Bill of Law on Insolvency Resolution: a proposal for rescuing viable companies

The use of bankruptcy proceedings as punitive sources for insolvent debtors has been left frozen in time. When enacted, Law No. 154/69 regarding Bankruptcy was one of the most modern in Latin America. However, to this date this law is rarely applied and the idea of “punishing” a debtor for reaching insolvency is gradually abandoned. Modern insolvency systems seek to recover the debtor’s business, by reorganizing or restructuring the debts rather than liquidating the assets, as this contributes to the development of the economy and is under the belief that it is preferable to maintain a business or company that once was feasible, despite the financial problems that the business or the company may have encountered on the way.

The truth is that, when facing financial problems in these days, insolvency and bankruptcy provided by Law No. 154/69 are not considered attractive for both debtors and creditors, so we express our total approval to the insolvency reform initiative in Paraguay. In fact, the Bill of Law on Insolvency Resolution was submitted to the Congress, intended to keep those effective provisions of the current law but, at the same time, adding some modern touches to our bankruptcy system through the incorporation of new institutions.

Extrajudicial reorganization agreement, preservation of business through a sale under way, cross-border insolvency and mixed model of receivership are some of the new additions.

Extrajudicial reorganization agreement is a preliminary step before filing for insolvency and allows the debtor in a state of insolvency or with financial problems to agree with an absolute majority of the creditors, namely representing two thirds of the accountable capital, a debt restructuring. The Bill provides for the approval of this agreement before a judge and such approval has the same effects as an approved composition of creditors in insolvency proceedings.

Furthermore, as a novelty, the bankruptcy process incorporates the sale of assets as a unit or the company in working order, which allows a more efficient settlement. In some cases, selling the unit or the company is more practical than liquidating the assets separately. This inclusion demonstrates the trend towards reorganization and recovery of a feasible business even in bankruptcy cases.

In addition, Model Law on Cross-Border Insolvency by the United Nations Commission on International Trade Law is adopted. This section of the project basically seeks to regulate cooperation between the Paraguayan authorities and those of foreign countries, create a mechanism that provides greater legal security to trade and investment, guarantee the protection of the debtor’s assets, optimize their value and protect the interests of creditors and other interested parties. 

Perhaps one of the most expected inclusions is the mixed system of receivers established by the bill. Currently, there are only six receivers in charge of all bankruptcy proceedings in the country. This deficiency also contributes to make the bankruptcy proceedings an unattractive solution for both debtors and creditors. This project is focused in appointing independent professionals with degrees in Laws or Economics, Accounting or Business Administration, as receivers; to that end, a registry or list under responsibility of the Judicial Council and the General Bankruptcy Receivership should be set. This list would be valid for five years. 

The interesting part of this is the procedure established for the selection and appointment of receivers in bankruptcy proceedings. The same will be drawn by lot and the appointed receiver shall not participate in future draws until the list is closed, which ensures a good and balanced distribution of the work for receivers.

Undoubtedly these inclusions will strengthen the system in regard to insolvency cases in the country. Promulgation thereof will contribute for developing the economy and attracting new businesses in the country.