Debt Collection Agency in Portugal

Debt Collection in Portugal

• Rates of payment and late payment interest are in compliance with relevant EU rules; furthermore, the standards set are among the most mild in Europe. Consequently, DSO appears high at about 69 days.

• The court procedure is a big obstacle when it comes to debt collection and it is best to settle first  with the help of recovery professionals. Alternate dispute resolution approaches and international courts (EU decisions will be equally enforceable in Portugal) may be worth considering where court is required in order to prevent incompetent domestic courts.

• Following changes enacted in 2012 to expand corporate restructuring prospects, insolvency cases still lead to business liquidation and it is unusual for unsecured debtors to reclaim their debts.

1. Summary

1.1. General financial information

1.1.1. Such documents are fairly reliable for all businesses to report their balance sheets and statements which are then eligible for review.

1.2. Key legal structures

1.2.1. Corporate debt responsibility is defined by legal structures, which can be summarized as follows:

• Sole Proprietorship (Empresario em Nome Individual) is essential for small businesses operated by an individual for which no business arrangement is needed. In this case the owner is responsible for all company debts. One or more people may also share ownership and responsibility by Partnerships (Sociedade em Nome Coletivo), in which case the partners may be collectively and separately accountable for the other partners' actions. Conversely, limited liability partnerships (Sociedade em Comandita) that grant the partners limited liability.

• Private Limited Responsibility Companies (Lda) represent the vast majority of Portuguese companies because they do not need minimum capital contributions (compared to EUR 5,000 prior to January 2011) while the responsibility of the investors is limited to their commitment. Public Limited Companies (SA) are used instead by larger structures that are likely to split their money into tradable securities (at least EUR 50,000). The owners ' responsibility in those companies is limited to the valuation of their stock.

• Foreign companies can preferably settle in Portugal by branch offices providing foreign parent company with no liability limits. It may also be possible to set up representative offices (escritório de representação), but they can not generate cash. Joint ventures may take the form of any legal structure listed above, but there is no need for incorporation (a contract drawn up for this purpose would be enough).

1.3. Regulatory framework

1.3.1. The legal system in Portugal is based on Civil Law, meaning that the rules are codified whereas the decisions of the courts have only a limited effect of creating law. County courts have general authority to deal with first instance disputes (Tribunais Judiciais de Primeira Instância), but usually they are split into different units concerned with particular economic issues (Tribunais de Comércio), jobs (Tribunais de Trabalho), maritime relations (Tribunais Marítimos) or criminal matters (Tribunais Criminais). Industrial courts exist in several parts of the country.

1.3.2. Disputes concerning public payments  must be taken before the civil courts at the same period. Appeals would then be put before one of the five courts of appeal in the world (Lisbon, Oporto, Évora, Coimbra and Guimarães) and the Supreme Court of Justice (Lisbon).

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. Domestic enterprises' payment activity remains slow partially due to a lack of banking assistance that limits the cash flow of companies and converts late payments into a cash management tactic. As a consequence, it is normal for firms in Portugal to decide to longer payment terms, and to receive payments on average in about 69 days. Tight conditions of payment to compensate for delays are usual.

2.2. Late interests

2.2.1. By Law Decree 62/2013 of 10 May 2013, two months after the compliance deadline originally set by the EU authorities, Directive 2011/7/EU which stipulates that payments must be made in the EU within 60 days has been transposed into national law.

2.2.2. The law provides that payment in business-to-business transactions will take place within 60 days from the date of issue and is therefore in accordance with the Directive; nevertheless, it is much more permissive than other EU Member States in which payment will take place within 30 days, unless otherwise decided between the parties. In fact, the typical payment terms for Portugal are 66 days, but the parties decide to longer payment terms if the conditions are not grossly unfair to the applicant.

2.2.3. Unless otherwise stipulated by law, late payment interest has to be determined on the basis of the refinancing rate of the European Central Bank, raised by at least 7 percentage points as reported in the Official Journal (Diário da República). Concern is primarily used as a tool of bargaining in practice.

2.3. Costs of debt collection

2.3.1. Likewise, EU rules allow borrowers to demand a fixed EUR 40 fee to cover their expenses, although extra payment charges may be requested in the process of legal proceedings to pay reasonable fees in excess of this amount (lawyers, rehabilitation companies etc).

