Legal Notes on the New Bankruptcy Law in Costa Rica

On February 16th, 2021, the legislative file N° 21.436, called the “Costa Rican Bankruptcy Law”, was approved in second debate, which is pending the respective signature by the Executive Branch in order to become Law of the Republic.

This Law contemplates a comprehensive reform of the Costa Rican bankruptcy regime, unifying under a single special law the substantial and procedural content of this matter. This implies a transformation of the known bankruptcy system into a system in which the preservation and rescue of the productive economic activities of companies will be prioritized.

With this new regulation, the proceedings for civil insolvency, administration and reorganization with judicial intervention, as well as the preventive creditor agreements and bankruptcy proceedings, are eliminated. Also, unlike the previous regulations, no distinctions are made between civil and commercial proceedings.

The principles that govern this new law are those of business viability, the preservation of the unity of the assets under procedures, the organization of debt payments through the effective protection of the interests of creditors, and equality and proportionality in the treatment of creditors, respecting the exceptions of privileged creditors.

An important aspect is that the Law provides, as part of the requirements to file the proceeding, the “financial inadequacy”, which means that the debtor is in a general, non-temporary, economic crisis and admits the possibility that it may proceed when such a financial inadequacy is imminent or there is a presumption and the same debtor requests the initiation of the process as a preventive measure and always for the sake of saving the company, so that it is not necessary to wait for the breach of one or more obligations to initiate the process.

One of the most notable features of the new Law is that it incorporates the possibility of Alternative Dispute Resolution mechanisms, through specialized mediation centers and alternative dispute resolution in these matters, a possibility that was not covered by the previous regulations.

This option brings us closer to the ideal of “prompt and fulfilled justice” enshrined in the Political Constitution, which has not been the reality of bankruptcy proceedings. Under the above, a conciliatory agreement can be reached before, during, in or out of the proceedings, which provides more and better legitimate solutions for both the debtor and his creditors, more expedite and less expensive.

The Law even provides for the establishment of specialized bankruptcy courts and authorizes the Supreme Court to establish the specialized courts necessary to attend this kind of proceedings. It should be remembered that there is currently a single bankruptcy court in Costa Rica, so this would help with the expedite of such proceedings.

On the other hand, it is necessary to highlight an important change that introduces the new legislation and is that the filling of the process does not necessarily imply the interruption of the economic activity of the debtor, since the judge can arrange the continuity of the commercial turn of the company as a form to conservate it.

The transitional provisions state that, under the non-retroactivity of the law, these already initiated proceedings must continue to be dealt with the former regulations; however, in the case of conversion of processes, they must comply with the new procedures established in the studied law.

Historically, more bankruptcy proceedings have been filed in Costa Rica’s courts than preventive proceedings, such as the preventive creditors agreement and the administration and reorganization with judicial intervention, a situation that clearly tells us that the current Law does not have a spirit of rescue.

Definitely the approval of this Law comes into our regime at a good time, which has been affected in large proportions as a result of the pandemic and has felt the economic effects of the closure of national and international companies in the absence of an agile and expeditious model of rescue or liquidation of assets.

For any queries, please feel free to contact us at anarvaez@lexincorp.com

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