Member Article

The main doubts of company directors about the consequences ofthe current Covid-19 pandemic in relation to insolvency, the PER, and the RERE.

As a result of the spread of the Covid-19 virus, the World Health Organization declared a public health emergency of international concern (PHEIC) on 30 January 2020 and a pandemic on 11 March 2020. Against this background, on 13March 2020, the Portuguese Minister of Internal Administration and Minister of Health signed an order declaring a state of alert that covers the whole country until 9 April 2020. Decree of the President of the Republic 14-A/2020 of 18 March declared a state of emergency due to the situation of public crisis resulting from the Coronavirus pandemic. The state of emergency covers the whole of Portugal and will last for 15 days, without prejudice to any renewals.

Besides the human consequences of Covid-19, the virus also has economic consequences. Therestrictions and containment measures implemented to prevent the spread of the Covid-19 pandemic are having a global impact.

Portuguese and multinational companies are already suffering serious consequences. Some sectors of the economy, such as tourism, food and beverages, and travel are being directly affected more than others. However, the whole of the economy is feeling the effects and this suggests a serious economic and financial crisis is looming.

The fact that many business activities operate as a chain means there could be widespread breaches of contractual obligations.

Faced with this scenario, we have set out below some notes and explanations to address the questions most frequently asked about the possible consequences of breaches of contractual or other legal obligations arising from the current situation. We also take a look at the impact of this situation on the difficult decisions that have to be made by the directors and managers of the companies affected. In providing this information, we will refer to the legislation applicable to the PER (Special Revitalisation Process), the RERE (Out-of-court Business Recovery Scheme), and to insolvency.

1. Is the current Portuguese and international situation caused by the Covid-19 pandemic justification for (legitimate) breach of our obligations to our creditors?

The classification of a pandemic as a “case of force majeure” may have implications when it comes to compliance with contractual obligations. In some cases, this may lead to the debtor being released from its responsibility and the creditor not being able to demand the performance of an unperformed obligation or the payment of compensation for any loss or damage suffered. However, to have this effect, performance of the obligation must have become objectively impossible and not just “more onerous”. If this situation is confirmed, it could lead to the application of the rules on a “change in circumstances” which, in exceptional cases, allows the party harmed by the change to ask for either (i) the termination of the contract, or (ii) its modification based on equity.

However, this situation must be examined on a case-by-case basis. The current situation does not stop directors from taking preventive and proactive action in compliance with their duties under the law and the articles of association of the company. Thisincludes negotiating with its creditors to adapt or modify the previously assumed obligations.

2. We have a recovery plan that was approved less than two years ago and we are at risk of not complying with it. Can we apply for a new PER?

The current legislation does not allow a company to have recourse to a new PER if the decision to approve the recovery plan in force was made less than two years ago. There is an exception for situations in which the company has fully implemented the plan or in which there are factors unrelated to the plan itself and where the subsequent change is outside the control of the company.

Covid-19 is an event of force majeure because it is unpredictable and totally unrelated to the regular operations and decisions made by companies.

Therefore, the current situation could justify recourse to a new PER, even if the above period of two years has not yet passed. However, we advise a case-by-case analysis of the situation.

Moreover, the suspension of deadlines and procedures resulting from Law 1-A/2020 does not apply to the periods (including grace periods and payment deadlines) established in recovery plans that have already been approved and ratified by the courts.

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