Welcome to the Americas Restructuring Review 2020, one of Global Restructuring Review's annual, yearbook-style reports.
Global Restructuring Review, for anyone unfamiliar, is the online home for international restructuring specialists everywhere, telling them all they need to know about everything that matters.
Throughout the year, GRR delivers pitch-perfect daily news, surveys and features, organises the liveliest events (under our GRR Live banner) and provides our readers with innovative tools and know-how products.
In addition, assisted by external contributors, we curate a series of regional reviews – online and in print – that go deeper into local developments than our journalistic output is able. The Americas Restructuring Review, which you are reading, is part of that series. It recaps the recent past and adds insight and thought-leadership from the pen of pre- eminent practitioners from all across the Americas.
Across 17 chapters and 208 pages, this edition provides an invaluable retrospective from 32 authors. All contributors are vetted for their standing and knowledge before being invited to take part. Together, our contributors capture and interpret the most substantial recent international restructuring events of the year just gone, supported by footnotes and relevant statistics. Other articles provide a backgrounder – to get you up to speed, quickly, on the essentials of a particular jurisdiction.
This edition is bigger than ever and covers Argentina, Bahamas, Bermuda, Brazil, Canada, the Cayman Islands, Chile, Dominican Republic, Mexico and the US (from several angles). It also includes two chapters on sovereign debt.
Among the nuggets you will find:
- a case study of the Noble Group's restructuring (the chapter of the Bahamas);
- a prediction on when Brazil's fabled new restructuring law might see the light of day;
- a request to Mexico's ruling party to amend the Concorso Law;
- clarification on when a foreign-to-foreign transfer may be “too foreign” for the purposes of US bankruptcy law;
- analysis of the (somewhat) contradictory Chapter 15 decisions in Oi, Agrigkor and QCOG; and
- a description of some new stratagems hedge funds and private equity funds have found to get high returns in rescue and much, much more. We hope you enjoy the review.
On behalf of GRR, I would like to thank the review's editors Richard Cooper and Lisa Schweitzer, of Cleary Gottlieb Steen & Hamilton, for the direction and energy they've given, and my colleagues Jon Allen and Adam Myers, in our production department, for changes to our design that provide a digest of each chapter for those short of time. Thanks to them, this is the finest review we've produced.
This chapter discusses the DR's Insolvency Law, which came into force in February 2017. It promotes and facilitates company reorganisation. Most of its procedures, including nullity claims, will be used during restructuring or negotiation, not liquidation.
A restructuring request can immediately transition from verification to liquidation, without going through reorganisation, disabling any nullity claim. A recent decision held that creditors cannot file nullity claims during liquidation, even in the event of possible voidable transactions.
Further, most insolvency officials are very wary on how courts assess their fees. Owing to lack of knowledge, most courts do not authorise advancement for officers' fees, which end up advancing and bearing all expenses incurred.
- Unfeasibility of nullity claims during liquidation
- Reserved for conciliator
- No appeal
- Officers' fees
- Criteria to grant advance payment of fees
- Effects of appeals of liquidation decisions
Referenced in this article
- Insolvency Law 141-15 is the principal legislation that governs insolvencies and restructuring procedures in the Dominican
- Rules of application of Law 141-15 – Executive Decree 20-17.
- Liquidation of Pawa Dominicana
- Liquidation of 33 Renova SRL
- Liquidation of Mones Packaging Solutions Mopack
- Reorganisation of Munné, SRL
- Reorganisation of Arconim Constructora, SA
Insolvency Law 141-15 is the principal legislation that governs insolvencies and restructuring procedures in the Dominican Republic. The Law was enacted in August 2015 but only entered into effect on 7 February 2017, after an 18-month transitory period. Furthermore, the rules of application of the Law 141-15 were signed into law by Decree No. 20-17 on 13 February 2017.
This means that the Dominican insolvency regulation has been valid for only two and a half years. Nevertheless, creditors and debtors are deciding to lean on the country's reorgani- sation and bankruptcy statue to protect their credits or assets.
