Dominican Republic

In summary

This chapter discusses the Dominican Republic’s Insolvency Law. Most of its procedures, including nullity claims, will be used during restructuring, not liquidation. A restructuring request can immediately transition from verification to liquidation, without going through reorganisation, disabling any nullity claim. A recent decision held that creditors cannot file nullity claims during liquidation, even in the event of possible voidable transactions. Further, there has been a development in how courts addresses the requests of advancement for officers’ fees.

Discussion points

• Unfeasibility of nullity claims during liquidation (eg, reserved for conciliator, no appeals)
• Officers’ fees (eg, criteria to grant advance payment of fees, effects of appeals of liquidation decisions)
• Situation in respect to the payment of the costs of the process (eg, approach of the courts)
• Treatment of credits originated from the reorganisation process (eg, essential suppliers, attorneys and financial advisors during the reorganisation)

Referenced in this article

• Insolvency Law 141-15
• Rules of application of Law 141-15 – Executive Decree No. 20-17.
• Liquidation of Pawa Dominicana
• Liquidation of 33 Renova SRL
• Liquidation of Mones Packaging Solutions Mopack
• Reorganisation of Munné, SRL
• Reorganisation of Arconim Constructora, SA
• Centro Médico de Prevención de Salud Centresa, SRL

Introduction

Insolvency Law 141-15 is the principal legislation that governs insolvencies and restructuring procedures in the Dominican Republic. The Law was enacted in August 2015 but only entered into effect on 7 February 2017, after an 18-month transitory period. Furthermore, the rules of application of the Law 141-15 were signed into law by Decree No. 20-17 on 13 February 2017.

This means that the Dominican insolvency regulation has been valid for only three and a half years. Nevertheless, creditors and debtors are deciding to lean on the country’s reorganisation and bankruptcy statue to protect their credits or assets.

To provide an illustration of the insolvency practice in the Dominican Republic to date, we will refer to the statistics provided by the court^[1] and the processes published by the reorganisation and liquidation courts on their website. In 2017 and 2018, there were 25 restructuring requests, out of which 19 were dismissed and only six were accepted; from January to July 2019, there were eight requests and only two were admitted by the court and there are two new processes in 2020

Of the eight active cases:

• two are currently in the liquidation phase pending for the approval of the definitive list of credits and the liquidation plan (Mones Packaging Solutions Mopack and Caribbean Recycling);
• one is back to the negotiation and conciliation phase due to the annulment of the decision that ordered the liquidation of the company (Pawa Dominicana);
• one is currently in a procedural limbo considering that the decision that ordered the liquidation was annulled and the debtor who initiated the process has not filed any new request for the reorganisation of the company (33 Renova);
• one is currently in the execution of the liquidation plan, which was recently approved (Trevigalante);
• two are still in the negotiation and conciliation phase of the restructuring process discussing the reorganisation plans (Munne and Arconim Constructora); and
• one is on the verification phase (Centro Médico de Prevención de Salud Centresa, SRL).

There is also a request pending approval for the first recognition of a foreign liquidation procedure in the Dominican Republic.

Our firm is participating in six of the eight currently active cases in the restructuring and liquidation courts and is representing the liquidator of the first request of recognition of a foreign liquidation procedure, which is pending approval. We have participated in the processes both as legal representatives of the debtors seeking reorganisation and of the main creditors of the processes. Also, in one case (Arconim) one of the author’s of this chapter (Fabio Guzmán-Saladín) acts as conciliator and the other author (Pamela Benzán-Arbaje) as auxiliary expert. This chapter describes the main issues that we have experienced in our practice in this area.

The unfeasibility of nullity claims during liquidation

To provide some context for this section, we must briefly explain how our restructuring and liquidation regulation works.

The insolvency process is divided into three phases or processes:

• verification;
• reorganisation or negotiation; and
• liquidation.

The verification phase determines if the documents and information provided to the court allows it to confirm that the requirements to file a reorganisation or liquidation request are met and determine the economic and operational status of the company seeking its ­reorganisation or liquidation.

The reorganisation phase is led by the conciliator (equivalent to a trustee in United States or United Kingdom insolvency regulations) who must register all the credits, and prepare (if the reorganisation is requested by a creditor) or review (if the reorganisation is requested by the debtor) the restructuring plan.

Lastly, the liquidation phase is led by a liquidator who is in charge of the preparation of the liquidation plan, the realisation of the assets and the payment to the creditors.

