Restructuring

Last verified on Tuesday 15th January 2019

Venezuela

Fulvio Italiani and Carlos Omaña
D’Empaire

    Actions prior to a formal proceeding

  1. 1.

    What duties do directors, officers or controlling shareholders of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? Is there a standard of care towards third parties? In what circumstances can directors, officers or controlling shareholders be found civilly or criminally liable for continuing to operate a company in financial difficulties? In practice, are such liabilities commonly enforced?

  2. If a company has negative net worth, the company’s management has a duty to call a shareholders’ meeting that must decide to either make capital contributions so that the company’s net equity is restored to an amount that is at least equivalent to two-thirds of the company’s legal capital. If the shareholders are unwilling or unable to contribute the amounts necessary to restore the company’s net equity then the company must be liquidated.

    There are no penalties for failing to call a meeting as explained above or for not making the required capital contributions, however, consistently failing to call a meeting to replenish capital can expose management to prosecution for negligent and even fraudulent bankruptcy. In other words, if a company continues to operate with a negative equity and the company’s management fails to at least convene the shareholders to try to remedy the situation via capital contributions, then management runs the risk of being prosecuted for negligent bankruptcy or even fraudulent bankruptcy. Of course, to prosecute management for fraudulent bankruptcy there need to be fraudulent elements such as asset concealment, fraudulent conveyances or outright fraud.

  3. 2.

    What actions are available to creditors (secured or unsecured) prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceedings? 

  4. Pre-insolvency, creditors will be able to enforce all of their contract rights, including acceleration, collection and foreclosure of collateral. There are at least three expedited collection and foreclosure procedures that allow unpaid creditors to (i) collect, (ii) attach prior to judgment and attach in aid of execution of judgment and (iii) foreclose on collateral. Namely, the vía ejecutiva expedited procedure allows unpaid creditors to provisionally attach a creditors assets to satisfy due and unpaid debts that are reflected on an authentic document such as a promissory note. Also, the mortgage or pledge foreclosure proceedings expedited procedure enables secured creditors to foreclose on their collateral with a court via a public auction carried out by a court. 

    Finally, under an ordinary commercial or civil proceedings, unpaid creditors can also obtain pre judgment provisional remedies in satisfaction of their claims, including attachment of property, injunctions and temporary restraining orders against transfer (or encumbrance) of property if they show to the court that (i) there is a material risk that a final judgment will be rendered ineffectual if the remedy is not granted and (ii) the collection claim is legitimate “on its face” or prima facie.

  5. 3.

    Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? If so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? Do insolvency proceedings stay the ability of secured creditors to foreclose on collateral of the debtor? Are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?

  6. Under Venezuelan law, self-help mechanisms that allow a secured creditor to repossess collateral without court oversight are illegal. The attachment and auction of collateral that secures indebtedness must be carried out through one of the expedited proceedings regulated under the code of civil procedure described in the answer to question 2, which means that the attachment, foreclosure and auction sale needs to be carried out under court supervision and via a public auction in which the secured creditor will be able to credit bid his or her claim.

    In some large financings, security interests have been granted via trust agreements whereby the trustee, the debtor and the creditor agree at the outset of the financing on a foreclosure mechanism that allows the creditor to take possession of the collateral to satisfy her claim in case of default. These structures have worked in the past and in some cases have even been recognised by bankruptcy courts but they nevertheless may still raise self-help issues, especially if the debtor's rights are not adequately protected by the trust agreement or a litigious debtor tries to challenge the validity of the trust on constitutional grounds.

    The declaration of a bankruptcy in Venezuela is accompanied by an automatic stay of all collection and enforcement procedures, including ongoing procedures for unsecured and secured claims, from the date of the bankruptcy declaration.

  7. 4.

    Can creditors that have equity as collateral take control of a debtor by exercising voting rights attached to pledged shares? 

