WHY AMEND THE LAW 20.720 ON INSOLVENCY AND RE-ENTREPRENEURSHIP?

Actualidad legal

WHY AMEND THE LAW 20.720 ON INSOLVENCY AND RE-ENTREPRENEURSHIP

Maria Ester Paredes M.

According to the figures published by the Superintendence of Insolvency and Re-entrepreneurship, the reorganization procedures presented by debtor companies from January 1 to May 31, 2020, reached 22, on the other hand, the liquidation procedures of debtor companies during the same period were 703. 

One of the main objectives of the Law 20,720, in the case of debtor companies, was to promote reorganizations and avoid liquidations (bankruptcies), specifically due to the loss of human capital and economic value of which they end, in most of the cases, to disappear.

The published figures show that this objective has not been met.

Considering the national contingency and the recession that affects us, it is very important that the initiatives to amend the Law 20.720 that have been presented by various legislators, also point to the need for companies, as engines of the economy and employment, it is much more convenient for them to reorganize than to fail.

I believe that the figures speak for themselves as, according to this law, any entrepreneur in difficulties, generally for the owner of a small or medium-sized company, it is much more convenient to file for bankrupcy than to continue dragging the burden of their debts in pernicious, expensive and inaccessible conditions to working capital.

Being categorical, with the current liquidation procedure, you will be able to pay only what you can with the auction of the assets that your company owns, and the debt balances that are not covered, will be remitted or forgiven.

That allows you, in a relatively short time, to start again and quickly discard the company declared in bankruptcy.

However, this formula greatly disserves creditors who, ultimately, do not recover their credits and are left without future collection tools, which intensifies their risk assessment methods, in the case of financial institutions, banks and non-banks, raise their provisions against the non-payment alternative, ultimately leaving many other entrepreneurs without access to credit or unbanked. In other words, credit becomes more expensive compared to the expectation of non-payment.

In this sense, the reforms must aim and promote reorganizations or renegotiations in the case of natural persons.

For instance, entry barriers could be modified or eliminated, making them more flexible, modifying the requirements established in the current law, allowing forms of capitalization or investments that are different and suitable to the current situation, through the establishment of supra-preferences for those who are interested in investing assuming the risk of bringing the company up again, in such a way that the it is more convenient to  choose this alternative and not the liquidation that destroys jobs and companies.

It would be advisable for our legislators and the authority to see what happens in practice with the application of Chapter Eleven of the bankruptcy law of the United States. It is desirable that companies reorganize and do not go bankrupt, which is happening today and for a long time in that country.

Tax benefits could be established for capitals that invest in complicated companies but with a capital injection, a modification of their internal organization, good treatment of expenses and/or a renewed business plan, they would be in a position to pay their debts and within a reasonable time, to be productive and generating employment again.

In close attention, it is also necessary to focus on the definition of a company that this law deals with indirectly.

This concept is so broad that implies that within the type of company, in addition to legal entities under private law, there are people who pay taxes in the first and second categories.

The latter includes natural persons who obtain their income through the provision of services, thereby issuing honorary tickets.

These people are excluded from the renegotiation procedure for natural persons, since, within the requirements to qualify, they must declare that they have not provided services for their economic activities for a period of not less than 24 months before the entry of their application.

Consequently, in practice, all persons with independent business or honorary paid workers in the country are excluded from the renegotiation procedure, treating them as a debtor company in such a way that they are forced to request the reorganization procedure, which entails a significant increase of demands and costs or again, it will be convenient for them to request your liquidation or bankruptcy.

When reviewing the amendments to the law, preventive procedures could be established for this type of people, with more flexible requirements that allow proposing new payment conditions to all their creditors, in accordance with their new economic conditions and accessing the bankruptcy financial protection, avoiding the collection of interest and adjustments for default.