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The most recent version of the Portuguese Insolvency and Business Recovery Code approved by Rectification no. 21/2017 of 25/08 became applicable on July 1, 2017, so it is important to have a fresh look at the legislation in force. Thus, companies using this mechanism must now submit a written declaration of willingness to enter into negotiations signed by at least 10% of the non-subordinated credits included in the List of Creditors attached to the records (although the percentage of credits may be reduced to 5% of the related credits by means of a duly substantiated request).
This is an amendment to the previous version, which we commented on in 2016, which created a more favourable regime for the approval of business recovery plans, maintaining essentially both the insolvency of natural persons and the insolvency of legal persons theoretical basis that many issues has been putting us through these years of validity.
I highlighted 6 of the most common ones I compile in this article.
What is the Difference Between Bankruptcy and Insolvency?
The insolvency or bankruptcy process consists of a universal execution process, of an executive nature, which replaces the special corporate recovery and bankruptcy processes in force at CPEREF.
The purpose of the insolvency proceedings is to liquidate the assets of an insolvent debtor and to distribute the proceeds obtained by creditors or to satisfy them by means of an insolvency plan based on the recovery of the company comprising the insolvent estate.
Insolvency translates the situation of those who are unable to meet their obligations, usually because of the absence of the necessary liquidity at a given time or in certain cases because the total of their liabilities exceeds the assets that they can afford to meet them.
The doctrine states that insolvency constitutes an executive action, since, it has the purpose of obtaining adequate measures for the effective redress of rights of credits violated. It is therefore an executive action with special characteristics since it is a collective execution and not singular.
Insolvency is a process that seeks to satisfy the credit claim on the remaining assets of the debtor, and is therefore a collective execution whose purpose is to satisfy the rights of all creditors of a debtor.
In the event of insolvency, it is intended to ensure equal treatment of all creditors, since it is foreseeable at the time of the presentation of the debtor to insolvency that not all creditors will see their claims satisfied.
Being a collective process the main purpose is the protection and satisfaction of the interests of creditors with the purpose of seizing the entire assets of the insolvent, proceeding to their liquidation and distribution of the product obtained by the creditors who are summoned to come to the process claim their credits.
What are the financial limits of a manager’s liability in the event of a company’s bankruptcy? Are they limited to the value of social capital? What consequence (at all levels: personal, banking, business, etc.) brings to a manager the bankruptcy of the company?
This is one of the topics under review. In the current regime, in relation to these two issues, they are better clarified together considering what the Code of Insolvency and Recovery of Companies stipulates as being the responsibility of the legal representative of the insolvent company.
The managers or managers of a commercial company have duties, attached to their functions, whose non-compliance leads to their accountability.
As a result, CIRE has introduced changes to the liability regime, aggravating the liability of directors and managers of a company that is declared insolvent.
First, there is the responsibility of the administrator or manager for the unfounded request for insolvency, as provided in Article 22 of the CIRE, which provides that “the deduction of an unfounded request for insolvency, or improper presentation by the debtor, generates liability to the damage caused to the debtor or third parties, but only in case of fraud. ”
In addition, another duty incumbent upon the administrator or manager is the obligation to file for insolvency, in accordance with Article 18 CIRE, which provides for a requirement to submit to insolvency within 60 days from the date of knowledge of the situation of insolvency.
Given that, in order to be held liable by the administrator or manager of the company for failure to file for insolvency, the following assumptions must be fulfilled:
a) The unlawfulness of the event giving rise to civil liability, that is, the violation by act or omission, of any duty incumbent upon the administrators and managers;
b) The guilt that is equally essential, although in the case of responsibility towards society, guilt is presumed, so it is necessary for the administrator or manager to prove that he acted without it;
(c) the existence of damage;
(d) the existence of a causal link between the unlawful conduct and the damage.
However, it should be noted that managers and managers can not be blamed and, therefore, the interested parties must prove their existence, in addition to verifying the assumptions of civil liability.
It should be noted that, in the context of insolvency proceedings, the main responsibility of the manager or manager stems from the outcome of the insolvency qualification incident, that is, whether it is considered to be fortuitous or culpable.
With the sentence of insolvency, the insolvency qualification incident of the debtor begins, which allows it to be classified as fortuitous or guilty and to determine if there were any responsible for the situation.
For the purposes of liability and imputation of fault, Article 186 (2) of the CIRE provides for verification of the following circumstances:
(a) non-compliance with the obligation to maintain organized accounts, production of fictitious or double-counting accounts or contribution to irregularities prejudicial to the understanding of the debtor’s financial position;
b) Failure to comply with the obligation to request the declaration of insolvency within 60 days of being aware of the breach of the obligations established by law;
c) Failure to comply with the obligation to prepare, within the legal term, annual accounts and to submit them for inspection or to deposit them at the Commercial Registry Office.
As a result, the qualification incident may include third parties who have acted together with the debtor, and the level of due diligence is the same, ie it must be proved that the same acted with intent or gross negligence to be held accountable.