  8. To replace the incumbent management, the secured creditor would have to foreclose and take title to the pledged shares unless the voting rights have been expressly pledged. It is customary to pledge the voting as well as the dividend rights of pledged shares or other forms of equity interests. By doing so, a defaulted secured creditor may replace management without having to first foreclose or take title to the pledged shares.

  9. 5.

    Can secured creditors credit-bid their debt in a sale of a debtor’s assets, outside or within a formal insolvency proceeding? If so, what procedures or limitations apply?

  10. Secured creditors may credit-bid their debt in a sale of a debtor’s assets, outside or within a formal insolvency proceeding. The terms and conditions of credit-bidding pre-insolvency are generally set by the court prior to the bidding process. Post-insolvency, the credit bidding rules will be set by the creditors committee, which is a collective action body that represents all the creditors and will also require court approval.

  11. 6.

    Are there legal or regulatory concerns that secured creditors should consider in connection with a sale or foreclosure? 

  12. Antitrust filings: there are no pre-acquisition antitrust filings under Venezuelan law, but the Venezuelan antitrust authority may open post-acquisition review of these acquisitions if they raise competitive concerns.

    Veil piercing: other than labour and tax liabilities, there are no exposures that an acquirer should be concerned about. In other words, in some instances, the owner of a company or the controlling entity of an economic group may be held joint and severally liable for the unpaid labour obligations and benefits accruing to the employees of a subsidiary. In certain tax matters that involve an “abuse of forms” a shareholder may be held liable for the tax liabilities of a subsidiary.

    However, in general, the separateness of legal persons is generally respected under Venezuelan law and piercing the corporate veil even for tax and labour matters remains a challenge and require trials that tend to be very fact-specific.

    Formal proceedings

  13. 7.

    What types of insolvency proceedings are available in your jurisdiction? Are different insolvency proceedings available for individuals and companies? Is there any distinction made between "preventive" insolvency proceedings and "actual" insolvency proceedings?

  14. There are two insolvency procedures under Venezuelan law both applicable to commercial legal entities and individuals: (i) the moratorium or atraso process, and (ii) the bankruptcy or quiebra process. Although either regime may be used to either liquidate business enterprises or to reorganise them, recent practice seems to show that if a company is salvable, most stakeholders prefer to have an out-of-court restructuring. Leading commentators consider the Venezuelan bankruptcy process as vexatious, reflecting in part the fact that there is still a social stigma attached to businesses that go bankrupt.

    The moratorium or atraso process (i) needs to be voluntary (ie, the debtor may not be involuntarily declared in atraso), (ii) does not provide for voidable preferences that allow for a claw-back of payments and transactions, (iii) automatically stays all collection actions against the debtor, (iv) allows for a debtor-in-possession regime whereby the management remains in charge of operations under court supervision, and (v) may only be granted for an initial one-year term (but may be extended by the court at its discretion). To be eligible for atraso, a debtor needs to show that its assets are greater than its liabilities.

    To request the “benefit” of atraso (as it is referred to in the Code of Commerce), the debtor must file a petition with the commercial court with jurisdiction in its domicile. The petition must enclose the favourable opinion with respect to the atraso of the debtor’s three largest creditors. If the atraso is granted, the debtor, its creditors and the court-appointed receiver must work together to prepare an amicable liquidation plan that must be approved by the court.

    The bankruptcy or quiebra regime (i) may be voluntary (requested by the debtor) or involuntary (required by an unpaid commercial creditor of any kind), (ii) provides for voidable preferences (described below) and (iii) automatically stays all collection actions against the debtor.  It is not entirely clear if the Venezuelan bankruptcy regime would allow a debtor-in-possession arrangement.

    There are no distinctions under Venezuelan law among preventive and actual bankruptcy.

  15. 8.

    May government-owned entities, states or municipalities file for an insolvency proceeding in your jurisdiction? If so, are there special rules or a separate regime that applies to such entities?

