Harmonisaton of EU Insolvency Law and its impact on avoidance actions in Portugal

The presentation of the Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law (COM/2022/702) marks a significant step towards the convergence of fundamental aspects of insolvency law throughout the EU, which is considered fundamental if cross-border investment and cross-border business relationships are to reach their potential. One of the relevant aspects of this proposal is avoidance actions, which are aimed at protecting the interests of an insolvent estate and the targeting of those operations that are detrimental to the viability of creditors in general terms.

The following article focusses on Portugal. It analyses the proposed avoidance actions and compares these actions with similar rules already in force in the Portuguese Insolvency Act.

1. Avoidance actions

The proposed directive distinguishes between three specific types of avoidance actions: (i) preferences; (ii) legal acts at an undervalue; and (iii) intentionally fraudulent actions.

(i) Preferences

This applies to legal acts benefitting a creditor or a group of creditors by satisfaction, collateralisation or in any other way, carried out three months prior to filing for the opening of insolvency proceedings or after the said filing. Under the proposal, these actions can be declared void.

If the due credit has been satisfied or adequately secured, however, it can only be declared void if the creditor knew or should have known about the debtor's incapacity to pay its debts (presumed if the creditor was a party closely related to the debtor) or that the opening of insolvency proceedings were filed.

The actions executed against fair consideration to the benefit of the insolvent estate are excluded once there is no risk of breaching the principle of equality among creditors.

Certain categories of actions described in the Portuguese Insolvency Act can be subject to unconditional claw-backs because they are considered to be detrimental to the insolvent estate, not allowing proof to the contrary. As an example, the law provides that the following can be subject to claw-back:

• the securities in rem created or replaced/increased by the insolvent in relation to pre-existing obligations, within a period of six months prior to the filing of insolvency proceedings;
• security in rem created simultaneously with the secured obligations within a period of sixty days prior to the filing of insolvency proceedings;
• payment or any other legal act of extinction of obligations of unmatured debts, made within a period of six months prior to the filing of such proceedings or made after such filing of proceedings but prior to maturity;
• payments or any other legal form of extinction of obligations, made within a period of six months prior to the filing of insolvency proceedings, in terms that are unusual in business.

Not only do these situations cover a longer period than envisaged in the draft directive, but knowledge of the debtor company's financial incapacity is irrelevant.

(ii) Legal acts at an undervalue

The proposal also covers the possibility of voiding legal acts carried out by the debtor for no consideration or when the consideration is manifestly insufficient, executed within a period of one year prior to the filing of the opening of insolvency proceedings or after the submission of such request.

Under the Portuguese Insolvency Act, these situations are already covered by certain actions described that can be subject to the unconditional claw-backs mentioned on the previous paragraph. For example, these include:

• acts concluded by the debtor free of charge within a period of two years prior to the filing of the insolvency proceedings; and
• acts against consideration carried out by the insolvent company where the obligations undertaken by the latter clearly outweigh those of the counterparty, within a period of one year prior to the filing of insolvency proceedings.

In addition, these situations may also fall in the general principle established in Portuguese law that states any actions detrimental to the insolvent estate performed within two years prior to the filing of the insolvency proceedings can be subject to claw-back. Any actions that may diminish, frustrate, hinder the satisfaction of the creditors of the insolvent estate are deemed detrimental. In this case, however, bad faith is required of the third parties, such as the knowledge that:

• the company was insolvent, or the detrimental character of the action and that the insolvency was imminent; or
• the insolvency proceedings had already been initiated.
• Bad faith is also deemed to exist whenever:
• such actions or omissions took place within a period of two years prior to the filing of the insolvency proceedings; and
• the third parties are specially related entities to the insolvent and have intervened or have taken advantage of these actions or omissions.

The situations currently foreseen in the Portuguese law and mentioned above also seem to cover the Proposed Directive’s regulations on undervalued transactions. In some cases, Portuguese law allows for a longer deadline although it may also be necessary to demonstrate bad faith, which is not the case in the Proposed Directive.

(iii) Intentionally fraudulent actions

Finally, the proposal foresees that legal actions through which the debtor intentionally causes harm to the body of creditors can be declared void within a period of four years prior to the filing of the insolvency proceedings or thereafter, and the counterparty knew or should have known about the debtor's intention to cause harm to the body of creditors (presumed if the creditor was a party closely related to the debtor).

This scenario falls under the general principle of the Portuguese law mentioned above. The Proposed Directive, however, provides a longer timeframe of four years compared to the two years period foreseen in the Portuguese law.

2. Effects

The Proposed Directive introduces significant measures to safeguard the interests of insolvent estates and creditors within the EU. It requires member states to enact laws ensuring that credits, rights, or obligations resulting from annulled or voided legal acts cannot be enforced against the insolvent estate and it must be ensured that the party benefiting from the legal act that was annulled or declared null and void is obliged to fully compensate the insolvent estate for the damage caused to creditors.

The effect of the claw-back foreseen in the Portuguese law is considered to be more limited, since it only provides a retroactive effect – it reconstitutes the situation that would have existed if the act had not been carried out or omitted.

The Proposed Directive also provides a limitation period of three years starting from the opening of insolvency proceedings for the avoidance of the relevant actions. In turn, the Portuguese law foresees that the claw-back must be executed within a period of six months after the knowledge of the act by the Insolvent Administrator, but not later than two years after the date of the declaration of insolvency.

Furthermore, the Proposed Directive emphasises the need to ensure the restoration of credits and the refund of counter performance of the party who benefitted from the legal act that has been declared void if the said beneficiary compensates the insolvent estate for damages caused. Those credits should be reimbursed from the insolvent estate to the extent that the counter-performance is still available in the estate or the insolvency estate is enriched by its value. If that is not possible, the third party may file a claim requesting the offset of credits and this claim will be ranked as having arisen before the opening of the insolvency proceedings.

Although the offset is not allowed, the Portuguese Insolvency Act foresees that the object of the third party resulting from the voidance will be returned if it is possible to distinguish from the remainder of the insolvent estate. If not possible, the obligation to return the corresponding amount will be a debt of the insolvency estate (which means that it will be ranked before the debts of the insolvency) regarding any enrichment at the time of the declaration of insolvency, and a debt of the insolvency regarding any remainder. In addition, the debt of the insolvency will be qualified as subordinated, which means that it will be paid last, after payment to privileged and common creditors. 

Additionally, the Proposed Directive also ensures that the rights provided are enforceable against an heir or another universal successor of the party, which benefitted from the legal act that has been declared void.

In this respect, the Portuguese law provides that the rights arising from the claw-back can be enforced to subsequent transferees only in case of bad faith, except in the case of universal successors or if the new transfer took place free of charge.

3. Conclusion

The Proposed Directive contains some measures that differ from the Portuguese law, although it seems to us that the basic principles of both are identical in that theyaim to protect the interests of the insolvent estate and creditors.

Therefore, the Proposed Directive is not likely to have a major impact on insolvency practice in Portugal, inasmuch as the avoidance actions foreseen in the Proposed Directive do not deviate substantially from the legislation currently in force in Portugal. The Directive, however, may bring about some favourable changes for creditors concerning the extension of the limitation period.

For more information on the Proposed Directive and insolvency law in Portugal, contact your CMS client partner or these CMS experts.