December 2020
Background
As you know COVID-19 (coronavirus), besides impacting the health of people all over the world, is also significantly impacting businesses and the economy.
In this regard, and in order to actively respond to this following economic crisis, the Portuguese Government has implemented several measures to support families and companies, namely those that are related to restructuring and insolvency procedures.
Amongst these, we would like to highlight the recently published Law no. 75/2020, of 27 November, in which it is included the new set of procedures called – Extraordinary Business Viability Process (Processo Extraordinário de Viabilização de Empresas referred to here by it Portuguese initials, “PEVE”).
Objective of the PEVE
The objective was to create a temporary extraordinary process to enable the recovery of viable entities aimed exclusively at companies that are in a difficult economic situation or facing imminent or current insolvency due to COVID-19 (provided it is not yet been declared judicially).(1)
The PEVE seeks to ratify a debt restructuring agreement established extrajudicially (“out of court”) between the company and its creditors, representing at least the majorities provided for in the Special Revitalisation Procedure (“PER”). (2)
According to this regime, the approval decision is binding on the company, the creditors who signed the agreement and the creditors included on the list submitted by the debtor (which may be contested by any creditor), even if they have not participated in the in the extrajudicial negotiation.
What preconditions should be observed?
The following conditions should be verified by the debtor or company when submitting the request to open this procedure in court:
- The company may not be subject to any pending PER.
- The debtor or company must gather and prove it has met the necessary conditions for his/its viability.
- Notwithstanding, it shall also demonstrate that, on December 31, 2019, the company’s liabilities did not exceeed its assets, according to the rules of the Insolvency and Corporate Recovery Code (“CIRE”). In other words, the debtor or company has to demonstrate that his/its difficulties arise from the pandemic context.
However, the law provides two exceptions for: (i) micro and small companies, where liabilities may be higher than assets, provided that certain additional conditions laid down in the law are met; and (ii) businesses, which, although not in a positive net position on 31 December 2019, have managed to regularize their financial situation under the transitional provisions allowing the use of the Out-of-Court Business Recovery Scheme (“RERE”) by businesses in a situation of insolvency, provided they have deposited the restructuring agreement in due time.
The process
The judge is responsible for verifying the compliance of all the preconditions and requirements by issuing the order granting or opening the PEVE, and appointing the interim judicial receiver (administrador judicial provisório or “AJP”).
In order to guarantee the celerity of the process, no provision is made for a credit claim phase. The phase for potential challenges by the creditors (based on undue inclusion or exclusion of credits, or errors in their amounts or their ranking) and for any application for the non-approval of the Viability Agreement, begins immediately and simultaneously. Besides this, there are short deadlines for the judge’s decision and priority is given to this extraordinary procedure over other prompt procedures (insolvency and the “PER”), including in the appeal phases.
The APJ has a very residual role in the PEVE. After its appointment, the APJ, essentially, has to immediately inform the Tax and Customs Authority, the Social Security Institute, I.P. and the Social Security Financial Management Institute, I.P. that the PEVE is pending.
However, in the end, the AJP plays a very important role (and this is not the case in the PER): (i) gives an opinion on whether the agreement offers reasonable prospects of ensuring the viability of the company, and; (ii) enabling the judge to use this opinion as a basis for supporting its decision on whether, or not, to approve it.
Without jeopardizing the general principle that stablishes that tax and social security credits are untouchable and the maintenance of general system of installment payments, provision is made for the possibility of reducing the rate of interest on arrears and the full forgiveness of interest on arrears, given that those debts are paid within 30 days of the court’s approval of the agreement. Other tax benefits (similar to those already existing in the PER) also apply.
The PEVE has the virtue of suspending debt recovery and insolvency proceedings as long as insolvency has not yet been declared. Additionally, it also prevents the suspension of essential public services. As in the case of PER, it is forbidden to perform acts of special relevance without the prior consent of the APJ.
As a result, the PEVE ensures the maintenance of the guarantees agreed between the company and its creditors, as long as they are provided for in the Viability Agreement and their purpose is to provide the financial means necessary for the business continuity. Furthermore, the PEVE extends to the shareholders (or other specially related persons) who finance the company’s activity (including by shareholder loans) the general movable credit privilege (ranked before the general movable credit privilege granted to employees), which was already provided for the financing granted by creditors that are not especially related.
The PEVE rules also establish that there is no possibility of any claw back in favour of the insolvent estate of the legal transactions provided for in the Viability Agreement that actually make new financing available to the company. The rules expressly include the deferment of payment and the constitution of guarantees.
Also the PEVE may only be used once. When it comes to an end, the company cannot use this procedure again.
In order to adapt the already existing judicial recovery instruments to the circumstances of COVID-19 pandemic, the following measures have also been introduced:
- In the PER and the PEAP (Special Payment Agreement Process), the judge may grant an additional time to conclude the negotiations begun with a view to adopting a recovery plan adapted to the context of COVID-19. The judge can also give time to the proponent of an insolvency plan to adapt the proposal to this same context.
- The application of the RERE to companies that are currently insolvent (even if not judicially declared) due to the COVID-19 pandemic, but which are still likely to become viable and which can demonstrate that on 31 December 2019 their assets exceeded their liabilities (established under the terms of the CIRE), or, although not in a positive net position on 31 December 2019, have managed to regularise their financial situation under the transitional provision allowing the use of the RERE by companies in a situation of insolvency, on condition they have deposited the restructuring agreement in due time.
- In cases where non-compliance with the approved insolvency plan is based on events occurring after 7 April 2020, the 15-day period to regularise the situation – failing which the moratoriums and forgiveness set out in it will be extinguished – will only begin to run after the law now approved ceases to be in force.
Furthermore, there are two other measures, which are easy to implement – since they will lead to the distribution to the creditors, as soon as possible, of large amounts deposited in processes in the hands of the State – with the sole purpose of responding immediately to the problem of lack of liquidity of companies:
- The obligation to make pro rata payments in all pending insolvency proceedings where the liquidation proceeds deposited exceed EUR 10,000, by implementing a simplified procedure, provided that certain additional requirements laid down by law are met;
- Priority is given to the processing of applications for the release of securities or guarantees provided in the context of insolvency proceedings or PERs.
Period in which PEVE can be implemented
In view of the above, please note that Law 75/2020 entered into force on November 28, 2020, and it will remain in force until December 31, 2021, with the possibility of extension by government decree.
(1) The creation of the PEVE is one of the measures foreseen in the Economic and Social Stabilization Program, a Portuguese Government plan to respond to the economic and social difficulties caused by COVID-19.
(2) The PEVE is strongly inspired by the abbreviated PER [Article 17-I of the Insolvency and Corporate Recovery Code (“CIRE”)] and The Out-of-court Business Recovery Scheme (“RERE”). The PEVE is a process of hybrid nature, and it falls into the set of instruments typically called “fast-track-court-approval-procedures”.
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If you need any additional information or clarification in respect of the above, please do not hesitate to contact Catarina Breia + 351 91 75 75 832 or cbreia@pt-nexia.com .