  16. It is not clear if government-owned companies are eligible for bankruptcy proceedings in Venezuela. Government-owned companies are mostly organised as sociedades anónimas under the Code of Commerce and logic would dictate that the Code of Commerce’s bankruptcy provisions should apply to them. 

    However, one important legal scholar has argued that the bankruptcy provisions of the Code of Commerce are not applicable to state-owned companies because state-owned companies are government instrumentalities and as such they “may not assume a quality of merchants”. Other legal scholars have argued otherwise.

    Also, public utilities are protected from attachments. Relevant government-owned companies typically operate in sectors that are reserved to the state or entities that are controlled by the state so realistically applying the Code’s insolvency regime would be extremely challenging.

  17. 9.

    On what grounds may or must a debtor be placed into an insolvency proceeding? Who may do this? What are the grounds for a voluntary proceeding? If an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? 

  18. Bankruptcy may be voluntary or involuntary and requires that the entity be in a cessation of payments situation meaning that the entity has defaulted on most of its debts. It is not technically required for the entity to be insolvent (ie, its liabilities being greater than its assets).

    Moratorium may only be voluntary and may not last more than one year that may be exceptionally extended for one additional year. To be eligible for an atraso, the debtor’s assets must be greater than its liabilities.

  19. 10.

    What effect, if any, does a filing have on a subsidiary or affiliate of the debtor? Are there any actions the debtor, the subsidiary or the affiliate can take to limit such effects? Are there any grounds for procedurally and substantively consolidating insolvency proceedings involving related parties? If a debtor organised under the laws of your jurisdiction entered into local insolvency proceedings, could the debtor’s foreign affiliates be included in the local filing? 

  20. The bankruptcy court has discretion to declare the bankruptcy of a company as well as one or several of its subsidiaries or affiliates. In some cases, courts have analysed the bankruptcy of a company group on a consolidated basis based on its consolidated financial statements and financial position.

    The debtor company, in the case of a voluntary filing, may request the court to declare its bankruptcy on a consolidated basis.

    We understand that the recognition of a Venezuelan bankruptcy in other jurisdictions will depend on the laws of those other jurisdictions where the bankruptcy’s recognition is sought, for example under the US Bankruptcy Code’s Chapter 15 or under similar statutes in effect in Japan and other jurisdictions some of which are based on an UNCITRAL model.

  21. 11.

    What notifications and meetings are required after a debtor has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? What must they show to prove their ownership interest in the underlying debt? 

  22. Under Venezuelan law, all debtors, including financial creditors (such as bond holders), bank creditors, trade creditors, arbitration creditors and even some tax creditors are grouped together under the creditors committee that is a collective action committee that operates on a majority rule based on the aggregate amount of each creditors claims. 

    The court will notify all creditors in some cases personally and generally via press publications. All creditors will have a voice on the creditor’ committee. 

    The participation of bondholders will depend on the formulation of the bond indentures. For example, under classic New York law bond indentures, bondholders will need to participate via the trustee, unless they are seeking to collect due and unpaid principal or interest (not accelerated principal). Venezuelan law bondholders will need to participate through the bond representative and will have to take actions based on the quorum and majority of their contracts.

    Labour claims are treated separately given that they have a super priority for unpaid labour benefits.

  23. 12.

    How are contingent creditors dealt with? Are inter-company or affiliate claims treated differently from other creditor claims in terms of recovery or voting? If so, has this been challenged and with what result? Are there special rules for certain contracts or debt instruments?

  24. Unmatured monetary claims will be legally accelerated as a consequence of the bankruptcy declaration. Contingent claims will be finally adjudicated by the bankruptcy court within special interlocutory proceedings within the main proceeding and will be entitled to participate in the creditor’s committee meetings.

    Close-out netting provisions in some cases will be enforceable and the set off may be accepted if the set off of the counter claims arise from the same transaction. Otherwise, the post insolvency set off will not be recognised by the court. This means that the holder of a claim against a bankruptcy counterparty may run the risk of having to perform and then have to get in line and participate as an unsecured creditor on the creditor’s committee.

