COVID-19 and Panama´s Insolvency Law 

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 [1] and governmental [2] activity. The impact of such measures is expected to be greater in some sectors, such as hotels, restaurants, retail (excluding pharmacies and supermarkets). [3]

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”) [4], 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 [5], 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” [6] 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.[7]

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. [8]

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.

 


Footnotes:

[1] Said measures include, Executive Decree No. 490 of March 17, 2020 (published in Official Gazette No. 28983-A of March 18, 2020), supplemented by Correction (in Spanish, “Fe de Errata”) of the Ministry of Health published through Official Gazette No. 28983-B of March 18, 2020,  which established a curfew throughout the national territory; which would then be expanded to 24 hours a day, through Executive Decree No. 507 of March 24, 2020 (published in Official Gazette No. 28987-B of March 24, 2020).


[2] See, for example, Agreement No. 146 of March 13, 2020 issued by the Supreme Court of Justice "Through which the suspension of judicial terms is decreed at a national level."


[3] "La Prensa" Newspaper, Panama, April 5, 2020, 1B, "Crisis tendrá un impacto desigual en las actividades", Roberto González Jiménez,


[4] Article 4, numeral 3, of the Insolvency Law defines “cessation of payment” as “Situation in which the debtor finds himself when he defaults on one or more overdue obligations that are documented as a ‘título ejecutivo’ (executive title)”; numeral 14, of the same Article 4 of the Insolvency Law defines “foreseeable lack of liquidity” as “Situation in which the debtor foresees the impossibility of paying its future obligations as they become due or experiences financial difficulties that may cause an imminent state of insolvency "; and, numeral 16 also of said Article 4 of the Insolvency Law, defines the term “Insolvency” as the “the state of a debtor that cannot tend to the general payment of its debts as they become due” or the “financial state of a company whose liabilities exceed the value of its assets”.


[5] Take note that Article 27 of the Insolvency Law establishes that a reorganization request may also be submitted by the Creditors General Assembly, although such general assembly, in our view, should be previously constituted by means of a liquidation insolvency proceeding. The same Article 27 also establishes that the request for reorganization of a debtor can be requested by the representative of a foreign insolvency proceeding.


[6] Article 39 of the Insolvency Law.


[7] Article 80 of the Insolvency Law.


[8] See Cosgrave, B.B., Lawrence, J. (March 29, 2020). COVID-19: Changes to UK Insolvency Law to Assist Directors and Companies, K&L Gates. http://www.klgates.com/covid-19-changes-to-uk-insolvency-law-to-assist-directors-and-companies-03-29-2020/; see also Covid-19: Restrictions on creditor rights, relaxation of obligations to file and other insolvency-related reforms/proposals (April 3, 2020), Linklaters. https://www.linklaters.com/en/insights/publications/2020/march/covid-19-relaxation-of-obligations-to-file-and-other-insolvency-related-reforms-proposals; see also O’brien, M.,Walter, D., Lucarelli, P. (March 23, 2020). Australia: Australian Government Responds on COVID-19 Insolvency Risks, Baker Mckenzie.  https://restructuring.bakermckenzie.com/2020/03/23/australia-australian-government-responds-on-covid-19-insolvency-risks/

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