Relegating the stigma of bankruptcy

Last month, July 2015 the Dominican Republic Congress approved a new law on insolvency, the new piece of legislation is identified as the Law of Restructuring and Settlement of Companies and Individuals Traders – the “Law” – called to create a safeguard procedure for that legal jurisdiction to protect merchants, companies and creditors in the event of financial difficulties of a company or business and which prevent it from complying with the assumed obligations; and thereby replacing an obsolete legal insolvency regime, marked by its inefficiency and archaism.

Indeed, the legislative measure in question introduces to the legal system of the Dominican Republic modern intervention procedures and mechanisms which will allow, where feasible, a company in financial difficulties to be submitted voluntarily or involuntarily and within a framework of protection, to a restructuring plan enabling the continuity of its operation, safeguarding the interest of creditors, preserving the productive unit and subsequently allowing greater job security; features which also will make progress and improvements in the investment climate in that country.

Until that time, the laws regulating the matter in general in the Dominican Republic, were collected primarily in the provisions of the Commercial Code, which is merely a translation of the French Restoration Commercial Code and was established in the Dominican Republic during the Haitian domination – 1821 – 1844 – ; remaining almost intact in this Code, the French original provisions, in force since the early XIX century.

As applicable under “bankruptcy” the rules were dealing almost exclusively about the asset liquidation of the bankrupt debtor; no reorganization procedures were contemplated nor any protection was offered against secured or privileged creditors, since the beginning of the procedure did not suspend collection actions that they could start to execute their guarantees, reason why the procedure affected creditors unsecured, this represents the credit holders who did not have any particular guarantee to recover the debt.

Within the framework of the provisions of Law 4582 of 1956 which made mandatory, before a creditor might start a bankruptcy action, to attempt a procedure prior arrangement with its debtor before the Chamber of Commerce and Production, existed the possibility of restructuring debts or achieve at least a repayment plan for them without resorting to judicial means in order to liquidate the debtor’s assets and proceed to the pro rata distribution of the results of that process.

However, this legislative attempt to safeguard debtors and creditors also excluded the secured creditors, which may have security rights in the debtor’s main assets, necessary for operation continuation and business development, and not being affected by the start of the tentative settlement procedure or agreement reached between the debtor and his unsecured creditors, would the process lack interest, those secured creditors could continue executing their rights on assets mentioned above, making the agreement with the debtor to honor its other obligations unfeasible.

Attempts before the Chamber of Commerce and Production under the procedure of tentative settlement would cause to expire in this stage all attempts of bankruptcy filings before judicial means, which in any case, appears to us as a purely vindictive interest, being directed to embarrass the debtor, inflicting the stigma attached to bankruptcy, not be the most effective process in our opinion for a different reason. Thus, possibly this is why, the judicial procedures and precedents on insolvency in the Dominican Republic are scarce and of little legal value as sources of rights in the matter.

Preserving the mechanisms and processes of liquidation for companies or businesses for which no reorganization procedure were viable, the new Law introduces the option of reorganization of a company before special courts created by Law, and whose interim authority, and until its effective creation, will be handled by the ordinary courts of the Dominican Republic.

The Law allows the use of these procedures only for traders, as in the previous regime, but in opposition, it takes into account the different forms of corporate organization dedicated to trade and not only individuals classified as traders under the Commercial Code, foreseeing specific arrangements applicable to commercial companies, domestic or foreign.

To start a reorganization or a restructuring procedure as it is called in the new Law in order to distinguish the term used in the context of the provisions of Article 323 of the Tax Code with respect to companies reorganizations, a debtor in financial difficulties may file a voluntary request before the competent court on the basis of his domicile; the same request can be filed by the debtor’s creditors who qualify based on the amount of their credits and certain additional requirements which would have to be verified.

Following the request, the court will appoint a “verifier” of which must be registered on a panel of qualified professionals to be held at the Chamber of Commerce and Production of the debtor’s domicile, to whom the debtor must cooperate as required by Law, providing all necessary information and support, and access to the books, records and financial statements which enable the performance of duties of the verifier which will be to verify the certainty of the stating restructuring request, ruling and informing the court dealing with the financial situation of the debtor.

After the request, the competent court must then appoint a “conciliator”, also within a registry of qualified and maintained professionals for this purpose, and who will be responsible to, among other things, develop and negotiate a restructuring plan, evaluate and recommend the disposition of existing agreements before the beginning of the process, and supervise the operation of the debtor which would be equally subjected to supervision and approval of a qualified majority of creditors, to which purposes none of them can concentrate more than 50% of the votes, regardless of the amount of their credits. The court’s decision would become the subject of a publication in a national newspaper on the website of the Judiciary, inviting the debtor’s creditors in the process of recognition and registration of credits.

