JOURNALA M E R I C A N B A N K R U P T C Y I N S T I T U T E

Issues and Information for Today’s Busy Insolvency Professional

Written by:Hipolito GarcíaHeadrick, Rizik, Alvarez and FernandezSanto Domingo, Dominican Republichgarcia@hrafdom.com

Contributing Editor:Josefina Fernandez McEvoyK&L Gates LLP; Los Angelesjosefina.mcevoy@klgates.com

On March 30, 2007, the executivebranch of the government of theDominican Republic sent a new

legislative proposal meant to addressbankruptcy issues to its Congress. Ifapproved by both chambers of Congress,it would replace its current approach tobankruptcy—which is antiquated,inefficient and essentially unused, andone that has failed to meet the needs ofthe many business failures created in thewake of a collapse of many of thecountry’s major banks in 2003.

Current bankruptcylaw in the DominicanRepublic is a productof its interpretationsof a Code of Com-merce originally im-posed on the nationduring a period ofHaitian dominationfrom 1821-44. Theelements of this

Code have remained unchanged since theearly 19th century, except for thoseprovisions created in Law Number 4582in 1956, which established a compulsorypreliminary conciliation proceedingbefore a creditor could institute abankruptcy proceeding against a debtor.Since that time, bankruptcies have oftenended at that compulsory preliminarystage of the proceedings and as aconsequence, court precedents regardingbankruptcy matters in the Dominican

Republic are practically nonexistent.Adding to this inefficiency, current

bankruptcy rules only deal withliquidation, never contemplatingreorganization and providing no guidancein matters of international insolvency.

The new proposed bankruptcy lawcan be seen as a consequence of theDominican Republic’s incorporation infree trade structures, on which theadoption of modern and efficient legalprovisions enabling the reorganization ofdistressed business enterprises has beenconsidered an urgent matter to beaddressed. It is mostly the work of aspecial committee in charge of drafting,revising and promoting the new law. Thecommittee was created by the ConsejoNacional de la Competitividad (NationalCouncil for Competitiveness), anorganization involving both the publicand the private sector and created by apresidential decree with the main purposeof formulating, implementing anddeveloping strategies for the key

productive sectors of the Dominicaneconomy, aiming toward a betterresponse to the current challenges posedby the processes of globalization and freetrade. Currently in force, the DominicanRepublic had already ratified bySeptember 2005 the U.S.-DominicanRepublic-Central America Free TradeAgreement (DR-CAFTA), the largestfree-trade agreement in over a decade tobe agreed upon among the signatorynations.1

The law is currently branded as theLey de Reestructuración Mercantil yLiquidación Judicial (Law onCommercial Reorganization and JudicialLiquidation). Drafts of the law begancirculating by May 2005 for review and

consideration by main sectors of theDominican Republic.

The committee appears to have usedthe U.S. Bankruptcy Reform Act of 1978and its amendments as its comparativesources, particularly its chapters 5, 7, 11and 13. It also employed the legislationon insolvency and bankruptcy of Canada(Bankruptcy and Insolvency Act of April27, 1997 and the Companies´ CreditorsArrangement Act of 1985), Mexico (Leyde Concursos Mercantiles de Mayo de2000) and Spain (Ley Concursal del 9 deJulio de 2003).

For the chapter on cross-borderinsolvency, the committee resorted to theModel Law on Cross Border Insolvency,promulgated in 1997 by the UnitedNations Commission for InternationalTrade Law (UNCITRAL).

With respect to the proceedingsrelated to the judicial liquidation of a

A New Approach to Bankruptcy in the Dominican Republic

Latin America Update

About the Author

Hipolito García is currently an associateattorney in Headrick Rizik Alvarez &Fernández, a leading law firm in theDominican Republic, where he hasconcentrated his work on corporate,banking and insurance law, withemphasis on mergers and acquisitions,taxes, international contracts, foreigninvestment, bankruptcy, and businesslaw in general. Josefina McEvoy is apartner with K&L Gates in Los Angelesand ABI’s Vice President-International.

1 The following nations are also parties to the DR-CAFTA: Costa Rica, ElSalvador, Guatemala, Honduras and Nicaragua.

44 Canal Center Plaza, Suite 404 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org

Josefina McEvoy

business, the law maintains the Frenchapproach previously resorted to by thedrafters of a proposal for a new Code ofCommerce, which, for a considerabletime, has been pending congressionalapproval. In addition to preserving theoption of judicial liquidation, theproposed law provides an approachtoward the reorganization of enterprisesbefore the Chamber of Commerce,following the spirit of Law No. 4582 of1956, which established and mademandatory certain preliminary amicablesettlement proceedings before anycreditor could initiate judicial bankruptcyproceedings under the old rules.

The present law permits onlymerchants to file a petition forbankruptcy relief but unlike the oldlegislation, which made only solebusiness proprietors eligible to bedebtors, the new law also considersbusiness enterprises to be eligible to bedebtors. An individual not engaged inbusiness is ineligible for reorganizationor liquidation under the new law.

