end as an alternative to
liquidation. The point is that a company
that is not (technically) insolvent today
may still need to be formally restructured
to ensure it is financially viable tomorrow.
In practice, this would be very difficult
under the supervision of the court as a
judge would be likely to declare it

The Portuguese regime is intended to
allow creditors total flexibility in deciding
the future of the company. The creditors
are therefore responsible for determining
whether to restructure or liquidate the
company. This decision is based largely on
a report prepared by a court-appointed
The freedom to control the company's
future in this way has also attracted
criticism. Certain quarters argue that the
reforms have led to a restructuring process
that is not supervised by the court, with far
too much leeway given to creditors.
One concept that the Portuguese model
does not incorporate is debtor control. A
debtor cannot of its own accord file for and
control the restructuring as in US Chapter
11 (and France, Italy, UK and, to some
extent, the German restructuring model). A
Portuguese debtor can apply to liquidate
the company but not to reorganise it.
It is hoped that with the continuing
market and economic constraints the
legislators will realise that change is
needed to protect companies and their
going-concern value whenever possible. A
more debtor-friendly and rehabilitationorientated
regime should also ensure that
the value of the debtor's estate by
restructuring viable companies for the
benefit of the creditors is maximised.

Claudia Santos Cruz is a partner in the Banking
and Finance group at Barrocas Sarmento Neves
and can be reached via ccruz@barrocas.com.pt.
Susana Morgado is a partner in the Corporate
Finance team and can be reached via