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Notes on the new Bankruptcy Law in Costa Rica
[/vc_column_text][us_separator][vc_column_text]On February 16, 2021, legislative file No. 21,436, known as the "Costa Rican Bankruptcy Law," was approved in its second debate. It is currently pending approval by the Executive Branch to become a Law of the Republic. This Law contemplates a comprehensive reform of the Costa Rican bankruptcy regime, unifying the substantive and procedural content of the matter under a single special law. This implies a transformation of the bankruptcy system as we know it into a system that will seek to preserve and rescue the economic and productive activities of companies. With this new regulation, civil insolvency, administration, and reorganization proceedings with judicial intervention, preventive creditors' agreements, and bankruptcy proceedings are eliminated. Likewise, no distinction is made between civil and commercial bankruptcy proceedings, unlike the current regulations. The pillars governing this new law are business viability, the preservation of the unity of the bankrupt assets, the organization of debt payments through the effective protection of creditors' interests, and equality and proportionality in the treatment of creditors, respecting the exceptions of privileged creditors. An important aspect to emphasize is that the Law establishes, as part of the objective conditions for requesting the opening of bankruptcy proceedings, "insufficient assets." This means that the debtor is facing a general, rather than temporary, financial crisis. It also allows for the possibility of insolvency proceedings when such insufficient assets are imminent or presumed, and the debtor requests the opening of proceedings as a preventive measure, always in the interest of saving the company. Therefore, it is not necessary to wait for the breach of one or more obligations to request the opening of proceedings. One of the most notable features of the new bankruptcy model is that it incorporates the possibility of Alternative Dispute Resolution (ADR) through specialized centers for mediation and alternative dispute resolution in bankruptcy matters, a possibility not contemplated in current regulations. This option brings us closer to the ideal of "prompt and complete justice" enshrined in the Political Constitution, which is no further from the current reality of bankruptcy proceedings. Based on the foregoing, a conciliation agreement can be reached before, during, within, or outside of bankruptcy proceedings, which provides more and better legitimate solutions for both the debtor and their creditors, with faster and less onerous costs. The Law even provides for the creation of specialized bankruptcy courts and authorizes the Supreme Court of Justice to establish the specialized courts necessary for processing these proceedings. It is important to remember that there is currently only one bankruptcy court in Costa Rica, so this would contribute to the expeditious processing of these types of proceedings. Furthermore, it is important to highlight an important change introduced by the new legislation: the opening of proceedings does not necessarily imply the interruption of the bankrupt's economic activity, since the judge may order the continuation of the company's commercial operations as a way of preserving it. The transitional provisions establish that, by virtue of the law's non-retroactivity, bankruptcy proceedings already initiated must continue to be processed under the regulations repealed by the new bankruptcy law; however, in the case of conversion of proceedings, they must comply with the new procedures established in the aforementioned law. Historically, more bankruptcy proceedings have been filed in Costa Rican courts than preventive proceedings, such as preventive agreements and administration and reorganization with judicial intervention, a situation that clearly indicates that the current bankruptcy model lacks a salvage spirit. The approval of this special bankruptcy law definitely comes at a good time for our country, which has been significantly affected by the pandemic and has felt the economic effects of the closure of national and international companies due to the lack of an agile and rapid recovery and rescue model or the liquidation of assets. For more information, please contact us at anarvaez@lexincorp.com; we will be happy to assist you.
