The Code on insolvencies in Portugal (CIRE) provides that acts that are detrimental to the insolvency estate, which have been carried out in the two years prior to the date of the start of the insolvency procedure, may be resolved for the benefit of the insolvency estate.
This mechanism is provided for both insolvencies of natural and legal persons.
For example : if the debtor files for insolvency in June 2024, transactions that took place between June 2022 and that date may be resolved for the benefit of the insolvency estate, subject to certain requirements, contrary to transactions carried out before June 2022, which may not be resolved.
The resolution of an act detrimental to the insolvency estate may be effected by the Insolvency Administrator, by registered letter with acknowledgement of receipt, within six months of becoming aware of the act, but no later than two years after the date of the declaration of insolvency.
Meaning: if the Administrator is only aware of the act three years after the declaration of insolvency, he will not be able to use the resolution mechanism.
The resolution has retroactive effects and presupposes that the situation that would have existed if the harmful act had not been carried out must be restored.
But what are considered acts harmful to the insolvency estate?
CIRE determines that acts that reduce, frustrate, hinder, endanger or delay the satisfaction of insolvency creditors are considered harmful to the estate.
There are acts that are always presumed to be detrimental to the insolvency estate, without admissibility of evidence to the contrary, such as:
- acts carried out by the debtor, free of charge, within the two years preceding the date on which the insolvency proceedings were initiated;
- acts carried out by the debtor, onerously, within the year preceding the date of the commencement of the insolvency procedure, in which the obligations assumed by the debtor manifestly exceed those of the counterparty.
For example : the sale of a property a few months before filing for insolvency, for €100,000.00, to a family member, must be resolved if the property had a market value of for example €200,000.00.
This is clearly an act that is detrimental to the satisfaction of the creditors’ claims.
In order for the act to be resolved, it is necessary to establish bad faith on the part of the third party acquirer. In this context, bad faith means, inter alia, the knowledge by the third party, at the time of the act, that the debtor was insolvent, even if imminently, and that the act was detrimental to the insolvency estate.
If the insolvent disagrees with a resolution of an act by the Insolvency Administrator, he has the right to challenge that resolution, if he does so within three months of the resolution, by means of legal action brought against the insolvency estate.
