Insolvency Law at El Salvador
In El Salvador, insolvency law is governed by the Insolvency Law (Ley de Insolvencia) and related regulations, primarily aimed at facilitating both the liquidation and reorganization of companies and individuals facing financial difficulties. The country's insolvency framework is designed to provide a legal structure for the orderly resolution of insolvency cases, protect the rights of creditors, and offer a chance for debtor rehabilitation when possible.
Key Features of El Salvador’s Insolvency Law:
Governing Legislation:
The Insolvency Law of El Salvador (Ley de Insolvencia) was enacted in 2005, which governs both corporate and individual insolvency proceedings.
Commercial Code of El Salvador also contains provisions related to insolvency and bankruptcy, particularly for businesses.
Types of Insolvency:
Corporate Insolvency: Applies to companies, corporations, and other business entities. It can involve restructuring or liquidation, depending on the situation.
Individual Insolvency: Applies to individuals who are unable to meet their debts. Individuals may also file for bankruptcy under the insolvency law, which includes provisions for both personal reorganization and liquidation.
Objectives of the Insolvency Law:
Rescue and Reorganization: The law provides procedures that allow a debtor (individual or company) to reorganize and restructure its debts under court supervision, providing a chance to resume operations.
Liquidation: If reorganization is not possible or feasible, the law provides for the liquidation of the debtor's assets to satisfy outstanding debts.
Fair Treatment of Creditors: The law establishes guidelines for treating creditors equitably and ensures that claims are handled in an orderly and transparent manner.
Insolvency Procedures:
Reorganization (Acuerdo de Reorganización): This procedure allows businesses or individuals to submit a debt restructuring plan that must be approved by creditors and the court. The goal is to avoid liquidation and restore solvency.
Liquidation (Liquidación Judicial): When a debtor is unable to restructure and their financial condition does not allow for recovery, they may enter into liquidation, where assets are sold, and proceeds are distributed to creditors based on priority.
Debt Settlement (Acuerdo Extrajudicial): A less formal process where the debtor and creditors negotiate a settlement or restructuring plan outside of court, although court approval may still be required.
Court’s Role:
The Commercial Court (Tribunal Mercantil) is responsible for overseeing insolvency proceedings in El Salvador, including approving debt restructuring plans, liquidations, and overseeing the conduct of insolvency administrators.
The court ensures that creditors’ rights are protected, and that the insolvency process is fair and transparent.
Insolvency Administrators:
Insolvency Administrators: The court appoints a professional insolvency administrator (who must be a licensed professional, often a lawyer or accountant) to oversee the proceedings. This administrator is responsible for managing the debtor's assets, negotiating with creditors, and ensuring that the insolvency process complies with the law.
In liquidation, the administrator is tasked with selling the debtor’s assets and distributing the proceeds among creditors.
Creditor’s Rights:
Creditors must file their claims with the court-appointed administrator within the required timeframes. Creditors can be classified into different classes based on the type of claim (secured, unsecured, etc.), and claims are paid in accordance with a set priority order.
Secured creditors (those with collateral) are paid before unsecured creditors, and there are also provisions for employee claims and tax claims to be given priority.
Reorganization Process:
The debtor proposes a reorganization plan that must be submitted to the court and approved by creditors. The creditors have the right to vote on the plan.
The debtor may also be granted a moratorium on debt payments during the reorganization process, giving them time to negotiate with creditors and implement the plan.
The Reorganization Plan must be reasonable and in the best interest of creditors, and if the plan is not approved by creditors or the court, the company may be forced into liquidation.
Cross-Border Insolvency:
El Salvador is a member of the Central American Integration System (SICA), which includes provisions for cooperation on cross-border insolvency matters. However, the country does not currently follow a formal set of international guidelines like the UNCITRAL Model Law on cross-border insolvency.
In cases involving foreign assets or creditors, the Salvadoran courts may cooperate with foreign courts or insolvency administrators on a case-by-case basis.
Recent Amendments and Reforms:
There have been discussions about reforming El Salvador’s insolvency laws to enhance procedures for small and medium enterprises (SMEs) and improve the speed and efficiency of the insolvency process. However, the core principles have remained largely the same since the 2005 law was enacted.
Key Steps in the Insolvency Process in El Salvador:
Filing for Insolvency:
Either the debtor or the creditors may file for insolvency with the court. The court evaluates the financial condition of the debtor and initiates the relevant insolvency procedure (reorganization or liquidation).
Appointment of Insolvency Administrator:
The court appoints a licensed insolvency administrator to take control of the debtor’s financial affairs. The administrator is responsible for managing the estate, negotiating with creditors, and overseeing the sale of assets in the case of liquidation.
Restructuring or Reorganization:
The debtor submits a reorganization plan to the court and creditors. Creditors must approve the plan through a vote, and the court must confirm it.
If reorganization is not possible, the process proceeds to liquidation.
Liquidation of Assets:
If a company is liquidated, the assets are sold, and the proceeds are distributed to creditors in order of priority.
The liquidation process concludes when all assets are sold and creditors are paid, and the company is legally dissolved.
Debt Discharge or Final Settlement:
In personal insolvency cases, after liquidation and asset distribution, the individual may receive a discharge of their remaining debts.
For companies, once liquidation is complete and creditors are paid (as much as possible), the company is dissolved.
Key Points:
El Salvador’s insolvency law is designed to provide a structured process for debt recovery and resolution, with a preference for reorganization when possible.
Creditors play a significant role in insolvency proceedings, especially in the reorganization process.
There is an increasing focus on improving the legal framework to support SMEs and streamline the insolvency process.
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