Protection from Financial Fallout: Suspension of Payments and Bankruptcy in El Salvador

As well as an unprecedented health crisis, the Covid-19 pandemic has inflicted great economic damage. The World Bank and the International Monetary Fund say the crisis will trigger the worst recession since the Great Depression of 1929. And who would have imagined that major retailers like J.Crew, Neiman Marcus and the great airline company Avianca would declare bankruptcy in the United States?

And what about the effects on employment? A report by the International Labor Organization (ILO), estimates a total loss of 195 million full-time jobs between April and June of this year.

El Salvador’s economy is deeply impacted by this world crisis. With many firms in the country facing problems, it is useful to know the legal tools that Salvadoran law provides to be able to manage insolvency states. Effective and timely legal advice will provide peace of mind to the many companies having to scrape by in these difficult times.

Commercial law in El Salvador provides two types of processes: suspension of payments and bankruptcy, both regulated by the Commercial Code and the Commercial Procedures Law.

What Exactly Are Suspension of Payments and Bankruptcy?

The law allows merchants to enter into a judicial agreement with their creditors and administer enough assets to cover their obligations through a suspension of payments. Salvadoran law offers merchants this opportunity before bankruptcy is declared. It means they can request that their creditors be called to enter into a general agreement.

On the other hand, bankruptcy is a state of insolvency or non-payment. When a judge declares that a company is bankrupt, it means they no longer have to comply with their contractual obligations.

The main objective of bankruptcy is for the company to cease its commercial activities due to not having the capacity to honor its contractual obligations.

Because of the importance and complexity of the subject, these processes must be carried out by experts in the field. In El Salvador, there is a possibility that merchants may be subject to this state of insolvency.

When Can Bankruptcy Be Declared?

– When the merchant defaults on his liquid and expired obligations.

– In cases where the merchant has insufficient goods to seize.

– When the merchant has been absent for more than 14 days, without leaving someone who can legally represent him.

– When the company’s premises have been closed for more than 14 days.

– When the merchant has transferred his assets to one of his creditors.

– When the merchant produces fraudulent or misleading files.

– When the merchant chooses bankruptcy of their own accord.

– When the merchant requests the suspension of payments and this is not granted, or when it is not possible to reach an agreement with the creditors.

– When the merchant does not comply with the obligations contracted in the agreement made due to the suspension of payments.

– Any other situation that is analogous to the those listed.

With respect to this last point, it is important to mention that the legislator allows the bankruptcy applicant to establish his claim in an analogous way if it can be determined that another situation fits into the legal concept required for the bankruptcy declaration.

What Actually Happens?

Both the “suspension of payments” procedure and “bankruptcy” are processed before a commercial court judge. In other words, the merchant must file a demand or request in the court before it can be analyzed and awarded.

The process begins when the merchant voluntarily requests a “suspension of payments,” before filing for bankruptcy.

If the merchant does not reach an initial agreement with the creditors (suspension of payments), what follows is a “universal bankruptcy judgment.” The merchant is thereafter disqualified from operating while the state of bankruptcy lasts.

Companies facing problems in El Salvador should be aware of the above-mentioned procedures so they can make decisions in the best of their interests.