Legal alert no. 55

It was published, on March 2nd, Law n. 7/2018 which foresees the legal regime for the conversion into capital of credits held on a commercial company or a civil law company having a commercial form, with registered office in Portugal([1])([2]) and with a turnover, as results from the last approved accounts, equal to or higher than one million euros (see Art. 2, no. 4 of the referred Law).

In accordance with the referred Law, the creditors, whose credits represent, at least, two-thirds of all liabilities of the company and the majority of the non-subordinated credits([3]), may now propose to the company the conversion of their credits into share capital, whenever the following cumulative requirements are met:

a)  The company’s equity, as results from the last approved accounts or, if applicable, from intermediate accounts prepared by the management body and approved for less than three months, is lower than the share capital;

b)  If subordinated claims on the company with a value higher than 10% of all non-subordinated credits are in delay for more than 90 days, or, in case of partial reimbursement installments of capital or interest, provided that the same correspond to non-subordinated credits with a value higher than 25% of the total of subordinated credits.

It should also be noted that the conversion proposal may foresee the transformation of the company into a different type, as well as the exclusion of all shareholders, provided that the shares do not have any value and, in any case, it shall have attached:

a)  report of statutory auditor showing that the company’s equity is lower than the share capital and other necessary requirements;

b)  document including the proposals for modification of the share capital, in which it shall be described the specific scope of the transaction; it shall be foreseen, when applicable, the reduction of the share capital and the relevant justification; as well as, the amount of the share capital increase to be subscribed by the proposing creditors, through the conversion of their non-subordinated credits into shares, as well as the grounds of the ratio of conversion of the credit into capital; and

c)   project for the amendment of the company’s bylaws.

Please also note that, pursuant to the Law now approved, the shareholders always hold a pre-emption right in the capital increase, on the understanding that, in such case, the increase shall be made in cash, which shall be mandatorily used in the redemption of the credits that, under the proposal, would be converted into capital, thus safeguarding their relevant position.

Once the conversion proposal is received, it shall be immediately convened the general meeting of the company, which shall be held within 60 days from the receipt date of the proposal, in order to approve or refuse the resolutions referred therein.  

In case the proposal is refused and the general meeting is not held or the resolutions referred therein are not approved or implemented within 90 days from its receipt date, the proposing creditors may ask the court with jurisdiction for the insolvency procedure the judicial replacement of the resolution on the shareholding change, through the submission of a request having attached:  

a)  the conversion proposal, including all the relevant supporting documents;

b)  proof of refusal of the proposal, proof that the general meeting has not been held, statement subscribed by the company or minutes of the general meeting attesting that the proposal was not adopted, as applicable;

c)   a list of the known creditors, other than the proposing creditors.

After receiving the documents, the judge appoints a temporary judicial administrator and the judicial secretariat shall notify the non-proposing creditors included in the list of credits and shall publish in Citius the temporary credits list. The creditors shall, within a period of 20 days from such publication, indicate their credits and inform if they also intend to convert their credits into capital.

As regards to the judicial replacement procedure it should be noted that:

a)  the procedure has an urgent nature;

b)  the relevant final sentence enables the share capital reduction or increase, the amendment of the bylaws, the transformation and exclusion of shareholders, as well as the submission of the relevant registries.

Additionally, within 30 days from the res judicata of the sentence, the shareholders may acquire, or enable a third party appointed by them to acquire, the share capital resulting from the change, by the relevant nominal value, provided that they also acquire or pay all the remaining credits on the company held by the proposing creditors.

Finally, please note that the Law now approved also foresees the effects of the credits conversion under pending insolvency procedures, as well as the effects of the declaration of insolvency under pending credit conversion procedures. Thus:

a)   in case the company is declared insolvent:

  • the conversion proposal and the effects of the subsequent shareholders’ resolutions cease immediately;
  • if a judicial replacement procedure is pending, it will be terminated.

b)   In case the changes to the share capital resulting from the credits conversion are approved and registered:

  • the company shall forthwith communicate such changes to any pending insolvency procedure; and
  • the relevant procedure will be extinguished, unless the insolvency has been declared.

This Law enters into force on March 3rd, 2018.

Access here the full text of Law n. 7/2018, dated from March 2nd.


[1] Law n. 7/2018, dated from March 2nd, was approved under “Programa Capitalizar”, a program approved by the Ministers Council Resolution no. 42/2016, dated from August 18th, “strategic program to support the capitalization of companies, the resumption of investment and the relaunch of the economy, aiming at promoting more balanced financial structures, reducing the liabilities of economically viable companies, albeit with excessive levels of indebtedness, as well as at improving the conditions on access to finance of small and medium-sized enterprises” (no. 1 of the referred Resolution).

[2] The law now approved expressly excludes from its scope: (i) the conversion of credits held on insurance companies, credit institutions, financial companies, investment companies, publicly traded companies and entities included in the public business sector, as foreseen in Decree-Law n. 133/2013, dated from October 3rd, as amended; (ii) the conversion into capital, as set forth in this law, of credits held by public entities, except entities included in the public business sector; and (iii) the conversion into capital, as foreseen in this law, of credits on companies whose turnover, as results from the last approved accounts, is lower than € 1.000.000,00.

[3] In accordance with Art. 3, no. 2 of this Law, “it is considered subordinated credits and non-subordinated credits those as defined in Articles 47 and 48 of CIRE”.

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