The Times They Are A-changin’ – in today’s ever changing world Bob Dylon’s song is as new as ever was. In Portugal the winds of change already led to a recent general court and legal proceedings reform aimed to improve management efficiency of the judicial system. From declarative to enforcement procedures, summary procedures and injunctions to cutting down on appeals, and from increasing court fees to imposing statutory deadlines for court… all have already been done. In an open economy model and environment system it is more than ever important to know what are the legal risks and how to minimize and overcome them. The better you know the better you perform. In this article we will summarize a clear and updated understanding of law and practise regarding guaranties and main legal proceedings applicable in Portugal.
Guarantees and securities
The main principles on liabilities are contained in the Portuguese Civil Code. The law established the general rule that debtor is liable in respect of his obligations. That will affect all the debtor’s assets including future ones. The breach of an obligation such as payment means that debtor is liable to pay compensation.
Personal guarantees
By the contract or an agreement the parties may request additional guarantees besides existing assets in order to ensure that obligation will be fulfilled. One of these guarantees is “fiança”. By entering into this kind of guarantee, a guarantor undertakes to pay on behalf of a third party in the event of this party not complying with the obligation of paying. The obligation depends on a principal debt and cannot exist without a valid principal obligation.
Mortgage
Like the other guaranties the mortgage is designed to protect a creditor in the event of debtor’s default. In this case creditor can recover payment from the judicial sale of the property. A mortgage aims to secure a defined sum of money that as to be clearly stated in deed or contract. A mortgage is created by means of a deed made by a notary or contract before the land registry and duly registered.
Pledge
The granting of certain securities will ensure that payment of a debt will be made by selling some specific assets of the debtor. Under Portuguese law, a pledge (penhor) may be created over cash or fungible securities. There are two types of pledge, civil and commercial. A commercial pledge is a pledge between entities or individuals subject to the regulations of the Commercial Code. These will be individuals with capacity to carry out commercial acts and other entities which engage in commercial activities. In general, the requirements for a civil pledge are somewhat stricter than those for a commercial pledge. A civil or commercial pledge may be used depending on the status of the parties. In practice, a civil pledge is more likely to be used.
Bank guarantee
A bank guarantee is a guarantee from a lending institution ensuring that the liabilities of a debtor will be met. First demand bank guarantee works as follows:- Issued by guarantor (a bank) on behalf of applicant and assuming his responsibility to pay to beneficiary under a complying demand;- An independent and irrevocable payment undertaking;- Separate from the underlying contract obligations – thus opposed to the concept of contract guarantee mentioned above.As there is no direct regulation in Portuguese law regarding bank guaranties the “law” is what parties have agreed. Accordingly it is always advised to pay special attention on the agreement generally submitted by the Banks to the parties.
Other securities
Generally it is possible to secure an obligation, e. g. obligation of payment, by cash deposits, securities, precious stones or metals, pledge, mortgage or bank guarantee. This security works well especially regarding cash deposits. However it is difficult to obtain from debtor. For amounts over €5000 it is more commonly used a bank guaranty than a “caução”.
Main legal proceedings
Ordinary proceedings
The ordinary proceedings in first instance can be divided into declarative proceedings and enforcement proceedings. In a declarative proceeding the court decides on the merit of the litigation between the parties. In an enforcement proceeding the court enforces a judgment or an enforceable title such as a cheque.
Declarative proceeding
After claim is submitted to the court it is served to the defendant. The service is generally carried out by registered mail. When it is shown to be impossible to serve the complaint via registered mail, the service is instead made through direct contact. The defendant then has 30 days to present his reply where he can defend itself by alleging procedural objections, arguing that facts are not true or stating other facts. The defendant may also file a counterclaim. However it must be connected with the main claim or with the defence against the main claim.
After written allegations was made the judge calls for a pre-trial hearing. At the final hearing the witness testifies and other proofs are taken. The final hearing ends with the court’s decision about contested facts and those remain unproven. If the defendant thereafter does not pay the amount he is required to pay within the term of the judgment, it is up to the creditor to start enforcement proceedings.
Enforcement proceeding
An enforcement proceeding begins with an application whereby the plaintiff identify his credit, the debtor and assets to be apprehended. Depending on the title and amount to enforce there may be a service of execution or an immediate seizure of debtor’s property. If there is a seizure and if there is a real guarantee, other creditors are served so that they can claim their credits.
The next phase is the sale of the property in order to pay to the creditor.
All execution acts such as service, attachment of property or earnings, sale and payment are made by an execution agent. The Judge has control over the execution, which means that he can always verify the legality of the execution agent´s acts.
Special procedures
In addition to the basic procedures there are several special procedures in Portuguese law. It is the case of the order of payment (“injunção”). Thought a simple procedure a creditor can obtain a writ of execution against his debtor. This procedure is not limited to small claims, but is eminently suited for those. This proceeding starts by completing a given form. The Court’s Secretary sends then a demand letter requesting debtor to pay the debt. The defendant has 15 days to oppose for payment served. In case of difficulty of tracing debtor it entitles also creditor to fast-track proceedings. If debtor fails to oppose or does not dispute the request to pay, the Court’s Secretary himself allows the immediate enforcement. The average timeframe required to obtain an execution order is two to three months. But if the request to pay is disputed by the debtor, it has to be then submitted to the judge appreciation and it can take about one year or more to be judged.
Court costs
Court costs of the civil law procedure are determined by the Court and not subject to any negotiation.
Generally all costs depend on the amount of the outstanding principal and interests. There are a range of different fees that can apply during a procedure dependant on the amount of monies outstanding.
Bankruptcy
The insolvency proceedings in Portugal can be initiated by the debtor or by creditors. If the debtor initiates a legal proceeding he should give in details of his assets, details of the claims and of the creditors, and a report stating the leading cause to the initiation of the proceedings of insolvency. If is a creditor that initiates the proceeding, he should give in details about the credit as well as present to court any facts that should presume the debtor is insolvent.
The insolvency proceeding is characterized by having two distinct phases: a declaratory phase and an enforcement one. The declaratory phase aims at the declaration of insolvency of the debtor. The enforcement phase consists of the execution of the assets of the debtor, the apprehension and liquidation of the goods, the identification of the liabilities, and the payment to the creditors.
The declaration of insolvency could have also criminal consequences. It is also possible that after the declaration of insolvency the creditors attempt to arrange through court the recovery of the company. If the recovery is the measure to be taken, all enforcements stop at once. A certain period of time is given so that the company tries to recover from is financial situation. Normally creditors agree on a plan of payment of the existing debts with the forgiveness of the interests and part of the principal debt. If during this period of time the company do not pay according to this plan, creditors can claim the company’s insolvency.
Reorganization
Recently (2012) another procedure was approved. It is the Special Corporate Revitalization Procedure “Processo Especial de Revitalização – PER” proceeding. The proceeding consists mostly in a simplified conciliation procedure involving the debtor and his creditors under the assistance of an interim administrator appointed by the court, with the purpose to reach agreement on a recovery plan, which shall thereafter be approved by the court.
Creditors can freely decide upon the contents of the plan. Under this proceeding the role of the court is just to confirm that the process is legally valid. In each case creditor must claim its credits in 30 (general insolvency proceeding) or 20 days (“processo especial de revitalização”) after publication in the Official State Gazette.