To provide an illustration of the insolvency practice in the Dominican Republic to date, we will refer to the statistics provided by the court. In 2017 and 2018, there were 25 restructuring requests, out of which 19 were dismissed and only six were accepted; from January to July 2019, there were eight requests and only two were admitted by the court.
Of the eight active cases, five are currently in the liquidation phase (Pawa Dominicana, Trevigalante, Mones Packaging Solutions Mopack, Caribbean Recycling and 33 Renova), two are still in the negotiation and conciliation phase of the restructuring process (Munne and Arconim Constructora) and one was rejected after the creditor who requested the liquidation filed a transactional agreement signed with the debtor.
Between 2018 and 2019, there have been eight appeals issued against decisions issued by the restructuring and liquidation courts, out of which one was not admitted, one was rejected, one was accepted, one is awaiting decision and the remaining four are still in the appeal process waiting for hearings dates.
Our firm is participating in seven of the eight actives currently active in the restructuring and liquidation courts. This article describes the main issues that we have experienced in our practice in this area.
The unfeasibility of nullity claims during liquidation
To provide some context for this section, we must briefly explain how our restructuring and liquidation regulation works.
The insolvency process is divided into three phases or processes:
- reorganisation or negotiation; and
The verification phase determines if the documents and information provided to the court allows it to confirm that the requirements to file a reorganisation or liquidation request are met and determine the economic and operational status of the company seeking its reorganisation or liquidation.
The reorganisation phase is led by the conciliator (equivalent to a trustee in United States or United Kingdom insolvency regulations) who must register all the credits, and prepare (if the reorganisation is requested by a creditor) or review (if the reorganisation is requested by the debtor) the restructuring plan.
Lastly, the liquidation phase is led by a liquidator who is in charge of the preparation of the liquidation plan, the realisation of the assets and the payment to the creditors.
It is important to note that according to the provisions of Law 141-15, creditors cannot request the involuntary liquidation of the debtor before attempting a reorganisation. However, upon a reorganisation request, the verifier and the trustee may recommend the immediate liquidation of the debtor under specific circumstances such as:
- lack of cooperation of the debtor during the verification or negotiation phase;
- when a reorganisation plan is not feasible under the particular circumstances of the debtor; or
- to avoid the increase of the debt and the diminishing of the debtors'
Likewise, the debtor, the trustee or any recognised creditor could claim the judicial liquidation of the debtor if they fail to comply with the restructuring plan.
This is due to the fact that our insolvency regulation was conceived to promote and facili- tate the reorganisation of insolvencies rather than force or facilitate the parties affected to go out of business. In practice, this entails that most of the actions and procedures created by the insolvency law, including nullity claims, were conceived mostly during the negotiation and conciliation phase of the reorganisation and not during the liquidation phase.
The problem with this situation in practice has been that in most cases the reorganisation has been unviable or impossible for multiple circumstances and, before a reorganisation plan is even attempted, the trustee or the verifier recommends to the court that the company is liquidated, thus skipping some phases of the process and, with it, the actions and procedures that the law has conceived for those phases, such as nullity claims.
The law establishes that ex officio, or upon petition of any creditor, the trustee may request the court the nullity of any transaction that took place two years prior to the reorganisation request when they constitute an unjustified dissipation of the debtor's assets. Transactions regarding public offering securities originated prior to the reorganisation request and with subsequent payment date are not subject to nullity action. Also, transactions involving the free transfer of assets or any other entered into by the debtor after the commencement of the insolvency proceedings may be annulled. Some transactions are expressly considered to be void, such as:
- the transfer of assets free of charge or at a price below market value;
- when the compensation given to the debtor or the creditor is notoriously superior or inferior than the compensation given or the obligation performed by the other party;
- partial or full compensations made by the debtor;
- payment of obligations not due by the debtor;
- the granting of new securities or increase of existing securities for debts originated prior to the reorganisation request with no justification;
- the transfer of property in favour of creditors that results in the payment of a higher amount to that received as a result of the liquidation; or
- transactions with related entities or companies where the debtor or any of the creditors serve as an administrator or are members of the board of administrators, or exercise effective control of the company or represent 51 per cent or more of the capital, or are able to designate the majority of its board of administrators, among others.