By Starting the process of reconciliation and negotiation of the restructuring plan, the goal of which must be to reach an agreement containing all measures to ensure that the debtor may be able to meet its financial obligations and develop steadily his business or trade, taking into consideration the particularities and characteristics of the borrower, and weight among others the following: the sale of assets, closure of production units, the need for financing, payment of secured creditors and reducing debt of unsecured creditors, as well as the conversion of debt into equity or other securities or measures that the case merits and be agreed by the creditor and the debtor.

The Law introduces additional points in the framework of the restructuring that are of interest, including:

(i) The possibility of a total or partial transfer of the company in difficulties as a feasible alternative for creditors to recover all or most of their debts;
(ii) Submission of a previous agreement of a restructuring plan before a restructuring request to publicize the financial and governance aspects of the business that would allow, according to the parties, resolve difficulties or situations that place the debtor in real or imminent restructuring; and,
(iii) The possibility of agreeing and implementing an abbreviated restructuring procedure when the total amount of debts involved does not exceed $10,000,000 DOP – to be indexed for inflation purposes – and to purposes in which the Law covers the reduction of the deadlines for the procedure to half, and it dispenses for the process the need to appoint certain officers usually required in general by law, including a Creditors’ Advisory or Conciliator Experts Auxiliary, all measures that would be subject to the approval of creditors and approval of plan by the competent court.

By determining the restructuring plan to be not feasible or by not reaching a plan within the limits provided by the Law, the conciliator would have to submit to the court the termination of the process and request the initiation of judicial liquidation.

Unlike the previous regime, where the start of the bankruptcy process entailed depriving the debtor of managing his business, the new regime allows the continuation of the later under the administration of the debtor, which is the general rule, while the exception will be the designation Conciliator as provisional administrator to replace the debtor in business management, before certain causes which justify the measure.

It is a similar principle to that applicable under US law comprised of the so-called Chapter 11, which is justified because it is reasonable to think that the familiarity of the debtor in the business management before the financial difficulties, could be crucial to the ability of that it can be reorganized, being dramatic the potential consequences of a management change in operations of the business in difficulty.

The permanence of the debtor in business management also allows the granting of new financing post restructuring process initiation; financing which, being granted in such circumstances, and with the interest of making feasible the restructuring process or the continuity of the operation would have a greater priority range than that of pre-existing debts for its repayment.

The process that preceded the adoption of the Law of Commercial Restructuring was long and difficult; since its beginning with the circulation, ten years ago, of this law’s draft its socialization until its formal introduction as a bill in 2007, the piece has been subjected to some critics, and some opposition, or rather, lack of support from key economic sectors of the Dominican Republic.

We understand, however, that the critics reflect a lack of culture in sustainable insolvency, and entrenched positions under legal uncertainty that both creditors and debtors are exposed when asserting their rights, under debts recovery and the abuse of the legal means available today are committed to achieve or expand the collection.

It shall come into testing whether the mechanisms to safeguard the interests of creditors have been appropriate, and whether the applicable penalties for the start of an insolvency procedure in bad faith or frivolous way, with the only interest to delay a debt repayment, are sufficiently severe and are properly imposed by the courts to discourage the abuse of rights granted by the Law.

The creation of specialized courts to hear these procedures is equally questioned, instead of subjecting, at least restructuring procedures and not the procedures leading to the settlement, the competence of judicial bodies, as was suggested in projects prior to the passed Law which subjected them to the jurisdiction of the Chambers of Commerce and Production, in harmony with the existing experience and precedents of Law 4582 of 1956, and what was meant as a better alternative to complete these procedures appropriately and rapidly. The Interest perhaps in creating special courts may allow or respond to safeguard the right to accessible, timely and gratuitous justice, reducing the cost to the parties in interest to undergo these procedures, compared with the costs that might be derived from letting this process management in the hands of the Chambers of Commerce and Production, even its official nature.

It will be a long and equally hard road to achieve now the implementation of a piece of legislation whose interpretation and application requires some specialization and training in this area from the involved parties, to which therefore the judges who will be dealing with such matters should undergo.

Despite all this, it is true that the Dominican Republic has undergone considerable economic crises – even recent ones – that have led to the disappearance of companies and the consequent loss of important domestic and foreign investments, and question whether their luck would have been the same, if an adequate legal framework existed to address the experienced financial difficulties, not entirely attributable to management failures, but external factors to which any industry might be exposed.

For the implementation of the Law, it requires that the Executive Power develops and puts in place an Implementing Regulation of the later within 12 months, anticipating also that the entry into force of the Law is scheduled 18 months counted from its promulgation.