For decades, restructuring and insolvency matters in the Dominican Republic involving merchants and companies in non-regulated industries have been carried out on a “de facto” basis, due to the obsolescence of the existing legal framework and institutions. Fortunately, that is not the case anymore.
As a member of the World Trade Organization, the Dominican Republic has entered into a number of international commercial agreements and conventions, which in turn has propelled the necessity to modernise the Dominican bankruptcy legal framework in order to promote entrepreneurship, productivity, wealth creation and fair treatment among different classes of creditors.
The Dominican Republic has made a huge step forward in the area of restructuring and insolvency with the enactment of the Restructuring and Liquidation of Companies and Merchants Act 141-15, which entered into effect on February 7th, 2017, and Regulation 20-17 for the application thereof. It applies to all Dominican companies; companies that are domiciled or have a permanent business establishment in Dominican territory. It also applies to Dominican individuals and foreign individuals engaged in commercial transactions within the Dominican Republic. Its provisions are of public interest (“orden público”), and therefore can not be amended or repealed by private conventions.
Restructuring and Liquidation of Companies and Merchants Act 141-15 (“the Law”)
This Law is divided into six titles; the first title reserved for the purpose, scope and general principles of the Law, which includes principles of procedural celerity, asset maximization, equal treatment and universality of the debtor’s assets and binding effects to all creditors, the officers (i.e. Verifier, Conciliator, Liquidator, Expert Advisors, Creditors’ Advisor, and Workers’ Advisor), the restructuring and liquidation jurisdiction, procedural rules and arbitral jurisdiction.
The second title refers to the restructuring proceeding, including its requirements, the filing of restructuring petitions, the conciliation and negotiation procedure, the operations of the entity during conciliation and negotiation, the debtor’s contractual obligations, claw back provisions, the claims recordation process, the restructuring plan approval and content.
The third title institutes the judicial liquidation procedure, covering the liquidation regime, the asset liquidation plan, the closure of liquidation proceedings, and recourses.
The fourth title relates to cooperation provisions in international procedures, comprising its general provisions, the access of agents and foreign creditors to the Dominican restructuring and liquidation jurisdiction, the acknowledgment of foreign proceedings and measures that may be granted, the cooperation with foreign courts and agents, and parallel proceedings.
The fifth title sets out the consequences of breaking the Law, including the corresponding sanctions, the felony of bankruptcy, and the procedure thereof.
The sixth title contains final and derogatory provisions and others pertaining to the Law’s entry into force.
Priority of Debts incurred during the Conciliation and Negotiation Phase
The aim behind these reforms is to encourage restructurings by using the conciliation and negotiation phase to agree a restructuring plan with creditors when there is higher value in the business continuing to trade which would be lost by simply liquidating it.
Article 86 of the Law establishes the correct order of payment priorities when the benefits of the ongoing operations of the debtor during the conciliation and negotiation phase are higher than the benefits of liquidation. It sets the correct order of priorities regarding the payment of debt stemming out of loans provided to the debtor in order to continue operations during negotiations providing that
“debts incurred regularly as a result of the ordinary operations after the start of the conciliation and negotiation shall be paid in the manner originally contracted. These debts shall be paid with priority over all other claims.”
The same Article further stipulates that
“loans disbursed by banking institutions or other third party financing providers duly authorized by the court” shall be paid right “after labor debts which sums have not been advanced yet pursuant to the Labor Code and other laws regarding social security and employee health,” and the “restructuring procedural expenses, including the fees of the officers and advisors involved in the process.”
This order of priority during the conciliation and negotiation phase could lead to secretive negotiations between creditors and management in order to try to novate their debts and other types of fraudulent practices against creditors during the conciliation and negotiation phase and before any restructuring plan is approved. Therefore, we consider that the figure of the Conciliator created by the Law, who is the officer in charge of overseeing the conciliation and negotiation as well as the execution of the restructuring plan, is a positive contribution for the deterrence of these undesirable practices.
The Dominican Republic now has a piece of bankruptcy legislation which benefits creditors. It is expected that, through a restructuring proceeding or orderly liquidation as established in the Law, creditors will have a better chance of receiving a substantial part of their claims with certainty as opposed to a remote possibility of receiving full payment of their claims or a real chance of no payment at all.