Furthermore, Law 141-15 establishes the invalidity of any contractual clause that, within 60 days prior to the commencement of the negotiation phase or after the initiation of proceed- ings, aggravates the situation of the debtor or accelerates the enforceability of claims not due.
In addition, articles of the application of law 141-15 establish that if the trustee does not file the nullity claim within the time frame indicated in the law, the registered or recognised creditors that represent at least 10 per cent of the total liabilities of the debtor may file the nullity claim on behalf of the remaining creditors.
As explained above, the judicial liquidation may be initiated upon recommendation of the verifier, thus completely skipping the restructuring phase. This gives rise to a problem when there are transactions that are detrimental to the mass and subject to annulment since it may seem as if they are completely voided in any scenario other than the company's reorgani- sation, which is contrary to the purpose of the insolvency regulation.
Nevertheless, since the law is of very recent application and there is only limited case law regarding insolvency proceedings and none regarding nullity claims, we, as practitioners of the insolvency regulation, were hoping for a purposive approach in the interpretation of the law to fix this gap in the legislation.
It is for these reasons that in the case of the liquidation of 33 Renova SRL, we filed a nullity claim against two transactions that affected the mass of creditors and were annul- lable according to law 141-15, which were declared inadmissible ex officio by the court, for the reasons outlined below.
The reorganisation of 33 Renova SRL was filed by one of the creditors of the company, so the court appointed a verifier to confirm that the requirements to file the reorganisation request were met, and to verify the economic and operational condition of the company and render a report regarding the viability of a reorganisation. Given the lack of cooperation by the debtor and the impossibility of obtaining proper information, the court, following the recommendation of the verifier, ordered the judicial liquidation of the company, skipping the restructuring phase.
Considering this situation, and based on the principles of the law that seek efficiency, the maximisation of assets and transparency in all reorganisation and liquidation procedures, during the liquidation phase we filed a nullity claim against two transactions that were signed by the company and one of its creditors. The creditor that pursued the insolvency procedure also filed a nullity claim against one of the main documents that supported the credit of our client, which is the major creditor of the company.
After several hearings and the submission of multiple claims and statements of defence, on 9 September 2019, the court rendered two decisions declaring the inadmissibility of each nullity claim based on a literal interpretation of the law 141-15 that entailed that the nullity claim could only be filed by the trustee;1 therefore, since in this particular case a trustee was never appointed, the court understood that the creditors – even when both had credits representing more than 10 per cent of the total liabilities of the mass of creditors – did not have active legitimation (ie, legal authority) to file a nullity claim.
In our opinion, this literal interpretation of the court contradicts the principles and purpose of the nullity claim, which the law, in its article 98, established as a mechanism intended to reconstitute the assets of the mass of creditors and ensure their equitable treat- ment. It is against the interest of the mass of creditors that an alleged creditor get paid during a liquidation procedure if its credit constitutes an annulled transaction that affected them and that is not supported on valid documentation. Unfortunately, these decisions are not subject to appeal since the law restricts the appeal to specific decisions.
Until now, the liquidator has not presented a valid provisional list of credits as it has been waiting for the decision of the court on these two nullity claims. This means that if the liquidator understands that the credit is not valid, the registration of the credit could be rejected. This decision could be appealed by the affected creditor. On the other hand, if the liquidator does register the credit, the last resource would be to file a revision claim against the provisional list of credits presented by the liquidator.
Nonetheless, this claim could also be dismissed if we take into consideration the deci- sion rendered by the same court in another case. In the liquidation of Mones Packaging Solutions Mopack SRL – which was originally initiated as a reorganisation request – during the registration of the credits, the trustee received a request for the registration of the credit of Allied Mones Corporation SRL, a company related to the debtor, which was supported in 326 invoices that seemed to be produced specifically for the collection of an inexistent credit and to procure sufficient votes for the reorganisation or liquidation plan. Given this fact, the trustee recommended to the court the rejection of the credit and Allied Mones Corporation SRL filed a revision claim against the provisional list of credits.
