The enactment of the General Organic Procedural Code resulted in material changes in bankruptcy proceedings in Ecuador. One of those changes was the creation of a preventive insolvency proceeding available to any person, whether or not engaged in trade, which is similar to the preventive proceeding or agreement with creditors created by the May 1997 Law on Insolvency Proceedings for companies incorporated in Ecuador and then subject to control by the Superintendency of Companies, Securities and Insurance.

Debtors, whether or not engaged in trade, are entitled to a preventive insolvency proceeding to preclude bankruptcy proceedings. This protective measure is available to individuals and to corporations not subject to control and supervision by the Superintendency of Companies, Securities and Insurance and the Superintendency of Banks. A preventive insolvency proceeding may be sought only by debtors, and not by creditors (unlike the proceeding established in the Law on Insolvency Proceedings for creditors of companies subject to control by the Superintendency of Companies, Securities and Insurance).

The main purpose of the preventive insolvency proceeding is to allow the debtor to obtain an extension of time and/or more favorable terms for payment to creditors. To this effect, the debtor must prove that it has sufficient assets to cover all its debts, or that it earns income on a permanent basis.

To avail itself of this method of protection, the debtor must file a request with the civil judge in its place of domicile including, in addition to the requirements applicable for all types of claims, the following:

  1. the reasons due to which it is unable to perform its obligation as previously agreed;
  2. a detailed list of its creditors;
  3. details and value of assets and liabilities;
  4. the extension requested, which cannot exceed three years;
  5. the proposed payment plan, specifying the funding sources, time periods and conditions as well as the proposed refinancing.

Once the claim is filed, and if approved by the judge, the judge shall order (i) temporary suspension of payments, (ii) service of process on the creditors, and (iii) designation of an auditor to verify the accuracy and veracity of the detailed and valued statement of assets and liabilities within a period not to exceed ten days from the date of designation and formal assumption of office.

In addition, if the debtor is engaged in trade, the designated auditor shall jointly manage the debtor’s business until the creditors’ meeting takes place.

The proceeding will be declared terminated and a voluntary bankruptcy proceeding will commence (which is understood to consist of the assignment of assets under the previous system) if the auditor’s report establishes that the liabilities exceed the assets of the debtor by 120% or more, or that by the date of the request there are overdue debts (which represents another difference in respect of the insolvency proceeding established in the Law on Insolvency Proceedings that makes the action admissible even if the requesting company has overdue debts).

If this is not the case, the judge will call a creditors’ meeting to approve the debtor’s proposal.

Following service of process on the creditors, the meeting will be held not less than ten days or more than twenty days after the date of the call.

Attendance to the meeting is mandatory for the auditor and the creditors that provide evidence of their status as such.

The creditors shall vote on their share in total liabilities; however, the General Organic Procedural Code provides that if mortgagees or pledgees vote they will lose their privileges.

The creditors’ meeting will analyze the auditor’s report and balance sheet. Then, the proposed payment period and the plan submitted by the debtor must be analyzed and approved by a majority representing more than fifty percent of the liabilities. Notwithstanding, if only one creditor represents more than fifty percent of the debtor’s liabilities, the vote of one additional creditor will be required.

It should be noted that even if the creditors refuse to accept the plan but fail to justify their refusal, the judge may order the approval of an agreement with the debtor on the terms proposed by the debtor.

The agreement with the debtor may contemplate new time periods and financing and other valid covenants that may facilitate the performance of the obligations. The agreement must be approved by the judge.

If the debtor is engaged in trade, the creditors may request that the auditor continue to jointly manage the business, or that another person be designated to undertake such joint management, until the agreement is fully performed.

In general, this new mechanism to protect debtors is positive and may benefit debtors that are in a position to perform their obligations on terms different from those initially agreed, thus avoiding unnecessary executory or bankruptcy proceedings. However, the way in which judges will use their discretionary power to accept requests, even against the will of a majority of creditors, is still to be seen.

Warning: This newsletter by Perez Bustamante & Ponce is not and cannot be used as legal advice or opinion since it is merely of an informative nature.

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