It is important to note that according to the provisions of Law 141-15, creditors cannot request the involuntary liquidation of the debtor before attempting a reorganisation. However, upon a reorganisation request, the verifier and the trustee may recommend the immediate liquidation of the debtor under specific circumstances such as:

• lack of cooperation of the debtor during the verification or negotiation phase;
• when a reorganisation plan is not feasible under the particular circumstances of the debtor; and
• to avoid the increase of the debt and the diminishing of the debtors’ assets.

Likewise, the debtor, the trustee or any recognised creditor could claim the judicial liquidation of the debtor if they fail to comply with the restructuring plan.

This is due to the fact that our insolvency regulation was conceived to promote and facilitate the reorganisation of insolvencies rather than force or facilitate the parties affected to go out of business. In practice, this entails that most of the actions and procedures created by the insolvency law, including nullity claims, were conceived mostly during the negotiation and conciliation phase of the reorganisation and not during the liquidation phase.

The problem with this situation in practice has been that in most cases the reorganisation has been unviable or impossible for multiple circumstances and, before a reorganisation plan is even attempted, the trustee or the verifier recommends to the court that the company is liquidated, thus skipping some phases of the process and, with it, the actions and procedures that the law has conceived for those phases, such as nullity claims.

The law establishes that ex officio, or upon petition of any creditor, the trustee may request the court the nullity of any transaction that took place two years prior to the reorganisation request when they constitute an unjustified dissipation of the debtor’s assets. Transactions regarding public offering securities originated prior to the reorganisation request and with subsequent payment date are not subject to nullity action. Also, transactions involving the free transfer of assets or any other entered into by the debtor after the commencement of the insolvency proceedings may be annulled. Some transactions are expressly considered to be void, such as:

• the transfer of assets free of charge or at a price below market value;
• when the compensation given to the debtor or the creditor is notoriously superior or inferior than the compensation given or the obligation performed by the other party;
• partial or full compensations made by the debtor;
• payment of obligations not due by the debtor;
• the granting of new securities or increase of existing securities for debts originated prior to the reorganisation request with no justification;
• the transfer of property in favour of creditors that results in the payment of a higher amount to that received as a result of the liquidation; and
• transactions with related entities or companies where the debtor or any of the creditors serve as an administrator or are members of the board of administrators, or exercise effective control of the company or represent 51 per cent or more of the capital, or are able to designate the majority of its board of administrators, among others.

Furthermore, Law 141-15 establishes the invalidity of any contractual clause that, within 60 days prior to the commencement of the negotiation phase or after the initiation of proceedings, aggravates the situation of the debtor or accelerates the enforceability of claims not due.

In addition, articles of the application of law 141-15 establish that if the trustee does not file the nullity claim within the time frame indicated in the law, the registered or recognised creditors that represent at least 10 per cent of the total liabilities of the debtor may file the nullity claim on behalf of the remaining creditors.

As explained above, the judicial liquidation may be initiated upon recommendation of the verifier, thus completely skipping the restructuring phase. This gives rise to a problem when there are transactions that are detrimental to the mass and subject to annulment since it may seem as if they are completely voided in any scenario other than the company’s reorganisation, which is contrary to the purpose of the insolvency regulation.

Nevertheless, since the law is of very recent application and there is only limited case law regarding insolvency proceedings and none regarding nullity claims, we, as practitioners of the insolvency regulation, were hoping for a purposive approach in the interpretation of the law to fix this gap in the legislation.

It is for these reasons that in the case of the liquidation of 33 Renova SRL, we filed a nullity claim against two transactions that affected the mass of creditors and were annullable according to law 141-15, which were declared inadmissible ex officio by the court, for the reasons outlined below.

The reorganisation of 33 Renova SRL was filed by one of the creditors of the company, so the court appointed a verifier to confirm that the requirements to file the reorganisation request were met, and to verify the economic and operational condition of the company and render a report regarding the viability of a reorganisation. Given the lack of cooperation by the debtor and the impossibility of obtaining proper information, the court, following the recommendation of the verifier, ordered the judicial liquidation of the company, skipping the restructuring phase.

Considering this situation, and based on the principles of the law that seek efficiency, the maximisation of assets and transparency in all reorganisation and liquidation procedures, during the liquidation phase we filed a nullity claim against two transactions that were signed by the company and one of its creditors. The creditor that pursued the insolvency procedure also filed a nullity claim against one of the main documents that supported the credit of our client, which is the major creditor of the company.