After several hearings, the court rendered a decision2 accepting the claim filed by Allied Mones Corporation claiming that the credit was supported in proper documentation, since the trustee did not file a nullity claim against the invoices that gave origin to the credit, thus its registration could not be rejected. Thus the interpretation of the court is that the only way to reject the registration of a credit that has supportive documentation – even if dubious – is through a nullity claim.
In summary, considering that in the case of 33 Renova SRL a trustee was never appointed, we will have to wait to see if the position of the court will withstand a revision claim against the provisional list of credit as it happened in the Mones Packaging Solutions case.
The problem regarding the payment of the insolvency officers' fees Creditors cannot request the involuntary liquidation of the debtor before attempting a reor- ganisation. On the contrary, debtors may initiate a voluntary liquidation and there are no material differences to proceedings opened involuntarily.
Nevertheless, even when this is a possibility, most cases prone to liquidation start with a reorganisation attempt from the debtor. This fact ultimately causes the court to appoint several officials, hence creating an important privileged credit caused by the fees of the officers involved. For instance, in some cases, the debtor requests a reorganisation, but the court designates a verifier before appointing a trustee and, upon the impossibility of a reorganisation, appoints a liquidator. This entails that a privileged credit for three different officers is automatically registered.
Regardless, even when the credit for the fees of the officers is considered privileged, and thus is of higher priority for collection and payment only preceded by labour liabilities, most professionals listed as potential officers for reorganisation and liquidation proceedings are very disappointed in how some courts treat the payment of their fees and expenses. Some have even asked to be withdrawn from the lists used by the courts to appoint the officials for the insolvency procedures.
The problem resides in the fact that most courts do not allow for advance payments of officers fees and expenses, and so all the officers involved in a reorganisation or liquidation procedure must bear all of the expenses incurred, including the fees for bailiffs required for subpoenas, expendable materials, fuel, travel expenses and so on, and fees for their auxiliaries and the hours incurred by them in the insolvency work, without having any certainty as to if, or when, they will get paid.
So far there are only two cases in which the courts have agreed to an advance payment of officers' fees: the reorganisation of Arconim Constructora, in which one of the authors of this paper is the appointed conciliator; and Pawa Dominicana.
In the first case, the trustee, Fabio Guzmán-Saladín, made a request to be paid his fees in advance after accepting his appointment, and the court accepted the request by issuing a decision. In the latter case, after the substitution of three appointed liquidators that condi- tioned the acceptance of their appointments on receiving an advanced payment of their fees and expenses, the court decided to hand the last appointed liquidator the remaining funds that were paid in advance by Pawa Dominicana to cover the expenses of the procedure. No resolution was issued by the court to sustain such a decision.
To put this in context, there are only two reorganisation and liquidation courts in the Domincan Republic: one in Santiago and the other in Santo Domingo, National District. There is only one case in Santiago and seven in Santo Domingo. While both courts are specialised in reorganisation and liquidation, each has a different approach when it comes to providing advance payment of officers' fees.
The Santiago court is inclined to a more purposive approach when interpreting the law and has established that an advance payment based on a provisional estimation of conciliator fees is possible even when the law provides that the trustee fees are determined when the restructuring plan is homologated or when the restructuring plan is terminated. The court understood that the fact that the fees cannot be liquidated in advance does not prohibit the court from making an advance payment, on a provisional basis, considering the range indicated in the law of between of 1 per cent and 3 per cent of the total assets of the debtor.
Furthermore, the court indicated that a law cannot escape the legal or sociological reality of the community for which the law is addressed, especially in a society where the practice of the legal profession is to require an advance payment for the services to be rendered. It also analysed the fact that the law provides that the expenses and fees of the verifiers are estimated at the beginning of their work and assumed by the debtor. In that line of thought, the court understood that, due to the reasonability, effectiveness and equality principles of law 141-15, an advance payment of the trustee's fees was possible and justified.
