Insolvency and special revitalization procedure: lastest amendments

Law No. 9/2022, from January 11th, which transposed Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019, established measures to support and speed up company restructuring processes and payment arrangements.

This Law has also modified the Insolvency and Company Recovery Code (“CIRE”), where the changes introduced in the Special Revitalization Procedure, hereafter “SRP”, and in the insolvency proceedings are particularly noteworthy.

SPECIAL REVITALISATION PROCEDURE

Regarding the SRP, the following legislative changes should be highlighted:

Recovery Plan:

• Content of the recovery plan: The recovery plan must contain, with this new amendment, at least the following information:

1. The identification of the parties.
2. A description of the asset and financial situation of the company at the time of submission of the proposal of the recovery plan.
3. The parties affected by the content of the plan.
4. The conditions of the restructuring plan, namely the restructuring measures proposed and their duration.
5. The company’s expected financial flows, including, inter alia, the investment plan.
6. The arrangements for informing and consulting employees’ representatives, the position of employees within the undertaking and, where appropriate, the general consequences as regards employment, including dismissals, temporary reduction of working hours or suspension of contracts of employment.
7. Any new financing provided for under the recovery plan and the reasons why such is necessary to implement the plan.
8. A statement of reasons containing a description of the causes and extent of the firm’s difficulties and explaining why there is a reasonable prospect that the recovery plan will prevent the firm’s insolvency and ensure its viability.

• Reasoned opinion on the recovery plan: if the vote concludes with the unanimous approval of the recovery plan leading to the revitalization of the company, the plan is immediately sent to the proceeedings, for the judge’s approval or refusal. It is now also necessary for the provisional judicial administrator, in addition to the documentation proving its approval, to send a reasoned opinion on whether the plan has reasonable prospects of avoiding the insolvency of the company or ensuring its viability.

• Classification of creditors: With the new amendment introduced, the application for submission of the SRP requires the offer of a proposal to classify creditors affected by the recovery plan into distinct categories, according to the nature of the respective credits, into secured, privileged, common and subordinated creditors and, if necessary, the grouping of the company’s creditors according to the existence of sufficient common interests, with the exception of small and medium-sized companies, namely:

1. Workers, regardless of the type of contract.
2. Members.
3. Bank entities that have financed the company.
4. Suppliers of goods and service providers.
5. Public creditors.

• Majorities for approval of the recovery plan: One of the major changes to the SRP regime concerns the majorities for approval of the recovery plan, in case of classification of creditors by categories. Thus, if the classification of creditors into different subcategories occurs, the rule of a favorable vote of more than two-thirds of all votes was defined, abstentions not being considered, obtaining:

1. The affirmative vote of all categories formed.
2. The affirmative vote of the majority of the categories formed, provided that at least one of these categories is of secured creditors.
3. If there are no categories of secured creditors, the favorable vote of most of the groups formed, provided that at least one of the categories is of non-subordinated creditors.
4. If there is a tie, the favorable vote of at least one category of non-subordinated creditors.

In other cases, the reorganization plan being voted by creditors whose claims represent at least one-third of the total claims listed with voting rights:

1. Collect cumulatively, abstentions not being considered:

• The affirmative vote of more than two-thirds of the total votes cast.
• The affirmative vote of more than 50% of the issued votes corresponding to non-subordinated claims related to voting rights; or
  2. Collect cumulatively, abstentions not being considered:
• The favorable vote of creditors whose claims represent more than 50% of the total claims related to voting rights;
• The favorable vote of more than 50% of the issued votes corresponding to non-subordinated credits related to voting rights.
• Period of suspension of enforcement procedures, during the negotiation period: Four months’ suspension of ongoing enforcement actions against the company under SRP has been set. These four months may, however, be extended for a further month if ongoing negotiations within the SRP:

1. Have made significant progress;
2. Are essential for the company’s recovery.
3. The continuation of the suspension does not unfairly prejudice the rights or interests of the affected parties.

This request for an extension occurs at the request of the debtor, a creditor, or the provisional administrator. Note that, during this period, filing new enforcement actions for debt collection is prohibited. Moreover, suspension can be lifted if the judge considers that it no longer benefits the negotiations on the reorganization plan or if it is requested by the company or the provisional judicial administrator.

