The New Insolvency Law of Costa Rica, legislative bill number 21436, has been approved by the Special Permanent Commission on International Relations and Foreign Trade and is now before Congress. This law proposes a series of changes to what has been the Costa Rican Insolvency Law.
In a year that has been particularly complex and challenging for all companies, there are very few cases where the financial situation has not been complicated. Therefore, it is of utmost importance to understand the change in paradigm or vision proposed by the new Insolvency Law. The bill’s statement of reasons affirms that an insolvency system that facilitates the rescue and reorganization of companies of all kinds helps market competition, unemployment rates, the strengthening of public revenue and finance, economic investment and reactivation, the formalization of productive activities, and the nation’s economic competitiveness.
Until now, Insolvency Proceedings, which are defined as Collective Enforcement Proceedings for Monetary Obligations, have been governed especially by the still-active stipulations of the 1996 Civil Procedure Code. However, there are also other rules that regulate insolvency proceedings and are dispersed across different legal texts of Costa Rican Law, maintaining the distinction between Preventive Proceedings (Administration and Reorganization by Judicial Intervention and Preventive Agreement) and Liquidatory Proceedings (civil and bankruptcy).
Among the novel changes proposed by the new Insolvency Law, the main one being the establishment of a single insolvency process for all types of private debtors, the following can be mentioned:
I. The Salvage of the Company
Based on the fact that the debtor’s financial responsibility is supported by Article 981 of the Civil Code, which states that all assets that constitute a person’s estate are liable for the payment of their debts, the principle that encompasses and colors the entire Insolvency Law is the Preservation and Salvage of the Company—of its productive activity—not its liquidation. Article 3.6 of the Law establishes that, in the insolvency process, the preservation and salvage of the productive economic activities of the debtor will be sought. This even includes the statement that improper or negligent actions by entrepreneurs, partners, legal representatives, administrators, employees, and other auxiliaries of the company will not prevent its preservation and salvage when it is viable. Likewise, the term “insolvency” is no longer used, but rather “financial crisis,” which by its very definition creates an opportunity for improvement. Imagine if, as a result of this pandemic, thousands of companies were liquidated in our country—how many direct and indirect economic and social effects would occur, how many jobs would be lost. The search for the salvage of companies, instead of their termination and liquidation, will seek to keep the productive activity afloat, which is even of public interest. If the debtor is allowed to continue operating, they could recover. However, it is undeniable that it will be necessary to determine in each case whether the preservation of the company is viable.
This Principle of Company Salvage also covers ongoing contracts, which, if considered beneficial to the interest of the insolvency process, must continue. This is developed in Article 20 and subsequent articles of the Law, establishing that “the declaration of insolvency shall not affect the effectiveness of contracts between the insolvent party and third parties with pending obligations, unless expressly provided otherwise by law.” And despite the fact that contracts are law between the parties, the new Law declares clauses that establish the termination of the contract or the power to terminate it as null and void by full right solely due to the declaration of insolvency of either of the contractors. Clauses that make the performance of one of the contractors more burdensome in the event of the opening of insolvency will also be null and void” (Article 20.3 of the Insolvency Law).
II. Active Standing
Article 12 of the Law establishes the legitimized subjects who may request the opening of the process, listing, of course, the debtor, those who exercise the administration or representation of autonomous estates (referring, for example, to trust contracts), the creditors (in the plural, which indicates that at least two must be able to request insolvency) of the debtor or of said autonomous estates, and public entities that legally exercise the supervision or regulation of business activities susceptible to being subject to insolvency (meaning the State is a legitimized entity to open the process).
III. Introduction of ADR for Insolvency
From Article 42 onwards of the Law, the possibility is provided for interested parties to reach agreements for the resolution of their conflicts—of the crisis itself—both before and during the insolvency process, within or outside of it. This opens the possibility for legitimate solutions, which remain within the framework of what is legal and possible, between the debtor and their creditors, which generates a result of more prompt justice (meaning the process ends more quickly), more agile, and less costly than the current preventive insolvency processes. These extrajudicial agreements, once approved by the judge, will be mandatory for all creditors, including those who have disagreed with it and even for those absent from the process. Likewise, these agreements may include third parties who are not creditors when they participate in the solutions adopted.
As can be deduced, the changes mentioned and others introduced by the Insolvency Law seek the advancement and agility of Costa Rican Insolvency Law, and they propose possible solutions and agreements that will allow for the preservation of the economy and of companies, without this meaning that the interests of creditors are left without protection. Among these solutions can be mentioned the partial forgiveness of debts, the granting of broader deadlines for compliance, a business restructuring plan, the refinancing or readjustment of debts, the delivery of assets, the capitalization of assets, increases in social capital, the liquidation of assets, or any other type of lawful solution not contemplated in the foregoing or that results from a combination of them. Now, in the event that these solutions do not prove to be viable, the Law also regulates in Article 46 and subsequent articles the Opening of the Liquidation of the debtor’s assets, as a last alternative to the financial crisis.