However, upon request of an advance payment of the trustee's fees in the case of Munne SRL, the tenth courtroom of the Santo Domingo court rejected the request based on a literal interpretation of the law indicating that such request was inadmissible considering that a restructuring plan has not been homologated and the negotiation and conciliation phase had not concluded.
Another challenge regarding the payment of officers' fees arises in cases where an officer is removed following a decision from the Court of Appeal that annuls the judgment that ordered the judicial liquidation of the debtor. This situation occurs because, according to our insolvency legislation, the initiation of an appeal does not automatically suspend the conciliation and negotiation process, the judicial liquidation process or the obligations of the officers. However, the interested party could demand the provisional suspension of the process to the court. The problem is that so far the practice of parties and officers in these processes has been to not request the provisional suspension of the appealed decision to the court, and so the liquidation continues its normal course, generating expenses and fees for the liquidator involved.
For instance, in the liquidation cases of Pawa Dominicana and 33 Renova, the decisions that rendered the court ordering the judicial liquidation of the companies were appealed and no one requested the suspension of the appealed decision. After several months, the Court of Appeal revoked the decisions that ordered the judicial liquidation of the companies based on procedural violations, thus revoking all subsequent decisions, including the ones that appointed the liquidator in each case. Neither the law nor its articles of application refer to this scenario or the specific event where a liquidator is removed for the annulment of the decision that ordered the judicial liquidation of the debtor.
This means that there are no legal provisions regulating this scenario, which brings a lot of doubts; for example, could the court appoint the same liquidator once it orders the judicial liquidation of the company after complying with all procedural formalities? The principles of procedural economy, efficiency and maximisation of assets would suggest a positive response, while a literal interpretation of the law, which requires that officers are appointed at random, would suggest a negative response. We will have to wait until a new decision ordering the liquidation of companies is rendered to confirm the position of the court in that regard.
If the court decides on an automatic removal of the revoked office, another question may arise: which rules are going to be applied to liquidate the fees of the revoked liquidator and when will the revoked liquidator will get paid? The answer seems to be that the court should use the same rules used for the estimation of liquidator fees as established in the law, based on the complexity of the work performed by the liquidator until the moment of its revocation, and that its credit should be registered and will get paid once a liquidation plan is approved according to the priority set forth in the law.
Article 67 of the articles of application of law 141-15 establishes that within five days after the acceptance of a reorganisation request the debtor must deposit at the court the amount provisionally estimated by the court to cover the expenses of the procedure, which cannot be more than 0.5 per cent of the registered credits or the credits reported by the debtor on its request. Nevertheless, this amount is not being used by the courts to advance the expenses and fees of the officers, but rather to cover the publications in the newspaper that the law establishes as mandatory (except in the case of Pawa where the remaining funds were deliv- ered to the liquidator who will have to transfer them on to the trustee following its revoca- tion). The law does not regulate this situation either, and so the court will have to establish how and when those funds are going to be transferred, as well as the requirement to request a report from the previous liquidator to audit the administration and use of said funds.
In Pawa, after its revocation, the revoked liquidator requested authorisation from the court to use the funds under its administration to make some payments to cover the expenses and fees incurred until its revocation; however, the request was declared inadmissible by the court since it was submitted by the liquidator after it had been revoked. We understand that even when the bottom line of the decision was correct, since it could not allow such payments without any proper audit and report, and without making a final determination of the liqui- dator fees, it should have at least tried to address the underlying problems of the situation: that a person who no longer served as liquidator still held custody of the documents, funds and assets of the debtor.
Furthermore, our insolvency statute establishes that such amounts must be paid to a special account created for that purpose by the Judicial Branch; however, to this date, such account has not been created. Another complaint regarding this matter is that the court does not provide reports on how the funds are being used in spite of requests made to that effect by the debtor and the creditors.
In conclusion, there are multiple issues to be tended to by the insolvency courts of the Dominican Republic; however, considering the very limited period in which the law has been valid, it is too soon to talk about established criteria for any specific problems that have arisen so far.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.