2.4. Protecting ownership

2.4.1. Protection of title clauses aimed at preserving possession of products after full payment of the relevant invoice is admissible in Portugal under the Civil Code (Article 409) given that they are clearly stated in the contract and that the contract has been registered (real estate, vehicles, aircraft or boats). Having said that, in most business-to-business deals where the products are to be converted and turned into a new product, the provisions do not apply.

2.5. Payments

2.5.1. The most common methods of payment are as follows: Swift bank transfers are becoming increasingly popular because they are fast, secured and supported internationally and domestically by an increasingly developed banking network. Nevertheless, export transactions should be guaranteed through an Export Credit Insurance policy which helps to minimize the risk of sudden or unexpected insolvency of customers.

2.5.2. Furthermore, Standby Letters of Credit (a bank guarantees the credit quality and repayment capabilities of the debtor) are reliable guarantees even if they are not often used in Portugal. It may also be known as irrevocable and verified Documentary Letters of Credit (a debtor promises that a certain amount of money is made available to a borrower through a bank once certain provisions specifically agreed upon by the parties have been met).

2.5.3. Instead, arranging settlements in advance or down payments is preferable although these may be viewed as a lack of confidence. Checks, trade bills and video vouchers, as in many nations, will gradually be used as debt identification terms, rather than means of payment. When left unpaid, these would essentially make the debt certain and unchallenged, thereby granting access to fast-track litigation aimed at securing an enforceable payment order against the debtor.

3. Collecting payments

3.1. Amicable action

3.1.1. Portugal's judicial system is strong and arbitration of lawsuits is an exceedingly time consuming activity. Consequently, convenient mediation options must always be seen as an easy solution to lengthy and expensive legal proceedings. Nonetheless, hiring collection experts will help manage payment payments and would continue to prove extremely effective insofar as domestic companies dread more than litigation the lack of commercial ties.

3.1.2. In all cases, legal dunning will commence with a recorded Demand Letter advising the delinquent of his obligation to pay the principal within eight days, together with late payment interest (as decided to contractually or as a guide to a legitimate rate). It would also seem wise to check whether the debtor undergoes an insolvency procedure: the company would then be registered in the Trade Register (Registo Comercial) or in the Official Journal (Díario da Républica II serie).

3.2. Legal proceedings

3.2.1. Ordinary proceedings. Request fast-track online hearings (injunção) may be sought from the court where the debt is certain and unchallenged (i.e. where a debt identification label may be provided). Furthermore, a European Payment Order procedure facilitating the recovery of undisputed debts (under Regulation EC No 1896/2006) may also be triggered where the debtor company has assets in other EU Member States. In this situation, the complaining party may order the Council Court to issue an Order to Pay which will then be enforceable without exequatur proceedings in all European Union countries (except Denmark).

3.2.2. Therefore, the Acção Declarativa is the primary remedy in situations where an argument is contested and can not be resolved amicably. Once the lawsuit is lodged with the court and alerted to the claimant, they can file a defense within 30 days. However, failure to pay or reply would entitle the court to pass a default judgment on the creditor's behalf. When the allegation has been properly proved and decided by written statements and an oral process, the court may then award damages, solely as sought (not more) by the claimant group.

3.2.3. The parties must always be accompanied by a solicitor licensed in the Portuguese Law Bar Association before entering civil, and all relevant documents must be written in Portuguese. Insofar as legal proceedings in Portugal are long, it is finally worth considering having arbitration or going to a foreign forum because both arbitral awards and EU decisions are fairly enforceable by domestic courts.

3.2.4. The records that would appear to prove the claim such as communications (email or other), contracts, purchase orders, invoices, certificates, payment letters and receipts. As court representation must be done through an attorney, power of attorney is also required in case of court or arbitral files.

3.2.5. Time limits. Legal disputes will usually be put before the courts within 20 years (prazo de prescrição ordinário). That time limit is assumed to be a specific matter of substantive law (no margin), but may be expanded if any evidence supports interrupting the expiration of that legal term.

3.2.6. Provisional measures can help preserve the rights of the borrower awaiting a final decision insofar as the courts may require the temporary attachment of the debtor's properties (freezing orders, orders for the repossession of assets, etc.). The latter holds control over its properties in this situation, but loses the ability to dispose of them as long as the proceedings begin. The courts may also make injunctive or declaratory proceedings designed to protect the interests of the creditors.

3.2.7. Nonetheless, as a general rule, emergency relief would only be issued if the applicant had shown the compelling need to do so. The court can make its judgment ex parte in emergency situations (i.e., in the absence of the debtor), as it finds necessary. The courts may also recognize interim actions as definitive and binding rewards in certain cases, in which case the claimant may launch a substantive action to secure a review of the ruling.

