Bankruptcy is the legal situation in which a corporation may temporarily or permanently close, due to the impossibility of fulfilling its obligations.
In El Salvador, bankruptcy is regulated under several legal authorities, such as: the Code of Commerce, the Law of Commercial Procedure and the Code of Civil Procedure. The process itself is basically to immobilize the goods of the debtor and supervise that such goods are equally distributed among its creditors. During bankruptcy process, a Trustee is named and is responsible for administration of the estate and liquidation of the goods/assets of the corporation.
Besides the process of bankruptcy, a debtor, may also request a suspension of its payment obligations; however both legal processes are obsolete as once a corporation or a debtor is in an extreme debt, banks and financial institutions immediately file Executory Proceedings in order to obtain the appointment of an Intervenor to exercise authority over the corporation’s assets. Any other creditors that appear in Court will embargo the same properties, triggering a technical joinder of legal actions or claims into one. Notwithstanding the aforementioned, secured or preferred creditors have priority over the rest of the creditors.
This does not alleviate the obligations of a debtor; furthermore, it does not guarantee either a restructuring or a re-organization of the debt that may assure that the creditors will indeed receive their payments.
It may also be the case that corporations have goods whose assets are worth many times the amount owed by it. In this circumstance they will be condemned to lose all their assets in order to pay their debts if they don’t find potential buyers.
In contrast to the Salvadoran system, other countries have modern insolvency regimes, in which honest debtors seek protection under a special procedure. In the United States, the US Code, regulates Bankruptcy and Chapter 11 contemplates the re-organization of a corporation that is in bankruptcy. Chapter Eleven allows large corporations facing a complicated financial situation to declare themselves in bankruptcy and may temporarily suspend their payment obligations. They also have to generate a plan of re-organization of their corporation, and it has to be approved by creditors and confirmed by a Bankruptcy Court, allowing the corporations not to close their businesses and to move on gracefully.
CAFTA has caused a series of reformations to the Salvadoran legal system, allowing us to anticipate the adoption of more sophisticated bankruptcy procedures in the near future. Adoption of such procedures will foster the investment environment in El Salvador which has always been in the vanguard of progress for Central America.
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.