Restructuring and bankruptcy law: boosting investors’ confidence in insolvency situations in the Dominican Republic
August 2016 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING
The lack of efficient insolvency regulation constitutes a major challenge for developing economies. There appears to be a strong correlation between modern bankruptcy laws and economic growth, to the point where the likelihood of an investment would often be subject to the existence of the former. The recently enacted Law 141-15 on restructuring and bankruptcy (the Law) places the Dominican Republic in the vanguard of countries with modern insolvency laws, and it is the latest country to join a growing regional trend.
The new Law also strengthens the investment climate in the country, given that creditors will be less sceptical when offering loans or investing because they will find self-assurance in an organised system that sets clear rules and eases the process of recovering debts. The Law seeks mainly to: (i) protect creditors from debtors facing financial difficulties; (ii) guarantee that entities remain operating; and (iii) promote cooperation and coordination vis-à-vis cross-border restructuring and bankruptcy proceedings.
This Law replaces the existing and obsolete regulation on the matter that dates back to the nineteenth century where the debtor, when facing bankruptcy, had no option but to engage in negotiations with its creditors or close its operations, with the remaining assets, if any, seized by the creditors. In any case, many debts were unrecovered due to the obsolescence of the process.
To add another layer of complexity to the already burdensome process, debtors and creditors were forced to undergo ‘private’ reorganisations or enter into out-of-court agreements, as the law at the time did not provide for restructuring proceedings. These were private agreements which faced many practical inconsistencies, including their unenforceability against third parties, which meant that unless all creditors executed the said agreement, the debtor could still be subject to security enforcement by non-signatory third parties.
In a sharp contrast with the old law, the new Law establishes a judicial restructuring process, which may be started at the request of the debtor or any of the creditors, and seeks to keep a business in financial distress operable. Upon commencing the restructuring process an immediate moratorium is imposed, the purpose of which is to give the business the needed breathing space, and which suspends all judicial actions against the debtor, executions and garnishments, while at the same time prohibiting the debtor from disposing of the company’s assets without proper authorisation. The majority of the creditors and the debtor must approve the restructuring plan, and it is binding on all creditors, despite any minority creditors’ objections, with few exceptions. In addition, the Law provides the possibility of reorganisation through a management trust.
Furthermore, and most importantly, the Law contemplates the possibility of pre-packaged bankruptcy or ‘pre-packs’ which enables the debtor to engage in an a priori reorganisation agreement with the majority of the creditors (making the process similar to Chapter 11 bankruptcy proceedings carried out in the US). This agreement must then be submitted to the court for approval. If approved, the pre-pack would have the same effect as an in-court restructuring, however it may represent a more expeditious and cost-efficient way of engaging in restructuring arrangements.
In those cases where restructuring the business is not feasible, or when the court-approved reorganisation agreement is not properly followed, the Law mandates the liquidation of the company, meaning that the assets and the properties of the business would be redistributed and the business itself dissolved. Upon commencing the liquidation proceedings, a court-appointed liquidator replaces the debtor in the administration of the business and its assets and the suspended judicial proceedings are resumed. This process is intended to liquidate the assets in the most profitable way, and distribute the profits to the creditors, in accordance with their order of priority.
In light of the increasing international commercial activity, and considering that it has become a common practice for businesses to operate or own assets in different countries, the newly adopted Law also fosters cooperation and coordination in cross-border insolvency proceedings by enacting the UNCITRAL cross-border insolvency rules, which provide for, inter alia, situations when national courts must recognise insolvency proceedings that have been already initiated in a foreign country. The importance of these cross-border insolvency procedures should not be underestimated because they substitute the need to engage in diplomatic proceedings or letters rogatory when international assistance is required in such proceedings. Finally, as a demonstration of the commitment to strengthen insolvency proceedings, the Law institutes specialised courts organised exclusively to decide such matters.
The Law seeks to ensure the maximum effectiveness of insolvency proceedings and promotes cross-border cooperation while being compliant with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems published by the World Bank. The Law achieves this goal through the combination of, firstly, developing a system that operates autonomously and responds to domestic needs and, secondly, ensuring the very same system is tied to and interacts with the systems of the country’s trading partners and provides them with the appropriate level of protection when faced with an insolvency situation.
The Law brings restructuring and bankruptcy in line with modern insolvency proceedings, dynamic markets, increased globalisation and cross-border trade and investment through a mixture of formal and informal procedures. In particular, it simultaneously achieves a double function: on the one hand, it ensures that where an entity is not viable there are readily available procedures that provide the swift and efficient liquidation to maximise recoveries for the benefit of creditors, while, on the other hand, when it faces only temporary lack of liquidity but remains a viable entity, it pursues the rehabilitation of the business. This is achieved by introducing a quick and easy access to the process, protecting all those involved, permitting the negotiation of a commercial plan, enabling a majority of creditors in favour of a plan or other course of action to bind all other creditors (subject to appropriate protections) and providing for supervision to ensure that the process is not abused.
In conclusion, while the Law has not yet entered in effect (it will do so on 7 February 2017), preparations are under way to enable its correct implementation. A Regulation to the Law is in the works and should be issued by a Presidential Decree by August 2016. The Law will place the Dominican Republic as a country to take into serious consideration when evaluating countries appropriate for foreign investment.
Mary Fernández is a founding partner and Jomar Vargas is an associate at Headrick Rizik Alvarez & Fernández. Ms Fernández can be contacted on +1 (809) 473 4500 or by email: firstname.lastname@example.org. Mr Vargas can be contacted on +1 (809) 473 4500 or by email: email@example.com.
© Financier Worldwide
Mary Fernández and Jomar Vargas
Headrick Rizik Alvarez & Fernández