Introduction: The Question

A recent judgment of the Court of Appeal of Porto (available online on the Bases Jurídico-Documentais do Instituto de Gestão Financeira e Equipamentos da Justiça, I.P. through the site (Case No. 1017/13.0TBSJM-A.P1 – Rapporteur: Deolinda Varão), dated 6 March 2014, ruled on the question of whether a private limited liability (quota) company could only file for insolvency with the consent  of all  of its three managing partners.

Development of the Question

According to Article 19 of the Código da Insolvência e Recuperação de Empresas (CIRE) Code of Insolvency and Recovery of Companies (Code of Insolvency and Recovery of Companies), where the debtor is not a natural person, the initiative to file for insolvency lies with the corporate body tasked with its administration, or, if this is not the case, with any of its directors. This provision of the law must be read in conjunction with the provision set out in Article 6(1)(a) of the same legislation, whe reby, for the purposes of the CIRE, where the debtor is not a natural person, the directors are deemed to be the persons tasked with the administration or liquidation of the entity or assets in question , in particular the members of the corporate body that is competent for that purpose.

According to the prevailing doctrine that has addressed this question, Article 19 of the CIRE does not only give the members of the corporate bodies the competence to perform the acts necessary to effectively file for insolvency, rather it also gives them the competence necessary to decide on whether to bring the action or not . Therefore, the scope of the provision must be interpreted in this broad sense , as giving to the members of the corporate bodies the legal power to take the decision to file  for insolvency, regardless of how they usually organise themselves to distribute the powers and competences to exercise rights, perform acts and comply with the obligations of the debtor. And this understanding is sustained by the legal framework established for the non-compliance with that such duty. As is easily seen from the perusal of Article 186 (3) and (4), 188 and 189, in case of non-timely filing, the directors shall be personally subject to various penalties of a personal and financial nature. It is not acceptable, strictly speaking, that the directors are subject to penalties for non -filing if, at the same time, they do not have the necessary competence to decide whether to bring the action or not. Where the administration is a plural body – as is the case in the action at stake – the question arises of how does the application for insolvency bind the legal person .

It so happens that this question is not a specific to the filing for insolvency , for which reason the reply to the same must be common to the one given to the question of the procedures to be followed to bind the debtor, in general terms . There is therefore, no basis to sustain that Article 19 of the CIRE introduces exception mechanisms in terms of how the debtor is bound; incidentally, the reference to the competence of the corporate body tasked with the administration is decisive. In addition to the literal reason referred above, another reason (of a legal nature) in favour of the opinion that whether or not a legal person is bound by the application for insolvency must be analysed in general terms, is given by Article 24(2) of the CIRE, which requires that the application for insolvency be filed together with a document proving the powers of the directors that represent the legal person and a copy of the minutes concerning the resolution to file the application by the relevant administrative body, where applicable . Incidentally,  the failure to attach such document is not only grounds for the preliminary rejectio n of the application for a declaration of insolvency (Article 27(2)(b) of the CIRE), as the lack of powers of the members of the corporate bodies that submit the application is also grounds for its preliminary rejection in accordance with paragraph (a) of the same legal provision, since such lack does, in any case, constitute a dilatory plea .

In the case referred to above, since the applicant of the insolvency is a private limited liability (quota) company, the question must be settled within the scope of corporate law, in particular, based on the provisions of Article 261(1) of the Código das Sociedades Comerciais (“CSC”) (Companies Code). To begin with, quota companies are administered by the management body, which can be individual or plural (Article 252(1) of the CSC).

In accordance with article 261(1) of the CSC on the operation of plural management, where there are several managers and unless otherwise provided for by a clause of the articles of association, their powers are exercised together, it being deemed that resolutions approved by majority are valid and that the company is bound by the legal transactions concluded by the majority of the managers or ratified by them . Thus, the first part of the provision sets out rules concerning the administ ration or management stricto sensu and the second part concerns active representation. In both those situations, a conjunction system or conjunctive method was adopted, in which typically the various members of the corporate bodies can only act together, although, in the second situation, the conjunctive method or system is mitigated by the rule of majority .

From the literal element of Article 261(1) of the CSC referred to above follows that the entire provision is residual in nature and can be excluded if the partners so wish and express in various forms, in particular, in the articles of association . Notwithstanding the above, not all the clauses of the articles of association that exclude this residual framework of article 261(1) of the CSC are lawful and, even if they are, not all are enforceable against third parties, also by virtue of the provisions of Article 260(1) of the same legislation, which sets out that the acts performed by managers on behalf of the company and within the powers conferred to them by law, bind the company vis-  third parties, despite the limitations set out in the articles of association or arising from partners’ resolutions.

In this specific case, the articles of association set out that the company applying for insolvency is bound by the signature of three partners. On the other hand, with regard to the administration or management of the company, the joint system rule residually set out in the first part of Article 261(1) of the CSC was reproduced. However, with regard to the active representation of the company (and how the same is bound), the majority rule set out in the second part of that provision was eliminated and replaced with the unanimity rule, whereby the company is bound through the intervention of all the managers, both in the resolutions and in the conclusion or ratification of legal transactions [which term should be taken as “legal acts”].