The special laws recentlypromulgated to regulate the insolvencyof financial institutions, energy providersand distributors, insurance companiesand pension funds should remainunaffected, as the proposed bankruptcylaw tracks those regulations and may infact supplement the insolvency pro-ceedings contemplated by the specialregulatory laws.

Under the proposed law, an eligibledebtor may file, with the Chamber ofCommerce in the jurisdiction in whichthe debtor maintains its domicile or placeof business, a voluntary petition for reliefif the debtor is insolvent or has ceasedpaying its debts as they came due.Further, one or more creditors holdingclaims in a qualified amount that alsocomply with certain requirements mayfile an involuntary petition against adebtor. The filing of a petition does notdetermine eligibility to be a debtor underthe new law. Upon presentation of thepetition, the Chamber of Commerce mustdesignate a “visitor” or “auditor” from apanel of qualified professionalsmaintained in the Chamber’s specialregistry, who is charged with the task ofverifying the accuracy or incorrectnessof the petition. The Chamber must alsopublish the petition and give notice to thepetitioner’s creditors at the expense ofthe petitioner.

If the petition is accepted, theChamber of Commerce must then

designate a “conciliator,” also from aprofessional panel that the Chamber willmaintain for such purposes. Thisconciliator is responsible for, amongother things, formulating and negotiatinga reorganization plan, evaluating andrecommending the disposing of pre-petition agreements to which the debtoris a party, and overseeing the operationof the debtor’s business subject tooversight and the approval of a simplemajority of the debtor’s creditors. Thereorganization plan must be approved bya majority of the creditors holdingallowed claims, representing a qualifiedportion of the aggregate debt.

Remarkably, the proposed lawpermits the debtor’s management tocontinue to operate the business. In areorganization case, operation of thebusiness will be the rule, and the debtor’smanagement will be removed andreplaced by a judicial administrator forcause. The law also permits debtor-in-possession (DIP) financing following theinitiation of the proceedings.

The proposed law containsprovisions aimed toward therehabilitation of enterprises in order topreserve jobs and maximize the returnto creditors. It also permits the avoidanceof certain transactions deemeddetrimental to the estate and the recoveryof unpaid assets as provided under theDominican Civil Code.

Despite a consensus concerning theneed for a new legal approach toinsolvency, there are still certain sectorsthat criticize specific provisions of theproposed law, such as those relative tothe rights of secured creditors. The mainreason behind such a position lies in thefact that the current legal regime appliessolely to unsecured creditors, which inturn is the result of an approach aimedsolely toward the liquidation of thedebtor’s business. Under the existingregime, secured creditors—usuallyfinancial institutions—remain unaffectedby the commencement of an insolvencyproceeding for or against the debtor. Theproposed law, however, contemplates thereorganization and rehabilitation ofviable business enterprises, followed byliquidation if the debtor’s reorganizationefforts fail. Accordingly, the proposedlaw requires secured creditors toparticipate in the reorganization processand will no longer permit them to pursuethe enforcement of security interests intheir collateral outside the insolvencyproceedings, if such is considered

essential to the continuation of thedebtor’s business during thereorganization proceedings.

The enforcement of security interestsin the Dominican Republic has beencharacterized historically by thecomplexity of the enforcementprocedures, severe time constraints and,in practice, an attempt by debtors andtheir attorneys to delay the enforcementproceedings under unprincipled orquestionable grounds. Therefore, it is notsurprising that the lending sector isskeptical of the new law and opposesparticipation in the reorganizationproceedings to be pursued under theproposed law as it perceives the proposedstatute as new fertile ground fordefaulting debtors to further delayenforcement actions through theinitiation of insolvency proceedings.

It will take a significant effort tocreate awareness among these keyproductive sectors of the DominicanRepublic regarding the need for this lawgiven the interrelation between businessinsolvency, financial crisis and thecreditor rights system. Should theNational Congress approve legislationthat excludes secured creditors, the lawwould be ineffectual, as most securityinterests in the Dominican Republic aregranted over assets that are essential tothe business enterprise. The creditindustry should focus its concerns onmaking sure that the new law includesadequate mechanisms to safeguard theirinterests and severely punish theinitiation of bad-faith or frivolousinsolvency proceedings. The applicationof the new law will require thedevelopment of a sustainable insolvencyculture that would include theestablishment of a strong specialized andpredictable judiciary and an efficient andreliable panel of bankruptcyadministrators. Enactment of the new lawunquestionably would benefit theDominican economy by promotinginbound foreign investment and cross-border business activities. ■

Reprinted with permission from the ABIJournal, Vol. XXVI, No. 5, June 2007.

The American Bankruptcy Institute is a multi-disciplinary, nonpartisan organizationdevoted to bankruptcy issues. ABI has nearly11,500 members, representing all facets ofthe insolvency field. For more information,visit ABI World at www.abiworld.org.

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