  25. 13.

    What effect does the commencement of an insolvency proceeding have on the debtor and its operations? Is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?

  26. The bankruptcy declaration will automatically stay all proceedings against the debtor and will accelerate all financial claims against her. Complete control of the management and operations of the debtor and its assets will be automatically passed to the creditors committee represented by the receiver under the court’s oversight. The termination of contracts will depend on the formulation of their respective termination clauses, which will be generally enforceable even post-insolvency.

  27. 14.

    In what circumstances could transactions entered into before an insolvency proceeding be challenged? How far does the clawback period extend? Who can bring such challenges and who bears the burden of proof? How frequently are such challenges made and upheld? 

  28. Certain transactions made by the debtor during the suspect period may be void or voidable. The suspect period starts on the date on which the cessation of payments occurred (the "suspect period date"), as determined by the court. The bankruptcy judge has broad discretion to set the suspect period date; however, the bankruptcy judge can backdate the suspect period date only up to a maximum of two years prior to the bankruptcy declaration.

    Under article 945 of the Code of Commerce, the following transactions of the debtor (article 945 transactions) are null and void if made on or after the suspect period date (the "suspect period") or during the 10 days preceding the suspect period date: 

    • transfers of assets (movable assets or real estate) with no consideration for the debtor (gifts);
    • granting of security (or other preferences in payment) on assets of the debtor to secure debt incurred before the suspect period;
    • payments of non-matured debt; and
    • payments of matured debt made in any matter other than cash or negotiable instruments, if the debt was payable in cash.

    Under article 946 of the Code of Commerce, other payments of matured debt by the debtor or all other transactions with consideration made by the debtor during the suspect period (after the cessation of payments date) are voidable if the payees or other parties to such transactions had knowledge of the cessation of payments of the debtor at the time of such payments or transactions.

    To void a suspect transaction, the receiver must request to bring an action with the bankruptcy judge against the debtor and the third party to the suspect transaction. However, at least in two cases bankruptcy judges declared the nullity of suspect transactions in the judgment declaring the bankruptcy, without allowing the other parties to such transactions to exercise their right of defence.

  29. 15.

    How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? Do liens on receivables, revenues or cash flow continue with respect to such collateral after a debtor’s insolvency filing has been accepted by a court, or are they cut off as of the date of the filing or acceptance? If they are not cut off, may the debtor use that cash collateral and, if so, must it provide any protection to the secured creditors?

  30. The bankruptcy court will recognise and enforce properly created security interests over the debtor’s assets (including receivables) and they will not be cut-off, provided that they are not avoided based on the voidable preference rules described in our answer to question 14. Venezuelan law currently does not recognise security interests over cash flows because these types of floating liens have been deemed to violate the principle that security interests must be granted over specifically identified assets.

    However, the enforcement of their claims and the foreclosure of their security interests must be carried out within the context of the main bankruptcy proceeding under the court’s oversight. This means that not individual foreclosure actions against the debtor will be permitted.

    The court’s approval will be required to ultimately liquidate the collateral to satisfy a secured creditor’s claim.

    Security over cash collateral will be recognised. There are precedents in which the secured creditor holding a security interest over cash has been allowed to set off its claim against the bankruptcy estate’s claim to the collateral. Also, trade creditors have a right to retain the debtor’s property in their possession until unpaid claims of the creditor are satisfied.

  31. 16.

    How are unsecured creditors treated? How are equity holders treated? May an equity holder recover prior to creditors being paid in full?

  32. See question 19.

  33. 17.

    What is the effect of an insolvency proceeding on current and retired employees?

  34. Current employees have a special privilege that places them on top of all other creditors, including secured creditors with respect to unpaid labour benefits (ie, severance payments and accrued vacation) as well as unpaid wages. Their claims are not consolidated into the main bankruptcy proceeding and must be heard before a labour court.

  35. 18.

