COVID-19 and Panama‘s Insolvency Law

7 April 2020

The health crisis caused by COVID-19 (better known as “Coronavirus”) has had a significant impact on both global and local trade. In our country, the first case, which was confirmed on March 9, triggered the implementation of significant sanitary measures that led to the necessary temporary closure of multiple enterprises, as well as limited the movement of the population, and restricted commercial  and governmental  activity. The impact of such measures is expected to be greater in some sectors, such as hotels, restaurants, retail (excluding pharmacies and supermarkets).

All this, in the end, could cause many of these enterprises to be unable to meet their financial and / or monetary obligations, as they face a state of “foreseeable lack of liquidity”, a “situation of cessation of payment” or “insolvency”- all of which are terms defined by Law No. 12 of 2016 (the “Insolvency Law”),  which regulates both reorganization insolvency proceedings and liquidation insolvency proceedings.

The Insolvency Law has important effects on companies that decide to avail themselves of, or are subject to, either proceeding.

Therefore, below, we briefly and generally emphasize on the Insolvency Law’s most relevant effects, and consider its applicability, in practice, considering the implementation of the aforementioned measures in our country.

Reorganization Insolvency Proceedings

This must be requested before the pertinent court by the debtor company,  after which the judge examines said request and decides, assuming it complies with the provisions of the Law, to admit it and initiate the reorganization insolvency proceeding. It is important to note that the mere presentation of the application has certain substantial effects on the company and its creditors, the most relevant effect being the “insolvency financial protection”  period, which is granted to the debtor by means of resolution declaring the start of the reorganization insolvency proceeding (issued by the judge after the previously mentioned request for reorganization has been granted).

Said “insolvency financial protection” implies that: (i) executory proceedings (“procesos ejecutivos”) of any class, proceedings for restitution of assets or evictions of the debtor are prohibited from commencing; (ii) all the contracts entered into by the debtor, including their conditions of payment, will remain in full force, and may not be either unilaterally terminated early, or required to be complied with in advance, and neither can the guarantees contracted for become effective; and (iii) the debtor may not be deemed unfit or be disqualified from contracting with state entities. Only in exceptional cases, according to the Insolvency Law, can some of these effects be countered.

Liquidation Insolvency Proceeding

This is appropriate when a company defaults on an obligation documented as an executory title (“título ejecutivo”); has at least three executory proceedings filed against it and has not presented sufficient assets to comply with full payment; or hides or abandons its business or closes its commercial establishment without having named an agent sufficiently authorized to fulfil its outstanding obligations.

A liquidation insolvency proceeding may be initiated at the request of the debtor, at the request of a creditor, or at the request of the representative of a foreign insolvency proceeding.

Among the effects that a declaration of liquidation has on the debtor, his assets and contracts, we underscore the appointment of a liquidator, who represents the creditors and has the power to sell and dispose of the debtor's assets, and use the proceeds to pay the credits that have been recognized in the insolvency proceeding and recorded as company liabilities (the “qualified credits”); the suspension of the statute of limitations on actions against the debtor for the credits presented to the liquidation insolvency proceeding; and also, the closure of current accounts of the debtor as of the date of cessation of payment, among others.

It is also important to note that, unlike a reorganization insolvency proceeding, during a liquidation insolvency proceeding, creditors with real guarantees may continue their actions against assets encumbered by a mortgage, antichresis or pledge, without affecting the ability of such actions to be carried out in the liquidation insolvency proceeding.

International Effects and Local Situation

In multiple jurisdictions around the world, modifications to insolvency laws similar to ours have been adopted as a response to the Coronavirus crisis, with the intention of protecting administrators of companies that, in those jurisdictions, have the legal obligation to declare insolvency when, for example, the company’s liabilities exceed its assets.

However, in Panama, the Insolvency Law does not impose a similar obligation on directors or administrators of the company (although this obligation did exist in the old and repealed bankruptcy regime of our Commercial Code). Another global trend, in terms of insolvency laws, has been to grant moratoriums or suspension on the rights of creditors, for example, to request the forced liquidation of companies during this crisis.

Although in Panama, as of the date of this writing, no changes to the Insolvency Law have been made in response to the current crisis, the Government has taken multiple measures to support various economic actors, and additionally the banking industry has opted to offer certain safeguards and protections to debtors.

With that in mind, at the moment we do not foresee that there will be requests for forced liquidation or reorganization by debtors during the crisis given that the Judicial Branch, as of the date of publication, keeps its doors closed and the filing of a bankruptcy request could not be complied with pursuant to the Insolvency Law.

However, as mentioned, it is of utmost importance to keep in mind our insolvency regulations since, in our opinion, once the health crisis is over, surely on the economic front, multiple companies will be in need of  “reorganization”, as established by the Insolvency Law, or otherwise opt for liquidation.

That said, nothing in the Insolvency Law prevents creditors and debtors from reaching out of court agreements to refinance their obligations.

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