Few doubt remains concerning the validity and enforceability against third parties of this legal framework, since the rule of Article 261(1) of the CSC only permits the understanding above. Indeed, if the clause of the articles of association requires that the company be represented by a number greater than the majority, the clause that provides otherwise must be observed for the company to be bound. Such clause, as well as the others, is enforceable against third parties in accordance with the provision of Article 168 of the CSC. The clause requiring the intervention of more than the majority of the managers for the company to be bound is a limitation of the power of representation of the managers. But it is a limitation in terms of the form of exercise of the powers, rather than in terms of their scope. And Article 260(1) only concerns limitations relating to the scope of the powers of representation.

In addition to the thesis set forth above, endorsed by much of the doctrine, we have the literal element, arising from the provisions of Article 261(1) of the CSC whereby, unless the majority intervenes, the company is not bound. Consequently, if the articles of association require more than the majority and the number of managers required does not intervene, the company is not bound. The limitations in Article 260(1) relate to acts that the managers can perform and that are listed at the beginning of the provision. The limitations at stake only relate to what are the acts that the managers can carry out or not (the scope of the powers of representation) rather than the limitations relating to the manner in which those powers of representation are exercised to perform those acts (which matter is dealt with in Article 261).

Reply to the Question Raised

In light of the above, the above mentioned judgment concludes that, based on the rules on the functioning of the management set out in the articles of association, the corporate body of the applicant company could only file for its insolvency if the three managing partners acted together, either as a result of a resolution taken unanimously, or through the simultaneous performance of the act itself by the three managers, with the possibility of subsequent ratification: only such joint resolution or act would bind the company filing for insolvency. This solution cannot be countered by the provisions of Article 186 et seq. of the CIRE, providing for the liability of the directors of legal persons arising from the non-compliance with the duty to file for insolvency, since the presumption of guilt established against them in a situation of insolvency (Article 186(3)(a) of the CIRE) can always be excluded in the procedural issue of qualification of the insolvency, by providing evidence that they voted to file for insolvency  (which evidence is easy to provide by attaching the minutes of the corporate body’s resolution )

– See Articles 188 and 189 of the CIRE, in particular paragraph a) of number 2 of the latter: once the insolvency is declared, on account of the fact that the requirements of the same are objectively met, only the members of the corporate body  that  have opposed and prevented the filing for insolvency will be held liable under the terms of that provision.

However, the question raised in the case is not limited to this, inasmuch as the filing for insolvency was not resolved by Management but rather by the general meeting of the partners. Article 19 of the CIRE did not reproduce Article 7 of the CPEREF, as amended by DL 315/98, whereby the initiative for filing was extended to the general meeting of partners. Notwithstanding the above, there is doctrine that considers that such change is not specially significant, since Article 19 does not exclude the intervention of the general meeting of partners for the filing to occur, provided it does so within the scope o f its normal powers. But it does not constitute an autonomous source of those powers, unlike what  happens  with  regard  to   powers   granted   to   directors   in   this   domain. This understanding is undoubtedly the one that best fits the legislative thinking . What really matters is that, once the insolvency is verified, the debtor files in a timely fashion, while the question of who promotes the filing is a minor one . That is why the law extends to shareholders the corresponding competence, which they would not normally have.

The general meeting of partners has competence to resolve on the dissolution of the company, insolvency being one of the forms of dissolution of the company (Articles 246(1)(i) and Article 141(1)(e) both of the CSC). Therefore, nothing precludes  the general meeting of partners from resolving to file for the insolvency of the company (all the more so as the list of the various paragraphs of number 1 of Article 246 above is not exhaustive). Once the resolution is taken, the general meeting will have competence to file for the insolvency of the company, in accordance with Article 19 of the CIRE, which does not exclude such possibility.

In the case of the files under consideration, there is another specialty relating to the fact that the resolution of the general meeting of partners of the applicant has a procedural flaw, since the same was adopted by a simple majority, while the articles of association (which eliminates the residual rule of Article 250(3) of the CSC) establishes that resolutions need to be taken by more than 2/3 of the votes of the share capital – which corresponds to unanimity, because there are three partners who hold equal quotas. In general, however, such procedural flaw only gives rise to the annullability of the resolution (Article 58(1)(a) of the CSC); as provided for in Article 59 of the CSC, such annullability is not recognised of the court’s own motion and which the appellant, partner of the applicant, did not timely claim to have relied on, in accordance with this last provision – as well as it did not rely on other flaws of the resolution, in particular, the convening notice of the meeting (Article 56 of the CSC). Accordingly, the resolution to file for the insolvency of the applicant must be considered valid as well as that t he body (the general meeting) filing for insolvency had the competence to do so .

It may seem inconsistent that the lack of unanimity of the partners and managers should bring about the lack of powers of a corporate body (management) but not of another corporate body (general meeting), but the reason for such apparent inconsistency is the special circumstance that the applicant is a company formed by three partners all of them managers. Despite this absolute coincidence of partners and managers, the specific rules of the different corporate bodies (in this case, management and general meeting) still apply; these rules, by themselves and in conjunction with the provisions of the articles of association, lead to different results.