    Do directors or officers of companies in insolvency proceedings suffer any consequences?

  36. Directors of banks and insurance companies are generally barred from serving and even owning shares in Venezuelan banks and insurance companies. 

    Public procurement bidding procedures may include terms and conditions that may limit or prohibit bids by companies owned or managed by individuals that have been declared bankrupt or that managed companies that were declared bankruptcy. 

    The directors of corporations other than those mentioned above will not suffer any consequences in terms of their ability to found, own or manage new companies.

    Individuals that have been declared bankrupt are generally barred from carrying out commercial activities unless they are rehabilitated by the court, which requires them to perform all of their obligations under the restructuring agreement.

  37. 19.

    How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority? May claimants with lower priority receive consideration under a reorganisation plan even though claimants with higher priority are not paid in full? 

  38. Pursuant to Venezuelan law, the payments waterfall should be as follows:

    First, to the receiver and other court-appointed or court-approved support contractors (auditors, experts, depositaries, security personnel, among other), this amount has a statutory cap of 10% of the value of the debtor’s assets;

    Second, employees for any unpaid salaries and labour benefits arising from the law or any individual or collective bargaining agreements;

    Third, the federal, state and local treasuries for any unpaid taxes and interest;

    Fourth, creditors that have a legal preference or that have a valid security interest over the debtor’s property;

    Fifth, all unsecured creditors.

    Sixth, creditors who have voluntarily agreed, by contract or otherwise to subordinate their claims.

    Seventh, equity holders. Equity holders are not able to recover any portion of their investors unless and until all the other creditors listed above have been paid in full.

  39. 20.

    Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?

  40. Local and foreign creditors are all treated the same within their respective class. There are no legal provisions that allow different treatment based solely on the creditor’s nationality.

  41. 21.

    What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be "crammed down"? Are there any substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?

  42. The debtor and the required quorum and majority of qualified creditors may enter into a restructuring agreement (i) to suspend or terminate the bankruptcy proceedings, and (ii) setting forth the terms and conditions of the settlement of the qualified claims.

    The restructuring agreement needs to be approved in a creditors’ meeting called by the bankruptcy judge. Secured creditors and creditors that have a legal preference are allowed to participate in the creditors meeting that will decide on the restructuring agreement but their presence will not be considered to determine the required quorum and majority, unless they waive their security interest or rights of preference. To approve a restructuring agreement (i) qualified creditors that represent two-thirds of the aggregate of qualified claims must vote in favour of the convenio in a creditors’ meeting in which three-quarters of the aggregate of qualified claims are present, or (ii) qualified creditors that represent three-quarters of the aggregate of qualified claims vote in favour of the convenio in a creditors meeting in which two-thirds of the aggregate of qualified claims are present.

    The restructuring agreement must be approved by the bankruptcy court, which may do so as long as the bankruptcy is not found to be fraudulent by the criminal court in charge of making such determination. 

  43. 22.

    May creditors trade their claims during the course of a reorganisation? What impact, if any, will it have on voting for a plan?

  44. Creditors are allowed to trade their claims during the course of a reorganisation and should not have any impact on the voting plan.

  45. 23.

    What kind of court supervision is there in each type of insolvency proceeding? Are the judges that supervise and administer the process specialised? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to control operations during the insolvency proceeding? May a debtor company or its creditors select or influence the selection of the trustee, receiver or other court-appointed officer? Can creditors form creditors’ committees? What formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the trustee, receiver or other court-appointed officer?

  46. In practice, the insolvency proceedings are heavily influenced by the receiver who is designated by the creditor’s committee and is under oversight of the court. The court will also have broad powers in the bankruptcy or atraso proceeding because all material decisions, including the restructuring agreement needs to be ultimately approved by the court. In general, the receiver will have more technical knowledge than the court, which will typically be versed in legal matters and not in financial and business matters. The labour union will also have power to influence the proceedings even though labour proceedings should be heard in a separate labour proceedings carried out before a labour court and not within the main bankruptcy proceedings.

