DISTRESSED M&A AND INSOLVENCY AND RESTRUCTURING PROCEEDINGS: WHAT THE FUTURE HOLDS

1. Introduction

In Portugal, although distressed M&A transactions may be carried out and concluded out of court – through, for instance, standard out-of-court asset or share deals -, a significant number of distressed M&A transactions occur in the context of restructuring or insolvency proceedings.

These types of transactions have a significant number of risks that, although mitigated due to judicial sanctioning in comparison to the out-of-court, still must be considered by a potential buyer of the

distressed company.

The distressed M&A landscape will benefit greatly from future legislative reforms, such as the proposed

European Union Directive establishing pre-pack proceedings, which will mitigate risks, expedite the sale of the distressed company, and ensure the continuity of its activity.

For the purpose of this short article, we will analyze the risks and benefits of carrying out distressed M&A transactions in the context of restructuring or insolvency proceedings, review the current legal framework, and reflect on how distressed M&A transactions may benefit from the implementation of a pre-pack mechanism.

2. Overview of the risks and benefits in comparison to out-of-court solutions

 

The upside of carrying out such transactions in the context of restructuring or insolvency proceedings is that it mitigates some of the risks associated with distressed transactions carried out outside of court. For instance, asset and/or share deals, like any other act carried out by the distressed company outside of formal

proceedings, may be subject to clawback.

However, the benefit of having the transaction, once fully implemented, beyond challenge, is offset by the fact that, in formal restructuring or insolvency proceedings, the buyer will likely need to negotiate with all relevant parties, namely the creditors, in order to obtain their approval. Moreover, while uncommon, even if the transaction is approved by the distressed company’s creditors in a

restructuring plan, it is possible that it fails to go through, since it will need to be judicially sanctioned by a Commercial Court, which may decide against it. It may also be challenged by any creditor through appeal.

That being said, and now referring specifically to insolvency proceedings, even if the transaction fails to be implemented in a restructuring plan – either because it was not approved by the creditors or because the Court decided not to sanction it – the buyer may still attempt to acquire the distressed company’s business

unit or its assets during the liquidation phase of the insolvency proceedings. In such a scenario, the sale of the company or its assets will be conducted by the insolvency receiver, who will, as a rule, sell them through a competitive process. Depending on the specific circumstances, a secured creditor may have the possibility of acquiring the distressed company’s assets if its security right is attached to those assets.

Another downside arises from the fact that the administration of the distressed company may be handed over to the insolvency receiver until the transaction is concluded. However, it must be noted that the distressed company can request to retain its own administration during the procedure but will have to submit a plan

within 30 days to maintain the administration.

Finally, it is important to note that insolvency proceedings – specifically those that are not expedited through Court sanctioning of an insolvency plan or those involving a significant number of uncooperative creditors – can be quite lengthy. A restructuring proceeding, although considerably faster than the insolvency proceeding, may still take up to three months to be fully implemented in the very best-case scenario. The time required to fully implement the transaction in the context of formal restructuring or insolvency proceedings also carries another downside: reputational damage to the distressed company, difficulties in obtaining financing, and difficulties with suppliers, since these formal proceedings are publicly announced and therefore disclose the financial state of the distressed company.

All the risks mentioned in this chapter associated with M&A transactions carried out in the context of these formal proceedings will, to some extent, be mitigated by the transposition of the Directive of the European Parliament and of the Council harmonizing certain aspects of insolvency law (Proposal COM/2022/702).

3. Overview of current legal framework

Similarly to out-of-court distressed M&A transactions, those carried out in the context of restructuring or insolvency proceedings are governed by the Portuguese Companies Code and the Portuguese Securities Code, as well as, of course, by the Portuguese Insolvency and Restructuring Code.

As with its out-of-court counterpart, a distressed M&A transaction carried out in the context of restructuring or insolvency proceedings may be implemented through an asset or share deal. The desired transaction may be implemented through a restructuring plan or, in the specific case of insolvency proceedings, during the liquidation phase.

For the purpose of this short article, since the main questions arising from implementing a distressed M&A transaction through a restructuring plan in a restructuring proceeding are similar to those arising in an insolvency proceeding, we will analyze them together.

1. i) implementing the transaction through a restructuring plan

In both insolvency^{1In the Insolvency proceeding creditors and the insolvency receiver may also present a plan.} and restructuring proceedings, the restructuring plan may be presented by the debtor, who, to better justify the price of the distressed M&A transaction and to compel its creditors to approve it, may present independent evaluations of the company or of its assets’ worth.

Then, the plan is presented to the creditors for their approval, who, depending on the specific nature of the proceeding, may suggest modifications.

In an insolvency proceeding the plan is approved when it is voted favorably by half of the total votes issued, of which more than half must refer to non-

subordinated claims, and provided that the creditors attending the relevant meeting represent at least one-third of the total credits held by creditors with a right to vote.

In a restructuring proceeding, in general terms,^{2The law defines several ways of obtaining the necessary majority for approval.} the plan is approved when it is voted favorably by creditors who represent at least one-third of the total credits where the plan collects more than two-thirds of the total votes issued, of which more than half must correspond to non-subordinated credits.

As mentioned previously, the Commercial Court may ex officio refuse to sanction the approved plan in the event of a non-negligible breach of procedural rules or the rules applicable to its content, whatever their nature, and also when, within a reasonable period of time to be determined, the conditions precedent to the plan are not met or the acts or measures that must precede approval are not performed.