In the procedural plane the incident of fault qualification follows the following legal procedures:
Anyone interested in the qualification can plead in writing and up to 15 days after the assessment meeting of the report what it deems appropriate;
Within 15 days, the insolvency administrator issues a reasoned opinion on the facts alleged in the application and if it considers insolvency as fault should identify the persons who should be affected by the qualification;
The opinion is then sent to the Public Ministry to rule within 10 days;
If the public prosecutor and the trustee issue opinions in order to consider fortuitous insolvency, an immediate decision is rendered and the proceedings are terminated;
If a wrongful insolvency is proposed by the Public Prosecutor’s Office or by the insolvency administrator, the persons who may be affected by the qualification to oppose it within 15 days are quoted;
In the event of opposition, any interested party may respond within 10 days.
In addition, along with the insolvency qualification incident, there is a duty on the part of the trial court to inform the Public Prosecutor of facts that indicate the commission of crimes for the purpose of prosecuting.
The insolvency situation is not likely to constitute the practice of crimes by legal persons, but the natural persons who hold their corporate bodies may be criminally liable.
Along this path, Article 227 of the Penal Code provides that:
“1 – The debtor who intends to harm creditors:
a) Destroying, damaging, rendering unusable or destroying part of its assets;
b) Fictitious diminution of its assets, dissimulating things, invoking supposed debts, recognizing fictitious credits, inciting third parties to present them, or simulating, in any other way, a lower equity situation, in particular by means of inaccurate accounting, false balance , destruction or concealment of accounting documents or not arranging the accounts even though due;
c) artificially create or aggravate losses or reduce profits; or
d) To delay bankruptcy, to buy merchandise on credit, in order to sell or use it in payment for a price that is appreciably lower than current;
shall be punished if the insolvency situation occurs and the latter is legally recognized, with a prison sentence of up to three years or with a fine.
2 – If the bankruptcy is declared as a consequence of the practice of any of the facts described in the previous number, the debtor shall be punished with imprisonment up to 5 years or with a fine of up to 600 days. ”
However, the classification of insolvency as a guilty party has the consequence that the persons affected by the judgment, the disqualification, from setting up between 2 and 10 years, their inhibition, for the period of 2 to 10 years for the exercise of trade, as well as for the occupancy of any office of commercial or civil society body, association, foundation, public company or cooperative.
It also implies the loss of any claims on the insolvent estate held by the persons affected by the qualification and their conviction in the restitution of the assets or rights in payment of those credits and also the obligation of unofficial registration of the disqualification or inhibition in the Registry of Civil Registry or Registry On the basis of the certificate issued by the secretary.
As a result, directors and managers are still criminally liable for the insolvency situation, if it is caused by their intentional action or by mere negligence, and it is still a factor of imputation of criminal responsibility to favor certain creditors or if after the declaration of insolvency the managers practice some act that frustrates the credits against the insolvent mass.
Also regarding the responsibility of the managers, it is important to verify their tax liability.
Article 88 (1) of the CIRE states that “the declaration of insolvency determines the suspension of any executive measures or measures required by insolvency creditors that reach the assets of the insolvent estate and prevent the establishment or continuation of any executive action instituted by the creditors of insolvency, but if there are others executed, execution continues against them. ”
This means that in pending tax foreclosure proceedings, no further seizures may be made, even if already ordered, nor can any precautionary procedures or sales be made, after the knowledge of the insolvency by the entities where the executions are executed.
As a result, managers and managers will be subsidiarily responsible for tax debts when, due to their intentional action, the tax credits have not been settled and the company’s assets are insufficient to meet those obligations, and these credits will be paid through the assets of managers and administrators.
Finally, it should be noted that in the draft law already presented in parliament and in public discussion the concept of guilt is no longer associated with insolvency, allowing administrators to be responsible in their personal sphere for debts without verify the assumptions I have outlined above. But as I write these lines there is still no certainty as to the final wording of the law in this matter, so we will have to wait.
Why is it more advantageous to be a creditor to file for bankruptcy than to be the manager presenting the company to insolvency?
With regard to this issue, it should be clarified that the procedural impulse is borne by the debtor, and the legal representative of the company has a duty to submit to insolvency within 60 days at the date of knowledge of the insolvency situation, as stipulated by Article 18 (1) of the CIRE.
Likewise, insolvency can be requested by any creditor, regardless of the nature of their credit or by the Public Prosecutor, in representation of the entities whose interests are legally entrusted to them.