    In practice, bankruptcy proceedings are a last resort after all other forms of out-of-court restructurings have failed. Bankruptcy proceedings in Venezuela are vexatious and historically end up with the company being wound down or sold piecemeal.

  47. 24.

    May a debtor obtain financing while in insolvency? Will the lender enjoy special rights or preferences for providing DIP financing? Can a DIP lender ‘prime’ or come ahead of an existing lien? What difficulties typically arise in obtaining such funding or any required approval thereof?

  48. It is theoretically possible for a debtor to obtain debtor-in-possession financing and this type of financing would be primed vis-a-vis all other creditors. More specifically, “creditors of the estate” are primed over all other creditors or “creditors within the estate”. 

    However, there have been no precedents and if any such DIP financing were to be, their priority would be limited to a 10 per cent statutory cap applicable to all “creditors of the estate”, which is measured on the value of the estate’s assets.

  49. 25.

    If a debtor company has issued debt securities, does your jurisdiction’s insolvency or securities law provide for any exemptions from registration of those securities under applicable securities law?

  50. No. The Venezuelan Securities Law does not currently contemplate any exemptions from registration of securities issued by an insolvent company.

  51. 26.

    May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does this require court approval? Can creditors recover the expense of participating in the process? How?

  52. Post insolvency set-off is generally not allowed. However, banks may set off deposits or security interests over cash deposits with amounts due by a debtor even after bankruptcy. It is also possible to off set cross claims with insolvent banks, insurance companies and broker dealer, however, the set-off is subject to approval by an intervention board, which is a board designated by the respective regulator and this approval is time consuming and cumbersome, which defeats the purpose of set-off.

  53. 27.

    If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?

  54. The debtor will be able to carry forward the tax losses for three years from the fiscal year on which they were originated. The bankruptcy process will not toll the aforesaid three-year period.

  55. 28.

    What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?

  56. The end of the insolvency produces the discharge of the claims in accordance with the restructuring agreement, but the court may subject the discharge to the debtor’s compliance with the convenio. 

    The bankruptcy may disapprove the convenio if the bankruptcy is declared fraudulent by a criminal court. 

  57. 29.

    How long do restructurings last? Is there a formal deadline?

  58. The atraso proceedings may last up year one year that may be renewed at the courts discretion for one additional year. There are no limits or deadlines with respect to bankruptcy proceedings.

  59. 30.

    Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work? Are out-of-court proceedings commonly used and what are the primary benefits and drawbacks?

  60. No. Under Venezuelan law there are no expedited or summary proceeding available to obtain court approval of an out-of-court or “pre-packaged” restructuring plan.

    Additional considerations

  61. 31.

    Does the government tend to play an active role in insolvency proceedings? What factors determine this?

  62. The Venezuelan government tends to intervene in bankruptcy proceedings to protect employment. Also, if the government believes that the industry is strategic, it may take over the company.

  63. 32.

    How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? If a company organised under the laws of your jurisdiction (or whose principal place of business is in your jurisdiction) entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?

  64. Venezuelan law does not currently have mechanisms whereby a foreign main proceeding would be recognised in Venezuela. Under Venezuelan law, a company incorporated in Venezuela could have to be put into insolvency proceedings in Venezuela, otherwise a foreign main proceedings of a company incorporated in Venezuela would not be recognised in Venezuela.

  65. 33.

    How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? What factors determine this?

  66. If a business is salvable, then all the stakeholders will tend to do whatever it takes to reorganise the business and restructure its debt out of court. The atraso process was conceived to facilitate an orderly liquidation of a business that is undergoing liquidity problems but that is solvent. On the other hand, the Code of Commerce contains two provisions dealing with the amicable winding down of business entities that do not entail a court procedure, court oversight or the designation of a receiver. Under the Code of Commerce’s winding-down rules, the shareholders’ may resolve to wind down a company for any reason, before the expiration of its duration as set forth in its by-laws, and designate one or several liquidators that will undertake all actions necessary to wind down the company. If a company can be amicably liquidated out of court, it does not make practical sense to go through a court proceeding that may turn vexatious. However, the winding down rules of the Code of Commerce do not provide for an automatic stay.