At the request of a creditor, the Commercial Court may refuse to sanction the plan, provided that the creditor has opposed the approval of the presented plan prior to its adoption and demonstrates that (i) their situation under the plan is likely to be less favorable than it would be in the absence of any plan, particularly in view of the situation resulting from an agreement already concluded in an out-of-court debt settlement procedure, or that (ii) the plan provides a creditor with an economic value greater than the nominal amount of their claims on the insolvency, plus the value of any contributions they may have to make.

In a restructuring proceeding, if the plan is not approved or is not sanctioned by the Court for any reason, the judicial receiver appointed must express their opinion on whether the company is insolvent. If the judicial receiver considers that the company is insolvent and the company does not oppose its insolvency declaration, the Commercial Court must declare the insolvency of the distressed company, converting the restructuring into an insolvency proceeding. In an insolvency proceeding, a plan may also be proposed; however, if it is not approved or not sanctioned by the Court, the liquidation phase of the company or of its assets will begin.

1. ii) implementing the transaction through the liquidation phase

 

In the liquidation phase, the insolvency receiver decides on the value and type of sale of the company’s business unit or of its assets, after hearing the distressed company and any creditor with a security right over the assets being sold. By law, the company’s business unit should be sold as a whole, unless there is no satisfactory offer or there is a recognized advantage in liquidating or selling certain parts separately.

Preferably, the company’s business and assets are sold through a competitive process, namely through an electronic auction. Secured creditors may propose to purchase the asset for the same or higher than the projected sale price and may use their claims to pay the price, provided that no creditors are ranked with a priority over them.

4. What the future holds: pre-pack proceedings

A pre-packaged insolvency, as it is traditionally known, is a formal insolvency mechanism where the sale of a distressed company’s business or assets is negotiated with a buyer before the opening of insolvency proceedings. Pre-pack procedures are designed to ensure the operational continuity of an insolvent company or part thereof, thereby avoiding the devaluation resulting from the interruption of activity upon the declaration of insolvency.

The Directive (EU) 2026/799 of the European Parliament and of the Council of 30 March 2026 (from now on, “the EU Directive 2026/779”) establishes that pre-pack proceedings must be composed of two consecutive phases: the preparation phase and the liquidation phase. The preparation phase is aimed at finding an appropriate buyer for the debtor’s business or part thereof, while the liquidation phase is aimed at approving and executing the sale of the debtor’s business or part thereof and at distributing the proceeds to the creditors.

These two phases are briefly analyzed below:

1. i) the preparation phase

The preparation phase begins with a request by the distressed company for the appointment of a supervisor. The monitor shall ensure the documentation and communication of each stage of the sale process and demonstrate that the sale is competitive, transparent, fair, and in accordance with market standards.

Among other responsibilities, the supervisor shall recommend the best proposal and declare that it does not constitute a manifest violation of the best interests of creditors test.

During the preparation phase, the distressed company retains management powers over its assets. If it becomes apparent that the distressed company will become insolvent or is already insolvent, it may benefit from a suspension of enforcement measures, provided that such suspension is necessary for the effective conduct of the pre-pack process. The suspension is not automatic and must be ordered by the court after consulting the supervisor and the affected creditors.

The preparation phase concludes with the supervisor’s selection of the best proposal.

1. ii) the liquidation phase

 

The liquidation phase begins with the declaration of the distressed company’s insolvency, during which the supervisor shall be appointed as the insolvency receiver and the sale of the distressed company shall be authorized on the terms proposed by the bidder selected by the supervisor, unless the supervisor has not issued the required opinion/declarations, or if the preparation phase was not conducted in a competitive, transparent, fair, and market-compliant manner.

It is important, however, to note that, if the court or the competent authority can decide that a valuation of the business of the debtor as a going concern is carried out on the ground that the best bid might not meet the best-interest-of-creditors test. However, when, under national law, the sale of the debtor’s business, or part thereof, requires the consent of the creditors, Member States may provide that the decision referred to in the first subparagraph can be taken by the creditors without the involvement of the court or competent authority.

Decisions to authorize or execute the sale are subject to appeal but shall not have suspensive effect, unless the appellant provides adequate security to cover potential losses caused by suspending the sale, or, where the appellant is a natural person, the court decides to waive the requirement to provide security, taking into account the circumstances of the case.

Once the sale is authorized and completed, the purchaser shall not assume any liability for the distressed company’s debts, unless expressly agreed.

5. Conclusion

 

The transposition of the EU Directive 2026/799 will have a significant impact on distressed M&A transactions and will mitigate – if not entirely eliminate – most of the risks and downsides mentioned above.

Firstly, its more straightforward procedure will allow for a faster completion of the transaction and therefore reduce any reputational damage and problems with financing and suppliers arising from a declaration of insolvency or from entering a restructuring procedure.

Secondly, since the transaction is subject to prior court approval, it may only be challenged where there is reasonable suspicion of abuse of the procedure, thereby eliminating the need to negotiate with the distressed company’s creditors to secure their approval.

Finally, the distressed company retains management powers over its assets.

The pre-pack procedure, as designed in the Directive, combines the convenience and benefits of an out-of-court solution with the legal certainty associated with a transaction carried out within formal proceedings.

Nevertheless, until the Directive is fully implemented in Portuguese law, the current legal framework governing insolvency and restructuring procedures still allows for the relatively straightforward implementation of distressed M&A transactions.