Insolvency Law at Costa Rica
In Costa Rica, insolvency law is governed by the Bankruptcy Law (Ley de Quiebras, No. 7804) which was enacted in 1998 and subsequently amended. The law regulates the procedures for handling both corporate insolvency and personal bankruptcy cases, including liquidation, reorganization, and debt restructuring.
Key Aspects of Insolvency Law in Costa Rica:
1. Types of Insolvency Procedures:
Liquidation (Quiebra): This is the formal process of winding up a business by selling its assets to repay creditors. It is initiated when the company or individual is unable to pay debts or when creditors petition the court.
Reorganization (Reorganización): This procedure is available for businesses or individuals who are financially troubled but still able to continue operations and recover. It allows for restructuring debts, negotiating new payment terms with creditors, and reorganizing operations.
Debt Settlement (Acuerdo Extrajudicial): A debtor can enter into a debt settlement agreement directly with creditors without going through court proceedings. This can be done through voluntary negotiations.
2. Insolvency Triggers:
Inability to Pay Debts: The debtor must demonstrate that they are unable to meet financial obligations when they come due, which is a key trigger for initiating insolvency proceedings.
Over-Indebtedness: If the liabilities exceed the value of assets, the debtor is considered over-indebted and may seek to file for insolvency.
3. Who Can File for Insolvency?
Debtors: A business or individual who is insolvent may voluntarily file for bankruptcy or reorganization.
Creditors: If a debtor fails to pay their debts, creditors can petition the court to initiate liquidation proceedings.
Court: The court may intervene to initiate insolvency procedures in cases where it is necessary to protect the interests of creditors or the public.
4. Insolvency Process:
Filing for Insolvency:
The debtor or a creditor must file a petition in court.
The court examines the financial situation of the debtor and may appoint an administrator or trustee to manage the case.
Reorganization Procedure:
The debtor presents a restructuring plan that includes proposals to pay creditors over a period of time.
Creditors vote on the plan, and the court must approve it.
If approved, the debtor continues operating under the terms of the reorganization plan, and the business is monitored by a court-appointed administrator.
Liquidation Procedure:
If reorganization is not possible, the business is liquidated. A liquidator is appointed to sell assets and distribute the proceeds to creditors according to priority.
The court oversees the liquidation to ensure that assets are properly distributed.
5. Priority of Claims in Liquidation:
The Bankruptcy Law establishes a ranking of creditors:
Secured creditors: Creditors with collateral or liens on specific assets.
Labor claims: Salaries, severance, and other worker-related claims.
Tax claims: Debts to the government, including taxes and social security contributions.
Unsecured creditors: These creditors are repaid from any remaining funds after secured creditors, labor claims, and tax claims are settled.
Shareholders: Paid only after all creditors have been satisfied.
6. Bankruptcy (Personal Insolvency):
Personal bankruptcy in Costa Rica is treated under the same law as business bankruptcies. Individuals may apply for bankruptcy or debt restructuring if they are unable to pay their debts.
The debtor’s assets may be liquidated to satisfy creditors. In some cases, a reorganization plan may be applied to help individuals restructure their debts and avoid liquidation.
7. Role of the Court and Trustees:
The court plays a critical role in the insolvency process, especially in approving reorganization plans and overseeing liquidation procedures.
A trustee or administrator is appointed to manage the process, ensuring that assets are properly handled and creditors’ interests are protected.
8. Rehabilitation and Debt Settlement:
The Costa Rican system allows for debt settlement agreements outside of formal bankruptcy proceedings, where the debtor negotiates directly with creditors to restructure debt or establish a payment plan.
For corporate rehabilitation, businesses can propose a reorganization plan to continue operations while repaying debts over time, subject to court approval.
9. Effects of Insolvency:
Once a company or individual is declared insolvent, the debtor loses control over their assets, and a trustee or administrator manages the liquidation or reorganization process.
Any ongoing business activities may be suspended during liquidation, but during reorganization, the debtor may continue operations.
10. Discharge of Debts:
After completing the required process, the debtor may receive a discharge from their debts in case of liquidation or successful reorganization.
However, certain obligations, such as debts related to tax obligations, alimony, or fines, are generally not discharged in bankruptcy.
11. Insolvency and Creditors' Protection:
Costa Rica’s insolvency law is designed to protect creditors' rights while providing debtors with a chance to rehabilitate their businesses or resolve personal debts through liquidation or reorganization.
RELATED Blog
0 comments