3.2.8. The filing of a first-instance appellate ruling may be placed before the courts of appeal if it reaches EUR 3,740. Decisions made in second instance in excess of EUR 14.963 may also be put before the Supreme Court of Justice, but the Supreme Court of Justice would only recognize legal issues (incorrect definition, inability to state grounds, failure to comply with procedural criteria etc.). Under the Dupla Conforme law, first instance rulings made and accepted in second instance can not be put before the Supreme Court of Justice.

3.2.9 Enforcement of court decisions. A verdict becomes typically enforceable as long as it becomes definitive (i.e. when all the areas of appeal are exhausted). If the debtor fails to comply with the judgment, compulsory enforcement (juízos de execução) of the judgment may be requested by Attachment Orders granting access to the debtor's bank account and Garnishee Orders granting third party debt payment due to the debtor.

3.2.10. Duration of a legal action. It could take one year to achieve a judgment at first instance, while achieving a definitive and enforceable decision in Portugal might take up to two years, depending on the nature of the situation. Enforcement measures can be very simple, but it depends on the presence of properties or the complexity in finding the objects to be seized and sold.

3.2.11. In general, domestic courts would need more time to deal with claims involving foreign parties, especially since documents would then be translated whereas foreign witnesses might need to be heard.

3.2.12. Costs of legal action. In practice, the losing party will usually be required to pay part of the cost of the successful party, although sums are at the discretion of the judge.

3.2.13. The average calculation of court fees is impossible to provide, as these will rely on the scope of the case and the specific processes to be performed. The payments for the Bailiff are calculated according to a common chart. The rules of the Bar Association do not authorize dependent no-win-no-fee agreements but combine bid structures (low fixed payments and incentives for success) may be allowed.

3.3. Alternatives to legal action

3.3.1. Alternative Dispute Resolution Methods (ADR). As a consequence of domestic courts ' difficulties in providing prompt rulings, the use of Alternative Dispute Resolution Methods is growing since a new Arbitration Act came into force in March 2012 as a means of increasing the judicial responsiveness to litigation demands thus reducing the caseload of courts.

3.3.2. Mediation requires naming a mediator who is in charge of having the sides reach a compromise. In other terms, the mediator has no authority to decide on the parties ' behalf and can not commit them to a judgment. An agreement is only binding where a settlement agreement is concluded at the end of the mediation between the parties. The mediator really does act as settlement facilitator.

3.3.3. Arbitration requires the parties agreeing to rely on an independent and impartial arbitrator from a third party who has the power to resolve a disagreement on their behalf. The decision of the arbitrator shall be binding upon the parties.

3.3.4. ADR can be cost-effective as an out-of-court settlement method, generally reducing delays, allowing confidentiality to be preserved and offering a binding decision that can then be enforced before the courts where necessary. The legal tribunal may also be regarded when including international transactions. A specially drafted provision has to be included in the contract of the parties in all situations.

3.3.5. Additionally, Portugal is a signatory of the Rome I Regulation on the law applicable to contractual obligations, which stipulates that the parties to a contract that, through mutual agreement, choose the law applicable to their contract, and choose the court which will have jurisdiction over the conflicts. Foreign traders may therefore, as an alternative, agree to resolve their business disputes in a foreign forum (i.e. under foreign law or before a foreign tribunal). Nonetheless, domestic courts can maintain exclusive authority over compulsory Portuguese law laws, or where the international law selected is considered to be inconsistent with Portuguese public policy.

3.3.6. Furthermore, it is important that the arrangement be distinguished by an external relation (for example, one party is chosen domicile in another country, or the place of execution is situated abroad), and that a provision of jurisdiction be drawn up specifically for this purpose.

3.3.7.  Enforcement of international awards. International rulings in Portugal may be enforceable but flexibility may be needed and different circumstances that occur. On the one side, decisions made in an EU country will profit from the especially favorable requirements for compliance. Apart from EU enforcement judgments usually enforceable immediately in domestic courts, the two primary ways of imposing an EU judgment in Portugal are the use of a European Compliance Order (EEO, as provided for in Regulation EC No 805/2004) where the allegation is uncontested or the declaration of the judgment under the terms of the Brussels I Regulation (44/2001);

3.3.8. If the judgment applies as an uncontested assertion, it can be strictly implemented (i.e. without registration) through the use of an EEO given the debtor has established properties in the nation. Similarly, a European Small Claims Procedure (as provided for in Regulation EC 861/2007) aimed at eliminating intermediate steps can be relied on while enforcing decisions of up to EUR 2000.