In the event that insolvency is requested by a creditor, it must necessarily prove that one of the index factors provided for in article 20 of CIRE is found and we transcribe:
“1. A debtor’s insolvency declaration may be requested by a person who is legally liable for his debts, by any creditor, even if conditional and regardless of the nature of his claim, or by the Public Prosecutor, on behalf of the entities whose are legally entrusted with any of the following facts:
a) General suspension of payment of overdue obligations;
b) Failure to comply with one or more obligations which, by their amount or by the circumstances of the default, reveal that it is impossible for the debtor to meet in a timely manner the generality of its obligations;
c) Escape of the owner of the company or of the administrators of the debtor or abandonment of the place where the company has its headquarters or carries out its main activity, related to the lack of solvency of the debtor and without designation of suitable substitute;
d) Dissipation, abandonment, hasty or ruinous liquidation of assets and fictitious constitution of credits;
e) Insufficiency of assets attachable to payment of the claimant’s credit verified in an executive proceeding filed against the debtor;
f) Failure to comply with obligations provided for in an insolvency plan or in a payment plan, under the conditions set forth in paragraph 1 a) and 2 of article 218;
g) General non-compliance, in the last six months, with debts of any of the following types:
(ii) contributions and contributions to social security;
iii) Credits arising from a contract of employment, or from breach or termination of this contract;
(iv) rents of any type of lease, including finance, purchase price or loan guaranteed by the respective mortgage, in respect of the place where the debtor carries out his activity or has his seat or residence;
h) If the debtor is one of the entities referred to in Article 3 (2), he or she shows a superiority of the liability over the asset according to the last approved balance sheet, or a delay of more than nine months in the approval and deposit of the accounts, if legally required.
2 – The provisions of the preceding paragraph shall not affect the possibility of representing public entities in accordance with article 13 ”
Since it is sufficient for the creditor to bring to the file the circumstances under which it is possible to deduce the non-performance by the debtor, together with the justification, nature and amount of his claim by providing evidence.
Even if insolvency is requested by a creditor, it does not prevent the debtor from having all the documentation provided for in Article 24 of the CIRE, as in the case of insolvency, and does not preclude the commencement of insolvency proceedings. of the incident of insolvency qualification as fortuitous or culpable.
If there are supplies of members in the partnership, they are also constituted as creditors of the bankrupt estate? How do you graduate these credits?
With regard to supplies due to the members of the insolvent company, they are considered as subordinated credits and are paid last, as stipulated in Article 47 and 48 of the CIRE.
As stipulated in Article 48 of the CIRE, “they are considered to be subordinate, being graduated after the remaining insolvency credits: (g) credits for supplies.”
Since subordinated claims can be settled on behalf of the insolvent estate, they do not confer the right to vote at the creditors’ meeting, and in the case of approval of an insolvency plan, the subordinated claims are totally forgiven.
Accordingly, the payment of subordinated credits is only made after full payment of the secured, privileged and common credits.
If there are high debts to the landlord, can the company deliver the store with all the stuffing (immobilized) as a payment in lieu of rent? Eliminating any good to be delivered to the insolvency administrator?
Although it is possible to conclude business before the declaration of insolvency, they can be solved in favor of the insolvent estate, and it is also analyzed the possible responsibility of the legal representatives in order to verify if there was bad faith in the conclusion of such business.
Article 121 (1) of the CIRE states that “acts prejudicial to the mass of persons practiced or omitted within the four years preceding the date of the commencement of insolvency proceedings may be resolved for the benefit of the insolvent estate.
In this way acts that diminish, frustrate, hinder, endanger or delay the satisfaction of creditors of insolvency are considered to be harmful to the mass.
Since in such a case such a situation could be regarded as an act prejudicial to the estate, since it makes it impossible to present any property for the satisfaction of creditors.
In the case of employee-initiated proceedings or legal disputes with third parties, can the company terminate its business and consider itself to be extinguished? Can you transfer that responsibility to the cessation representative?
The insolvency proceedings, as a universal execution, aim to protect the interests of creditors, and in this context also corresponds to a process of dissolution and liquidation of the insolvent company.
On the other hand, the shareholders may dissolve the company, without the insolvency, through the process of dissolution and liquidation of companies, in the commercial register.
The extinction of the company requires the unanimous decision of all members regarding the dissolution of the company and only in cases in which there is no asset or liability to be settled.
The dissolution of a company can also be made in the following terms:
a) Dissolution and liquidation (without assets or liabilities): a decision by a qualified majority of ¾ votes cast at a dissolution meeting of the company is required; lack of liability and assets and that the articles of association do not provide for other forms of specific termination procedures.
b) Dissolution and liquidation by sharing (with assets and without liabilities): the shareholders proceed to share the assets of the company, requiring a qualified majority of ¾ of the votes.
c) Dissolution with liquidation (with assets and liabilities): an act is necessary in which the dissolution and liquidation of the company is deliberated and the approval of the accounts, and in the case of an unliquidated liability, it is necessary to appoint a liquidator .
d) Dissolution with settlement by global transfer (with liabilities): a resolution is required by a qualified majority of ¾ of the votes, providing for the dissolution and approval and closure of the accounts. It may be determined that the assets will be passed on to one of the partners, and it will offer money to the others, provided that such transmission is preceded by a written agreement of all the creditors of the company.
It should be noted that the dissolved company does not lose its legal personality, it is possible to declare its insolvency and in the context of this insolvency, it will always be verified the responsibility of legal representatives or third parties in the scope of the insolvency qualification incident, as already mentioned .
On the other hand, in the case of immediate extinction or liquidation and sharing of assets, the company loses its legal personality, and can no longer be a party to the court. However, the pending lawsuits against the company continue after the extinction of the company, against the administrators and managers, represented by the liquidators.
Originally published on February 21, 2012 and updated on September 8, 2016 and December 17, 2017.
Photo credit: averie woodard in Unsplash