  67. 34.

    What is the appeal process for an insolvency proceeding in your jurisdiction and what effect do appeals have on approved plans? How long do appeals take to resolve?

  68. The debtor may appeal the order to admit the petition for trial and the order of preliminary injunctions before a superior court, but the filing of the appeal will not suspend the bankruptcy proceedings or the enforcement of the preliminary injunctions. The appeal process could take considerable time (several months and even years). The same can be said for the approval of the convenio.

  69. 35.

    Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?

  70. A Venezuelan bankruptcy or atraso proceeding can be manipulated in myriad ways. The unions can call for government intervention, the litigators may appeal every motion and challenge every action by the court and the creditor’s committee. In sum, unreasonable participants can complicate the development of the bankruptcy process.

  71. 36.

    What impact, if any, has the ongoing volatility in the global credit markets and rise in corporate restructurings had on your jurisdiction’s insolvency regime? Are any amendments to your jurisdiction’s insolvency laws envisaged? If so, which problems are such amendments intended to address and how? 

  72. Venezuela has been relatively isolated from the international capital markets for well over two years as a result of Petróleos de Venezuela’s and the Republic’s default of their financial indebtedness. The biggest issue that will face Venezuelan insolvency law is the potential application of the existing insolvency regime to government-owned companies such as Petróleos de Venezuela. There is no clear answer to this question.

    The opposition-controlled National Assembly received a few months ago a proposal for a Law for the Protection of the Assets of Government Companies. We are not aware if this proposal is currently being discussed.

    In addition, the Venezuelan government, through the government or the National Constituent Assembly (which has been declared illegitimate by the United States and the majority of the international community) could try to enact a general insolvency law or a special bankruptcy and insolvency regime applicable to government-owned entities, or include any such regime in the new Constitution currently being prepared by the National Constituent Assembly.

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Questions

    Actions prior to a formal proceeding

  1. 1.

    What duties do directors, officers or controlling shareholders of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? Is there a standard of care towards third parties? In what circumstances can directors, officers or controlling shareholders be found civilly or criminally liable for continuing to operate a company in financial difficulties? In practice, are such liabilities commonly enforced?


  2. 2.

    What actions are available to creditors (secured or unsecured) prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceedings? 


  3. 3.

    Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? If so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? Do insolvency proceedings stay the ability of secured creditors to foreclose on collateral of the debtor? Are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?


  4. 4.

    Can creditors that have equity as collateral take control of a debtor by exercising voting rights attached to pledged shares? 


  5. 5.

    Can secured creditors credit-bid their debt in a sale of a debtor’s assets, outside or within a formal insolvency proceeding? If so, what procedures or limitations apply?


  6. 6.

    Are there legal or regulatory concerns that secured creditors should consider in connection with a sale or foreclosure? 


  7. Formal proceedings

  8. 7.

    What types of insolvency proceedings are available in your jurisdiction? Are different insolvency proceedings available for individuals and companies? Is there any distinction made between "preventive" insolvency proceedings and "actual" insolvency proceedings?


  9. 8.

    May government-owned entities, states or municipalities file for an insolvency proceeding in your jurisdiction? If so, are there special rules or a separate regime that applies to such entities?


  10. 9.

    On what grounds may or must a debtor be placed into an insolvency proceeding? Who may do this? What are the grounds for a voluntary proceeding? If an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? 


  11. 10.

    What effect, if any, does a filing have on a subsidiary or affiliate of the debtor? Are there any actions the debtor, the subsidiary or the affiliate can take to limit such effects? Are there any grounds for procedurally and substantively consolidating insolvency proceedings involving related parties? If a debtor organised under the laws of your jurisdiction entered into local insolvency proceedings, could the debtor’s foreign affiliates be included in the local filing? 


