The country needs a modern framework that simplifies processes so that companies do not close due to the impossibility of restructuring their debts.
That a company has financial or liquidity problems to pay its creditors is part of the rules of the game of undertaking and risking being part of the productive sector.
It does not necessarily mean that it has been mismanaged and, within any modern society, there must be agile and effective mechanisms to facilitate reaching payment plans that prevent the loss of jobs and business skills.
However, since 1997, in Ecuador an obsolete Preventive Bankruptcy Law is in force that never facilitated debt restructuring or meant a lifeline for companies in trouble.
In 26 years, only 27 companies nationwide have used this regulation to face their financial problems.
For this reason, lawyer César Coronel, general manager of the legal firm defensadeudores.ec, explained that one of the most positive characteristics of the recent decree-law on corporate debt restructuring, issued by the President of the Republic, Guillermo Lasso, last 7 July 2023, is that the current Preventive Bankruptcy law is completely repealed.
“While in Ecuador, since the 1990s, only 27 companies have used that law to try a payment plan with their creditors, in other countries like Colombia, with more modern and effective regulations, 5,000 companies in a single year achieved financial relief to avoid a closure,” he said.
economic urgency
Ecuador has suffered several economic blows in recent years, from a pandemic to two violent strikes. Until the end of 2022, registered 51,226 fewer active companies in the country compared to 2018 levels. In addition, there are around 13,807 inactive companies.
Thus, it becomes evident that the country needs mechanisms so that fewer companies close their doors and can restructure their debts. Only in this way can employment and development be generated.
The Lasso decree law, which is now in the hands of the Constitutional Court (CC), seeks to prevent further deterioration of the already registered, but also prevent what may happen with the impact of an El Niño phenomenon that could generate economic losses of between $3,000 and $4,000 million to the productive sector.
In this context, the so-called pre-bankruptcy agreements, which were in the Organic Law of Humanitarian Support and were in force until June 22, 2023, are definitively incorporated into the Ecuadorian legal system. In addition, figures such as concordat agreements are incorporated.
The central idea is that, within a period of six months, and not in several years as was the case in the current obsolete legislation, sit at the same table the debtor and creditors to come up with realistic payment plans.
“One advantage is that In order to reach an agreement, only 51% of the will of the creditors is needed (now 75% is needed). On the other hand, the decree law provides that while the negotiation process lasts, neither legal nor arbitration actions can be initiated, nor coercive actions against the debtors. Those processes that are already being developed are suspended for the entire duration of the negotiation and even 60 days later,” Coronel pointed out.
Who benefits?
According to Lasso’s decree law, the Mechanisms for financial relief can be requested by all types of commercial companies regulated by the Superintendency of Companies, that is, corporations, limited companies, simplified stock companies (SAS), among others.
Those companies that are already in dissolution or liquidation are expressly excluded. also remain outside the foreign companies whose operating permit has already been withdrawn; insurance companies; banks and all those companies related to stock exchanges and fiduciaries.
Agreement mechanisms may be requested, if the Constitutional Court approves the decree law, in three types of situations:
1 Insolvencia actual: when a company is currently unable to pay its obligations
2 Imminent insolvency: when the company anticipates that in a period of approximately three months it will no longer be able to meet its obligations.
3 Probable insolvency: when the company anticipates that in a period of no more than two years it will fall into arrears and will stop paying its obligations.
According to Ricardo Romero, a corporate attorney, the new regulation has a preventive character to prevent companies from reaching the point of liquidation or closure.
“Before the business becomes unviable, the important thing is to provide tools so that, without stopping paying employees, other obligations can be suspended until an agreement is reached on how and how much to pay creditors. Everything will be controlled and endorsed by the Superintendency of Companies,” Romero pointed out. (JS)
Lack of knowledge about the liquid financial situation of companies
In order to avoid a liquidation or closing, the first step is to know the financial situation of the company. It seems obvious, but in most cases there is dknowledge about issues such as what income and expenses really are.
If there are already problems to pay, according to the lawyer César Coronel, general manager of the legal firm defensadeudores.ec, it is necessary to start from recognizing those problems; and then clearly identify creditors, how much is owed to each and what judicial processes are already underway.
In addition, you have to set the true ability to pay of the company “A very recurring mistake is trying to reach separate agreements with creditors without understanding that there is a global debt situation that must be addressed together,” Coronel concluded.
“What is proposed in the decree law has characteristics similar to what is called Chapter 11 or Bankruptcy law in the United States. Undoubtedly, there is still a lot to do, but I think it is an important advance, especially for companies. The outstanding debt is still that the benefits should be extended to natural persons”, lawyer César Coronel, general manager of the legal firm defensadeudores.ec