By: Andrés López

On February 8, 2022, the Congress of the Republic approved Decree 8-2022, which contains and regulates the Insolvency Law, which has as its purpose the continuity and restructuring of credit, corporate and business obligations in general, said law will enter into force 90 days after its publication.

Among other aspects, the already approved law initiative contemplates facilitating individuals and corporate traders to face, and thus be able to solve different types of credit obligations pending compliance, arising from any type of legal business, provided that they have fallen into a state of insolvency.

Likewise, this regulation intends to install an effective process and system but prioritizing the continuity of the business that is in a state of insolvency, so that it can normally comply with the debts owed to its creditors, but in case this is impossible, to proceed with the liquidation of such entity in a way that is not too cumbersome, and under the legal guarantees granted by the law.

Insolvency and possible bankruptcy proceedings are currently regulated in the Civil and Commercial Procedural Code, which is outdated and almost inapplicable due to the ineffectiveness of the process.

Unlike the latter regulation, the new approved law intends to maintain “afloat” the operability of the companies, and in this way to be able to face the obligations of its different creditors, being able to avoid to a great extent the need to reach a liquidation of the company and its patrimony.

According to the Civil and Commercial Procedural Code that regulates the Voluntary Insolvency of Creditors and the Necessary Insolvency of Creditors, both figures, unlike what is established in the new law, entail the loss of the administration of their operations, however, the new regulation gives the option of being able to manage such operations through an Insolvency Administrator, either voluntarily or in a compulsory manner through a necessary insolvency, but preserving the active mass that the debtor has at its disposal.

GENERAL ASPECTS OF THE REGULATION AND ITS PROCESS:

1-. According to the regulations, the judicial declaration of bankruptcy may be requested in two main ways: the first by the debtor voluntarily, and the second being by any of its creditors, guarantors and/or sureties of the same debtor and by its co-debtors, in which case the bankruptcy is called necessary.

2-. In the first case mentioned above, the administration and control of the debtor’s assets on a voluntary basis will be in charge of the debtor, under the supervision of an insolvency administrator.

3-. In the second case, such administration would be in charge of the Trustee in Bankruptcy.

4-. The Insolvency Administrator is the figure created within the law to be in charge of the protection and conservation of the active mass (made up of the assets and rights that form part of the debtor’s assets at the date of the declaration of the insolvency proceeding), whose main function is to ensure the correct administration of the debtor’s assets in accordance with the provisions of this law.

In voluntary insolvency proceedings, the debtor itself may choose him/her from a list of three persons proposed by the National Insolvency Directorate and the Judge will appoint him/her in the resolution declaring the insolvency proceeding. In the necessary insolvency proceeding, the Insolvency Administrator will be selected by the creditors representing more than half of the debtor’s liabilities.

5-. The purpose of the Reorganization Plan is the partial or total recovery of recognized credits and the continuity of the debtor’s activity. Such plan may consider a financial, administrative, or operational reorganization and may be agreed on assets, and present and future rights. Both debtors and creditors may propose solutions and achieve reorganization plans in accordance with the provisions of this law. The reorganization plan, once validated, shall be binding on the debtor and all its creditors.

6-. Regarding its procedure, the reorganization proceeding must be filed before the Courts of First Instance of the Civil Branch of the place where the debtor has its center of operations or domicile. Failing this, it may be filed in the place where the debtor had its last domicile. Jurisdiction in bankruptcy proceedings is non extendable.

The court hearing the insolvency proceeding will also have jurisdiction over corporate liability actions brought against the administrators or directors of insolvent companies, as well as revocation actions related to the assets or liabilities of the insolvency proceeding. The Judicial Branch may create specialized insolvency courts.

7-. In general, the insolvency proceeding will be processed in accordance with the principles and rules established by the Code of Civil and Commercial Procedure for the Oral Trial, in which case the Judge, at the request of a party or ex officio, considering the nature of the insolvency proceeding and the complexity of the matter, may appoint the hearings that may be necessary, and must at least support those that are developed in this law, which are the first hearing where the Judge will dictate:

  • Declaring or not the insolvency proceeding
  • The suspension or limitation of the debtor’s possession over the insolvency estate
  • The appointment of the Insolvency Administrator
  • The remuneration of the Insolvency Administrator

From the publication of the judicial declaration of the insolvency proceeding, the creditors will have a period of 15 days to present themselves to verify their claims. Creditors, whether they have received the communication from the Insolvency Administrator, who do not appear to verify their claims within the period, will have to verify them judicially, at their own expense, and will lose the right to receive the participation that would have corresponded to them in the payments already made.

At the second hearing the Insolvency Administrator will present his final report with the inventory of the assets and the list of creditors. For their part, the creditors representing at least 60% of the liabilities approve or reject the recommendation to reorganize or liquidate contained in the Bankruptcy Administrator’s final report, and the Judge will issue an order approving them and will order the liquidation. If after the publication of the bankruptcy plan there is no acceptance within the 15-day period as indicated in the regulations, the Judge may order the liquidation.

8-. At any stage of the proceeding, at the request and under the responsibility of the petitioner, the Judge may order precautionary measures to protect the integrity of the debtor’s assets.

9-. After the resolution, and if the events established in the law occur, the Bankruptcy Judge may always order the liquidation, and the person in charge of executing it is the Bankruptcy Trustee appointed for such purpose.

10-. The judicial resolutions issued in the bankruptcy proceedings may only be challenged by means of the appeals of revocation and appeal. Cassation may not be used in relation to this law. The following resolutions, among others, shall be subject to appeal:

  • That which declares the bankruptcy
  • That which orders the liquidation of the active mass
  • That which resolves the termination of the insolvency proceeding
  • That which resolves the termination of the insolvency proceeding