BizCLIR

Insolvency systems are an important element of financial stability. An effective insolvency system facilitates the rehabilitation of enterprises and provides an efficient mechanism for the liquidation of those enterprises that cannot be rehabilitated. Increasingly, the reform of the legal framework for insolvency has become an important component of international donors’ economic programs in many countries because of the impact that such reform can have on the country’s economic and financial system.

In the absence of adequate insolvency laws, individual creditors may compete to be the first to seize collateral or obtain a judgment against a failing debtor. It is in the collective interest of creditors that the reorganization or liquidation of a debtor be carried out in an orderly manner. In April 2001, the World Bank issued a report, “Principles and Guidelines for Effective Insolvency and Creditor Rights Systems.” Even though the insolvency principles focus primarily on corporate insolvency, some of the concepts identified are also helpful when developing principles and rules for the insolvency of non-corporate and “mixed” capital debtors, (e.g., banks and decentralized entities).

Costa Rica’s commercial laws do not provide a framework for efficient, transparent, and reliable methods for recovering debt, including seizure and sale of immovable and movable assets. As is the case with most Central American nations, Costa Rica’s bankruptcy rules focus on the liquidation of business entities rather than on their reorganization. They do not provide for an equitable treatment of creditors, to the detriment of creditors located in a foreign jurisdiction. Moreover, Costa Rican law does not directly provide for the type of “rehabilitation” or “workout” procedures that are found in Chapter 11 of the United States Bankruptcy Code. Thus, Costa Rica is missing an important opportunity to enable some companies to return to viability and even profitability. This situation would likely be improved through strengthening of the existing legal framework, including better reconciliation of bankruptcy law with other commercial laws, and greater education of judges, lawyers, and other professionals about the theoretical and administrative aspects of a sound bankruptcy regime.

Overall, the virtual absence of a functioning bankruptcy system in Costa Rica represents a missed opportunity of potentially enormous economic significance—namely, a healthy market economy is one in which entrepreneurship and reasonable risk-taking is encouraged. Where creditors know that their investments are protected when an indebted enterprise falters or fails and that they will be able to seek and receive at least partial payment on the enterprise’s debt, they are more likely to loan money or provide goods on credit in the first place. The fundamental goal of commercial bankruptcy law is to allow for the fair and efficient dissolution of businesses that are not viable and, for those businesses that have a chance at achieving viability, the opportunity to extend, reduce, or wipe out debt and protect themselves from pursuit by creditors. This goal cannot be reached under present Costa Rican bankruptcy laws.