After several hearings and the submission of multiple claims and statements of defence, on 9 September 2019, the court rendered two decisions declaring the inadmissibility of each nullity claim based on a literal interpretation of the Law 141-15 that entailed that the nullity claim could only be filed by the trustee;^[2] therefore, since in this particular case a trustee was never appointed, the court understood that the creditors – even when both had credits representing more than 10 per cent of the total liabilities of the mass of creditors – did not have active legitimation (ie, legal authority) to file a nullity claim.

In our opinion, this literal interpretation of the court contradicts the principles and purpose of the nullity claim, which the law, in its article 98, established as a mechanism intended to reconstitute the assets of the mass of creditors and ensure their equitable treatment. It is against the interest of the mass of creditors that an alleged creditor get paid during a liquidation procedure if its credit constitutes an annulled transaction that affected them and that is not supported on valid documentation. Unfortunately, these decisions are not subject to appeal since the law restricts the appeal to specific decisions.

Considering this, the strategy was to wait until the presentation of a valid provisional list of credits so that, if the liquidator understood that the credit was not valid, the registration of the credit could be rejected and this decision could be appealed by the affected creditor. On the other hand, if the liquidator had registered the credit, the last resort would be to file a revision claim against the provisional list of credits presented by the liquidator. However, before the liquidator had a chance to present a valid provisional list of credits, the decision that approved the reorganisation of Renova was annulled by the Court of Appeal^[3] and the creditor that originally commenced the reorganisation has not filed the corresponding documents to request the revamp of the reorganisation process, leaving it in a procedural limbo.

Moreover, in the case of the liquidation of Mones Packaging Solutions Mopack SRL – which was originally initiated as a reorganisation request – during the registration of the credits, the trustee received a request for the registration of the credit of Allied Mones Corporation SRL, a company related to the debtor, which was supported in 326 invoices that seemed to be produced specifically for the collection of an inexistent credit and to procure sufficient votes for the reorganisation or liquidation plan. Given this fact, the trustee recommended to the court the rejection of the credit and Allied Mones Corporation SRL filed a revision claim against the provisional list of credits.

After several hearings, the court rendered a decision^[4] accepting the claim filed by Allied Mones Corporation claiming that the credit was supported in proper documentation, since the trustee did not file a nullity claim against the invoices that gave origin to the credit, thus its registration could not be rejected. Thus the interpretation of the court is that the only way to reject the registration of a credit that has supportive documentation – even if dubious – is through a nullity claim.

The problem regarding the payment of the insolvency officers’ fees

Creditors cannot request the involuntary liquidation of the debtor before attempting a reorganisation. On the contrary, debtors may initiate a voluntary liquidation and there are no material differences to proceedings opened involuntarily.

Nevertheless, even when this is a possibility, most cases prone to liquidation start with a reorganisation attempt from the debtor. This fact ultimately causes the court to appoint several officials, hence creating an important privileged credit caused by the fees of the officers involved. For instance, in some cases, the debtor requests a reorganisation, but the court designates a verifier before appointing a trustee and, upon the impossibility of a reorganisation, appoints a liquidator. This entails that a privileged credit for three different officers is automatically registered.

Regardless, even when the credit for the fees of the officers is considered privileged, and thus is of higher priority for collection and payment only preceded by labour liabilities, in the early stages of application of the law with the very first cases most professionals listed as potential officers for reorganisation and liquidation proceedings were very disappointed in how some courts were treating the payment of their fees and expenses. Some even asked to be withdrawn from the lists used by the courts to appoint the officials for the insolvency procedures.

The problem resided in the fact that most courts did not allow for advance payments of officers fees and expenses, and so all the officers involved in a reorganisation or liquidation procedure had to bear all of the expenses incurred, including the fees for bailiffs required for subpoenas, expendable materials, fuel, travel expenses and so on, and fees for their auxiliaries and the hours incurred by them in the insolvency work, without having any certainty as to if, or when, they will get paid.

However, as explained below the position of the courts started to change on this topic after several requests from officers under very different circumstances. First, in the Pawa Dominicana case, after the substitution of three appointed liquidators that conditioned the acceptance of their appointments on receiving an advanced payment of their fees and expenses, the court decided to hand the last appointed liquidator the remaining funds that were paid in advance by Pawa Dominicana to cover the expenses of the procedure. No resolution was issued by the court to sustain such a decision.

Then, on the Arconim Constructora case, the trustee, Fabio Guzmán-Saladín, made a justified request to be paid his fees in advance after accepting his appointment and the court accepted the request by issuing a decision.

To put this in context, there are only two reorganisation and liquidation courts in the Dominican Republic: one in Santiago and the other in Santo Domingo, National District. There are only two cases in Santiago and six in Santo Domingo. While both courts are specialised in reorganisation and liquidation, each had a different approach when it came to providing advance payment of officers’ fees.

