Ecuador’s insolvency, reorganization and bankruptcy regime can be inhibited by disjointed and overlapping laws, procedural obstacles, and social stigma surrounding insolvency. 

Last year, the regime was partially updated by two new laws:

1. The Organic Law of Entrepreneurship and Innovation (February 2020), supporting start-ups, with provisions on restructurings.

2. The Organic Law for Humanitarian Support to Combat the COVID-19 Crisis (June 2020), introducing temporary measures to combat COVID-19’s anticipated bankruptcy-wave.

Overview    

Ecuador has traditionally had two main bankruptcy proceedings for corporate debtors: preventive contests and creditor contests, as well as formal liquidation. 

Preventive Contest

Covering SCVS-regulated companies, preventive contests aim to promote agreement and avoid liquidation. Throughout the process, debtors can continue operations, all creditor actions are suspended, and the debtor cannot sell or grant interests over assets, outside normal business operations.

Creditor Contest 

Creditor contests apply to all debtors, where there is a presumption of bankruptcy.

A court-appointed “Receiver” manages the debtor company and bankruptcy estate, putting all assets up for auction to settle all debts (obligations) in order of legal priority. 

If there are enough funds to settle all obligations, the debtor takes whatever is left. If funds are insufficient, creditors decide whether the debtor must pay the outstanding balance.

The law fails to specify what happens if the creditors do not release the debtor, but, presumably, the debtor company would be liquidated. 

Exceptional Bankruptcy Processes Pursuant to the COVID-19 Humanitarian Support Law

The COVID-19 Humanitarian Support Law introduced three additional bankruptcy processes, available until 2023, to manage a COVID-19 bankruptcy spike:

  1.  Pre-Contest Agreement
  2. Exceptional Preventive Contest 
  3. Exceptional Judicial Rehabilitation

The Pre-Contest Agreement

This enables debtors and creditors to reach agreement via mediation, using restructuring measures like haircuts and debt capitalizations. The final agreement is legally binding, and debtors can keep operating throughout negotiations.

There are two areas of ambiguity, however. Creditors can only challenge the Pre-Contest Agreements if it is “prejudicial” to one or more of them, but it is unclear what prejudicial means here, and there is a lack of distinction between secured and unsecured creditors.

The Exceptional Preventive Contest

When Pre-Contest Agreement fails, the debtor may petition for an Exceptional Preventive Contest.

There are two major problems:

  1. There is no specified minimum percentage of outstanding obligations creditors supporting the agreement hold to make it binding, and thus it is unclear whether the Preventive Contest’s 75% threshold or the Creditor Contest’s 51% threshold applies.
  2. Secured creditors must choose between preserving their priority over collateral and exercising their rights to vote on restructuring arrangements.

The Exceptional Rehabilitation Proceeding

In this proceeding, if the debtor's assets are sufficient to pay at least 60% of all outstanding obligations, the court can order a payment plan for the remaining 40% and the debtor can be rehabilitated. The law lacks detail, however. What happens if the debtor’s assets are necessary for operating? How is the payment plan decided?

Exceptional Bankruptcy Processes Pursuant to the COVID-19 Humanitarian Support Law

The COVID-19 Humanitarian Support Law introduced three additional bankruptcy processes, available until 2023, to manage a COVID-19 bankruptcy spike:

  1.  Pre-Contest Agreement
  2. Exceptional Preventive Contest 
  3. Exceptional Judicial Rehabilitation

The Pre-Contest Agreement

This enables debtors and creditors to reach agreement via mediation, using restructuring measures like haircuts and debt capitalizations. The final agreement is legally binding, and debtors can keep operating throughout negotiations.

There are two areas of ambiguity, however. Creditors can only challenge the Pre-Contest Agreements if it is “prejudicial” to one or more of them, but it is unclear what prejudicial means here, and there is a lack of distinction between secured and unsecured creditors.

The Exceptional Preventive Contest

When Pre-Contest Agreement fails, the debtor may petition for an Exceptional Preventive Contest.

There are two major problems:

  1. There is no specified minimum percentage of outstanding obligations creditors supporting the agreement hold to make it binding, and thus it is unclear whether the Preventive Contest’s 75% threshold or the Creditor Contest’s 51% threshold applies.
  2. Secured creditors must choose between preserving their priority over collateral and exercising their rights to vote on restructuring arrangements.

The Exceptional Rehabilitation Proceeding

In this proceeding, if the debtor's assets are sufficient to pay at least 60% of all outstanding obligations, the court can order a payment plan for the remaining 40% and the debtor can be rehabilitated. The law lacks detail, however. What happens if the debtor’s assets are necessary for operating? How is the payment plan decided?

Start-ups Restructuring

The Organic Law of Entrepreneurship and Innovation establishes a new framework for restructuring start-ups, which can continue operating throughout, while also benefiting from several bankruptcy protections. 

Ecuador’s bankruptcy laws offer multiple avenues for debtor companies and their creditors. Despite certain flaws, there are many helpful features, and, in these difficult economic times, their shrewd application can make all the difference in preserving a distressed business’ value and maximizing creditors’ recovery.

Jesús M. Beltrán Tribin
Partner, Robalino

With more than 20 years of professional experience locally and internationally, Jesus has unrivaled experience advising lenders and borrowers in various types of cross-border financing, such as syndicated and bilateral loans, club deals, project financing and acquisitions.

He also advises issuers and underwriters on bond and equity issues in capital markets, as well as on securitizations, structured financing, derivatives transactions and loan portfolio repurchases.

Jesus has extensive experience in restructuring liabilities, and extensive knowledge of the banking sector, particularly of the various laws in Latin America that impact the business of multi-jurisdictional institutional banking.

In the Corporate area, he focuses on mergers and acquisitions, joint ventures, equity investments and other strategic cross-border transactions. Jesus also has in-depth knowledge of the laws that regulate insolvency and bankruptcy processes in Ecuador.

Juan Bernardo Guarderas
Senior Associate, Robalino

Juan Bernardo has extensive experience advising clients on local and international transactions, acquisitions, joint ventures, asset purchases, share purchase agreements (SPA), shareholder agreements (SHA), among other complex corporate matters. He also gives corporate and corporate advice to companies.

 Before joining ROBALINO Abogados, he was an associate of a prestigious firm in Ecuador, where he was part of the tax and corporate area, focusing his practice and training on tax advice and structuring, administrative processes and contentious tax litigation before the tax administration.

Currently, Juan Bernardo works in the M&A department, in cross-border transactions with an emphasis on mergers and acquisitions, purchases, sales, joint-ventures and all business areas. 

He collaborates with the Financing and Capital Markets area, advising and assisting clients in syndicated and bilateral loans, as well as in bond or share issues in international capital markets, among other transactions of the firm's line of business.