  12. 11.

    What notifications and meetings are required after a debtor has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? What must they show to prove their ownership interest in the underlying debt? 


  13. 12.

    How are contingent creditors dealt with? Are inter-company or affiliate claims treated differently from other creditor claims in terms of recovery or voting? If so, has this been challenged and with what result? Are there special rules for certain contracts or debt instruments?


  14. 13.

    What effect does the commencement of an insolvency proceeding have on the debtor and its operations? Is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?


  15. 14.

    In what circumstances could transactions entered into before an insolvency proceeding be challenged? How far does the clawback period extend? Who can bring such challenges and who bears the burden of proof? How frequently are such challenges made and upheld? 


  16. 15.

    How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? Do liens on receivables, revenues or cash flow continue with respect to such collateral after a debtor’s insolvency filing has been accepted by a court, or are they cut off as of the date of the filing or acceptance? If they are not cut off, may the debtor use that cash collateral and, if so, must it provide any protection to the secured creditors?


  17. 16.

    How are unsecured creditors treated? How are equity holders treated? May an equity holder recover prior to creditors being paid in full?


  18. 17.

    What is the effect of an insolvency proceeding on current and retired employees?


  19. 18.

    Do directors or officers of companies in insolvency proceedings suffer any consequences?


  20. 19.

    How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority? May claimants with lower priority receive consideration under a reorganisation plan even though claimants with higher priority are not paid in full? 


  21. 20.

    Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?


  22. 21.

    What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be "crammed down"? Are there any substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?


  23. 22.

    May creditors trade their claims during the course of a reorganisation? What impact, if any, will it have on voting for a plan?


  24. 23.

    What kind of court supervision is there in each type of insolvency proceeding? Are the judges that supervise and administer the process specialised? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to control operations during the insolvency proceeding? May a debtor company or its creditors select or influence the selection of the trustee, receiver or other court-appointed officer? Can creditors form creditors’ committees? What formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the trustee, receiver or other court-appointed officer?


  25. 24.

    May a debtor obtain financing while in insolvency? Will the lender enjoy special rights or preferences for providing DIP financing? Can a DIP lender ‘prime’ or come ahead of an existing lien? What difficulties typically arise in obtaining such funding or any required approval thereof?


  26. 25.

    If a debtor company has issued debt securities, does your jurisdiction’s insolvency or securities law provide for any exemptions from registration of those securities under applicable securities law?


  27. 26.

    May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does this require court approval? Can creditors recover the expense of participating in the process? How?


  28. 27.

    If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?


  29. 28.

    What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?


  30. 29.

    How long do restructurings last? Is there a formal deadline?


  31. 30.

    Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work? Are out-of-court proceedings commonly used and what are the primary benefits and drawbacks?


  32. Additional considerations

  33. 31.

    Does the government tend to play an active role in insolvency proceedings? What factors determine this?


  34. 32.

    How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? If a company organised under the laws of your jurisdiction (or whose principal place of business is in your jurisdiction) entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?


  35. 33.

    How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? What factors determine this?


  36. 34.

    What is the appeal process for an insolvency proceeding in your jurisdiction and what effect do appeals have on approved plans? How long do appeals take to resolve?


  37. 35.

    Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?


  38. 36.

    What impact, if any, has the ongoing volatility in the global credit markets and rise in corporate restructurings had on your jurisdiction’s insolvency regime? Are any amendments to your jurisdiction’s insolvency laws envisaged? If so, which problems are such amendments intended to address and how? 


Other chapters in Restructuring

  • Colombia
    Philippi Prietocarrizosa Ferrero DU & Uría
  • Mexico
    Cervantes Sainz
  • Peru
    Rebaza Alcazar & De Las Casas Abogados Financieros
  • Venezuela
    D’Empaire