The Santiago court is inclined to a more purposive approach when interpreting the law and has established that an advance payment based on a provisional estimation of conciliator fees is possible even when the law provides that the trustee fees are determined when the restructuring plan is homologated or when the restructuring plan is terminated. The court understood that the fact that the fees cannot be liquidated in advance does not prohibit the court from making an advance payment, on a provisional basis, considering the range indicated in the law of between of 1 per cent and 3 per cent of the total assets of the debtor.

Furthermore, the court indicated that a law cannot escape the legal or sociological reality of the community for which the law is addressed, especially in a society where the practice of the legal profession is to require an advance payment for the services to be rendered. It also analysed the fact that the law provides that the expenses and fees of the verifiers are estimated at the beginning of their work and assumed by the debtor. In that line of thought, the court understood that, due to the reasonability, effectiveness and equality principles of law 141-15, an advance payment of the trustee’s fees was possible and justified.^[5]

However, upon request of an advance payment of the trustee’s fees in the case of Munne SRL, on 30 August 2019,^[6] the tenth court of the Santo Domingo court rejected the request based on a literal interpretation of the law indicating that such request was inadmissible considering that a restructuring plan has not been homologated and the negotiation and conciliation phase had not concluded.

Nevertheless, following a new request made by Munne’s trustee based on the reasoning of the decision of the Santiago court, on November 12, 2019, the tenth courtroom of the Santo Domingo court issued a new decision^[7] going back on its previous literal interpretation and instead applying a purposive approach to accept the trustee’s request and approve the advance payment of Its fees.

Another challenge regarding the payment of officers’ fees arises in cases where an officer is removed following a decision from the Court of Appeal that annuls the judgment that ordered the judicial liquidation of the debtor. This situation occurs because, according to our insolvency legislation, the initiation of an appeal does not automatically suspend the conciliation and negotiation process, the judicial liquidation process or the obligations of the officers. However, the interested party could demand the provisional suspension of the process to the court. The problem is that so far the common practice of parties and officers in these processes has been to not request the provisional suspension of the appealed decision to the court, and so the liquidation continues its normal course, generating expenses and fees for the liquidator involved.

For instance, in the liquidation case of Pawa Dominicana, the decision rendered by the court ordering the judicial liquidation of the company was appealed and none requested the suspension of the appealed decision. After several months, the Court of Appeal revoked the decisions that ordered the judicial liquidation of the company based on procedural violations, thus revoking all subsequent decisions, including the one that appointed the liquidator. On the contrary, in the 33 Renova case, the suspension of the appealed decision was requested, and, since the requesting party did not properly justify the suspension, this was dismissed by the court and the decision on the suspension request was rendered three months after the appeal decision annulling the decision was issued. Neither the law nor its articles of application refer to this scenario or the specific event where a liquidator is removed for the annulment of the decision that ordered the judicial liquidation of the debtor.

This means that there are no legal provisions regulating this scenario, which brings a lot of doubts; for example, could the court appoint the same liquidator once it orders the judicial liquidation of the company after complying with all procedural formalities? The principles of procedural economy, efficiency and maximisation of assets would suggest a positive response, while a literal interpretation of the law, which requires that officers are appointed at random, would suggest a negative response. We will have to wait until a new decision ordering the liquidation of companies is rendered to confirm the position of the court in that regard.

If the court decides on an automatic removal of the revoked office, another question may arise: which rules are going to be applied to liquidate the fees of the revoked liquidator and when will the revoked liquidator will get paid? The answer seems to be that the court should use the same rules used for the estimation of liquidator fees as established in the law, based on the complexity of the work performed by the liquidator until the moment of its revocation, and that its credit should be registered and will get paid once a liquidation plan is approved according to the priority set forth in the law.

Article 67 of the articles of application of law 141-15 establishes that within five days after the acceptance of a reorganisation request the debtor must deposit at the court the amount provisionally estimated by the court to cover the expenses of the procedure, which cannot be more than 0.5 per cent of the registered credits or the credits reported by the debtor on its request. Nevertheless, this amount is not being used by the courts to advance the expenses and fees of the officers, but rather to cover the publications in the newspaper that the law establishes as mandatory (except in the case of Pawa where the remaining funds were delivered to the liquidator who will have to transfer them on to the trustee following its revocation). The law does not regulate this situation either, and so the court will have to establish how and when those funds are going to be transferred, as well as the requirement to request a report from the previous liquidator to audit the administration and use of said funds.