3.3.9. The procedure for registering an EU judgment with domestic courts is relatively simple, if the claim is disputed. To order for the judgment to be recognized, the judgment holder will appeal to the court involved and provide the court with, among other records, an approved copy of the judgment, a validated transcript and, if interest is asserted, a letter stating the amount and interest rate at the time of the application and forwards. Once the judgment has been published, it can be applied as if it were given by domestic courts (such an exequatur process is no longer required from January 2015, according to Recast Regulation EC 1215/2012).

3.3.10. On the other hand, decisions made in foreign countries outside the EU will generally be accepted and applied on a reciprocity basis such that the originating country is subject to a bilateral or multilateral arrangement with Portugal negotiated for that reason. Exequatur prosecutions will take place in domestic courts, in the absence of equitable agreements. As a general rule, international rulings can not be challenged on the merits of the case, but courts may refuse admissibility if the foreign ruling in the issuing country is neither definitive nor enforceable, if it is considered inconsistent with domestic public policy or with decisions of domestic courts, if the offender has not benefited from a proper legal procedure, if the foreign court has imposed penalty

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4. Managing insolvent debtors

4.1. Insolvency in Portugal

In Portugal, insolvency is a matter of both cash flow and balance sheet. Portuguese Insolvency Law (Insolvency and Recovery Act, as authorized by Decree Law No 53/2004 of March 2004) originally provided for a single insolvency procedure (processo de insolvência) with a view to securing compensation by arbitration or liquidation, but revisions carried out in 2012 could be more effective in supporting companies in financial difficulty.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. Decree-Law 178/2012 created a' extrajudicial recovery system of companies ' (Processo Especial de Conciliação, PEC administered under the auspices of the IAPMEI). Under this IAPMEI negotiated process, the claimant and their investors (representing at least 50 percent of the debt) will reach a compromise in a discreet and cooperative manner. This scheme replaces a previous procedure regulated by Decree Law No 316/98 of 2008 which was not commonly used since any compromise had to be reached with creditors representing two-thirds of the debt. Recent comments show that just over 10 percent of businesses who underwent the latest PER test have become insolvent.

4.2.2. Debt restructuring. Debt arbitration under the 2004 statute put a financially troubled corporation under the supervision of a court-appointed trustee at the behest of the applicant, their investors and the Public Prosecutor (Ministério Público); The court appointed a creditors ' committee to accept proposed insolvency proposals but only had limited impact on the system.

4.2.3. After April 2012, a modern 'revitalization' process (Programa Especial de Revitalização, or PER as given under Law 16/2012) also enables financially distressed businesses to begin discussions with their investors on restructuring and debt relief.

4.2.4. A suspension delays any civil action for three months in order to protect the claimant while the parties attempt to reach a settlement that becomes binding on the parties as long as a quorum of creditors has been decided, as defined by law and approved by the court. Hence, while the purpose of the PER protocol is still to guarantee the creditors ' ultimate happiness, more versatility has been added to maximize rescue opportunities.

4.2.5. Winding up proceedings. Liquidation happens by apprehending and selling all the debtor company's assets. The procedure is done by public auction by a court official, an insolvency supervisor.

4.2.6. Priority Rules. The laws of priority normally apply as follows when administering the proceeds from the sale of the debtor's assets: guaranteed debts benefiting from priority status, privileged debts benefiting from general benefits (workers, social security, state), specific debts, and subordinated demands (which can only be fulfilled once all debts have been repaid). Some investors have trouble in most situations retrieving part of their debts. For domestic loans, an insolvency agreement calls for the recovery of VAT on assets not protected by credit insurance policies.

4.2.7. Cancelation of suspicious transactions. Liquidators are normally entitled to ask the courts to cancel suspicious transactions deemed harmful to the creditors and to reduce, frustrate, obstruct, endanger or delay creditors ' satisfaction in bankruptcy proceedings. A defendant duration is valid beginning four years before the start of the prosecutions.

4.2.8. Duration of insolvency process. Insolvency prosecutions can be time-consuming in Portugal, as in many nations, and could take between two years (on average) to nine years for the most complex cases.

4.2.9. The records that would appear to prove the claim such as communications (email or other), contracts, purchase orders, invoices, certificates, payment letters and receipts. Since legal representation must be provided through a solicitor, a power of attorney is also needed in case of trial or arbitral papers.