Conversion of Debts into Equity

The much-anticipated Law no. 7/2018, of the 2nd of March, which entered into force on the day following its publication, establishes the legal framework for the conversion into equity of debts of companies, or legal entities operating under a commercial status, with head office in Portugal.

This piece of legislation starts by imposing a number of restrictions, both from a subjective point of view, regarding the creditors and debtors that may benefit from the regime, as well as from an objective perspective, in what concerns the type of debts included.

In fact, debts of insurance companies, credit institutions and financial companies, investment companies, public companies and also entities integrated in the state-owned business sector are excluded at the outset.

Moreover, debts to state-owned entities can only be converted into equity under this regulation by means of an authorization from the Minister of Finance, provided that said entities are integrated in the state-owned business sector and that the principles and rules of said sector are complied with.

Likewise, debts of companies with a turnover lesser than EUR 1,000,000.00 (one million euros) according to the most recently approved accounts of the financial year, are not qualified for conversion.

The conversion of the debts into equity shall follow a procedure triggered by the creditors, through a proposal to the debtor company, if all the following assumptions are verified:

– The company’s equity is inferior to its share capital, according to the most recently approved accounts of the financial year;

– A delay of more than 90 days in paying unsubordinated debts in an amount higher than 10% of the total unsubordinated debts of the company or, in case of instalments of partial reimbursement of capital or interest, where said instalments arise from unsubordinated debts in an amount higher than 25% of the total unsubordinated debts.

The proposal must be endorsed by creditors which are owed debts corresponding simultaneously, to the majority of unsubordinated debts of the company and to, at least, two thirds of the company’s total liabilities. In addition, the proposal shall be filed together with a report from a statutory auditor, as well as the projected terms for the equity modification, with a substantiated description of the content of the transaction, including the amount of the equity increase, and its prior reduction for covering losses, if applicable.

After receiving the proposal, the company shall, immediately, convene a general meeting of shareholders, to be held within 60 days, without prejudice to the proposal being modified by means of an agreement between the company and the creditors.

In case the meeting does not take place, or the proposal is not accepted or even if the resolutions foreseen in the proposal are not implemented, the creditors may resort to judicial means, in order for the court to replace the company in the aforementioned actions.

In the context of this judicial procedure, which has a similar nature to the insolvency procedure, and without prejudice to its vicissitudes, the homologation award shall constitute an instrument able for supporting the reduction and increase of the share capital, the amendment of the by-laws, the transformation of the company and the dismissal of shareholders, as well as the respective registrations. Nevertheless, if during this period the debtor company is declared insolvent, the effects foreseen in this regime shall not be materialized. In consequence, it is the debtor company’s obligation to provide information within any insolvency proceedings in which it is involved, in respect to any changes that might occur under this legal framework.

The content of this information does not constitute any specific legal advice; the latter can only be given when faced with a specific case. Please contact us for any further clarification or information deemed necessary in what concerns the application of the law.