Pre-pack proceedings in Portugal introduce a brave new world

The pre-pack proceedings regime set out in the Title IV of the Proposal for a EU Directive to harmonise certain aspects of insolvency law, dated 7 December 2022, will be a tremendous challenge for all judicial agents acting in Portugal since a similar regime does not exist there. In fact, the sale process of a business under an ordinary insolvency proceeding is demanding and time consuming, which normally leads to the insolvent company’s discontinuation as a result of not being able to pursue its business activity. The question remains: will this situation create an incentive for pre-pack plans or will any new regime be looked at suspiciously?

1.Portuguese regime: no pre-pack procedings

Presently, there are no pre-pack proceedings regime under the Portuguese Companies’ Recovery and Insolvency Code (CIRE). Any sale of the business is carried out under the liquidation phase when the company is declared insolvent and creditors have not approved a recovery plan. In this context, the liquidation phase tends to be time consuming and, in fact, the trend is that the “business” is usually not sold since at this stage there is no business activity. Only assets of the business remain part of this liquidation phase, if any.

2.Pre-pack proceedings: Possible new trend

It was not long ago that the insolvency regime in Portugal set out, for the first time, the possibility of having the insolvent company agree a recovery plan with its main creditors (Processo Especial de Revitalização) under the supervision of the court before any insolvency declaration had been requested and issued by the court. This follows a brief court proceeding that benefits from a stay of individual enforcement actions for a period that may take up to four months. In a way, the Processo Especial de Revitalização shows some resemblance with pre-pack proceedings.

Within the last five years, the approval rate of such recovery plans has been 50%. However, the use of this proceeding has been decreasing since 2016 after a continuous increase from 2013 when this regime completed its first full year. It is therefore not clear how companies in Portugal will react to this new regime. Similarly, recovery plans under the Processo Especial de Revitalização quickly became a trend, and over time we have been experiencing a decrease in the number of these proceedings.

Still, it is common knowledge in Portugal that the results of the liquidation phase under an ordinary insolvency proceeding are not satisfactory for creditors who are often paid residual amounts in comparison to their initial claims. When this is not the case and they are paid a more significant amount, they are still paid late.

This means that it is likely that pre-pack plans may become the next insolvency trend in Portugal, provided that the Portuguese legislator acts within a reasonable timeframe to any new EU Directive that may facilitate its implementation in Portugal.

For more information on pre-pack regulations in Portugal, contact your CMS partner or these local CMS experts: Gonçalo Madeira and Cristina Rogado.

This article is part of our Law-Now blog series "Harmonisation of Insolvency Laws in the EU", which will provide an overview of the EU Commission's draft directive, including the most important objectives and planned measures. The series itself will deal with the two exciting topics of the draft directive, "pre-pack proceedings" and "insolvency avoidance actions" and show how these topics are being discussed in the Member States and what the situation is like in individual non-Member States.