• Expansion of the concept of essential performance contracts: This new amendment extends the notion of “essential public services” – previously provided – to include any contracts for the supply of goods or services whose suspension would lead to the paralysis of the company’s activity.

Creditors are thus prevented, during the entire standstill period, from refusing to comply with, terminating, bringing forward or unilaterally altering essential executory contracts detrimentally to the company, regarding debts constituted prior to the order appointing the provisional administrator, where the sole basis is non-payment.

On the other hand, the price of goods or services essential to the company’s activity during the standstill period that has not been paid becomes a debt of the insolvency, once the company is declared insolvent within two years of the end of the period of suspension of enforcement measures.

• Financing incentives: the guarantees granted to creditors that finance the company’s activity have become essential for the success of a recovery plan. Thus, creditors who, during the process or in the execution of the recovery plan, finance the company’s activity, are rewarded with a credit over the active mass. This credit can go up to an amount corresponding to 25% of the company’s non-subordinated liabilities on the date of the declaration of insolvency if the company’s insolvency is declared within two years from the date the decision approving the recovery plan becomes final.

The impugnation of financing acts was prohibited.

INSOLVENCY PROCEEDINGS

This legislative modification stands out for:

• The presentation of the initial insolvency petition must now include a document identifying the companies over which the debtor company exercises controlling powers, or which are considered associated companies, following the provisions of the annex to Decree-Law 372/2007, of November 6th, and, if applicable, identifying the proceedings in which its insolvency is requested or was declared.
• Remaining liabilities exoneration can now be requested after three years.
• If, during the assignment period, the debtor breaches any of the obligations to which it is bound, the assignment period may be extended up to a maximum of three years and for a single time, upon reasoned request by the debtor, the trustee responsible for supervising the debtor’s compliance with its obligations, the insolvency practitioner, if he is still in office, or any insolvency creditor.
• That compensation claims arising from the termination of employment contracts by the insolvency practitioner after the debtor’s declaration of insolvency constitute claims on the insolvency.
• The duty to file for insolvency does not apply to companies that have filed for the SRP during the above-mentioned period of suspension of enforcement measures.
• The insolvency practitioner shall proceed to the sale of assets after the final court decision declaring the insolvency and a meeting to consider the liquidation report is held. For this purpose, ten days after the meeting judicial administrator must present the plan for the sale of assets. The insolvency practitioner shall be dismissed, with just cause, if he fails to submit the liquidation plan for the sale of assets or fails to comply with it upon request of any interested party.
• Mandatory partial apportionments if the following conditions are met:
  1. There is a final and unappealable decision declaring the insolvency and the proceedings have continued for the liquidation of assets.
  2. When the time limit to contest the list of creditors ended and no impugnation was filed or, if it was, the impugnation has been decided.
  3. An amount equal to or greater than EUR 10,000.00 is deposited in is deposited in the active mass’ bank account.
  4. The case is not in condition for the final apportionment.

We must also refer to Decree-Law 57/2022 of 25 August has recently amended the ICRC concerning the processing of the incident of verification of liabilities and ranking of claims in insolvency proceedings, simplifying it and reducing judicial intervention.

The amendments introduced are limited to articles 129 no. 1 and 130 no. 3 of the mentioned legal diploma.

Therefore, about Article 129, the insolvency practitioner, besides drafting a list of all creditors recognized and non-recognized, now must submit a ranking of the creditors recognized, which has as a reference the foreseeable composition of the active mass.

Thus, the insolvency practitioner drafts a proposal for a judicial decision. This might be subject to criticism since this change was made by a government decree while the Law that transposed the Directive still awaits approval.

As stated above, article 130 of the ICRC was also modified, giving the insolvency practitioner, once again, a greater focus. With this change, if the judge agrees with the list of recognized claims and the proposal for graduation drawn up by the insolvency practitioner, both documents may immediately be approved by the judge, as opposed to the previous situation, in which the judge would proceed to a jurisdictional assessment of the matter in question.

Therefore, in the absence of any objections, a decision immediately will be issued on the verification and ranking of claims. This amendment aims to speed up the processing of this incident, thus contributing to the efficiency of insolvency and recovery proceedings.