In Pawa, after its revocation, the revoked liquidator requested authorisation from the court to use the funds under its administration to make some payments to cover the expenses and fees incurred until its revocation; however, the request was declared inadmissible by the court since it was submitted by the liquidator after it had been revoked. We understand that even when the bottom line of the decision was correct, since it could not allow such payments without any proper audit and report, and without making a final determination of the liquidator fees, it should have at least tried to address the underlying problems of the situation: that a person who no longer served as liquidator still held custody of the documents, funds and assets of the debtor.

Furthermore, our insolvency statute establishes that such amounts must be paid to a special account created for that purpose by the Judicial Branch; however, to this date, such account has not been created. Another complaint regarding this matter is that the court does not provide reports on how the funds are being used in spite of requests made to that effect by the debtor and the creditors.

Situation in respect to the payment of the costs of the process

As indicated above, the law outlines that, within five days of the acceptance of a reorganisation request, the debtor must deposit at the court the amount provisionally estimated to cover the expenses of the procedure, which cannot be more than 0.5 per cent of the registered credits or the credits reported by the debtor on its request. Following the enactment of the law, this has been one of the main points of discussions between the attorneys and companies interested in reorganisation procedures, as well as within the general legal community.

Originally, the reasoning of the court of Santo Domingo, in the National District, was to request, upon the acceptance of the reorganisation, the payment of the full 0.5 per cent to the debtors, which, depending on the amounts involved in the reorganisation, could be a great burden and even an impasse for companies seeking reorganisation, considering that they are already facing problems of liquidity and cessation of payments.

On the contrary, the Santiago court has adopted a more flexible and purposive approach interpreting the law based on its principles and objectives, which in this case is to set the necessary legal scenarios to allow the distressed companies to continue operating while trying to restructure its debts and operations. Following this interpretation, in the Arconim Constructora case, the Santiago court, instead of asking upfront for the full 0.5 per cent referred by the law, opted to make provisionary estimations of these costs and fees based on the costs involved in each phase of the process and then make payment requests from time to time to the company in reorganisation. This has allowed the company to keep the necessary capital and cash flow to continue its ordinary operations and payment to its essential suppliers, while also complying with its obligations before the court regarding the payment of costs and fees related to the reorganisation procedure. We understand that this will be the approach to be adopted by other courts in the upcoming cases.

Treatment of credits originated from the reorganisation process

Once the decision approving the reorganisation request becomes irrevocable and the conciliation and negotiation process commences, all payments of credits originated before the date of the reorganisation request, among others, are suspended until the reorganisation plan is approved or the judicial liquidation is ordered. This stay of proceedings will stand during throughout the negotiation and conciliation process and will be overturned with the approval of the reorganisation plan or with the judgment that orders the initiation of the judicial liquidation process.

To ensure that, despite this suspension, the debtor can continue with its ordinary operations, the law establishes that the debtor has the obligation to file before the court a list of the providers or suppliers that are essential for the ordinary course of business. These providers or suppliers are required to maintain the provision facilities during the restructuring of the debtor and the credit originated after the start of the restructuring process will be considered preferential for payment.

There has been a lot of discussion whether the attorneys and financial consultants assisting and advising the debtor on its reorganisation should be considered as essential providers so that the payment of their fees can be made by the debtor without any complication and their credit can also be considered preferential for payment. In practice, we have seen that this is the common practice. For example, in the Arconim Constructora case, the attorney and financial consultant of the debtor were listed as essential providers. Since the law mandates that the court should obtain the conciliator comments on this list, the authors in their capacity of conciliator and auxiliary expert, were able to express their position on this regard, arguing that these creditors could not be considered as essential providers because the nature of the credits should be necessarily linked to the ordinary operations conducted by the company in distress and not related to the reorganisation procedure alone. Nevertheless, the authors emphasised that, considering that these credits were essential for the success of the reorganisation itself, they should be allowed, but not as essential providers. The court rendered its decision authorising such credits and granting them the category of credits against the mass, which entails that the creditor can seek immediate payment of its fees and the debtor is allowed to pay when the fees are due.

This is an important development in the case law given the obscurity of the law in this regard, since it has set the legal precedent to, even when not mandatory, provide the necessary protections in favour of the attorneys representing companies in distress so as to obtain the payment of their corresponding fees. This will result in a bigger interest from attorneys to represent companies in need of reorganisation, thus a greater development of this area of law in the country.

In conclusion, there are multiple issues to be tended to by the insolvency courts of the Dominican Republic. However, considering the very limited period in which the law has been valid, it is too soon to talk about established criteria for any specific problems that have arisen so far.

Notes