New Law for bankruptcy proceedings 

On May 10th, 2023, Law No. 21,563 was published in the Official Gazette. It “Modernizes bankruptcy procedures contemplated in Law No. 20,720 and creates new procedures for micro and small businesses.” Its validity begins within a period of 3 months from that date. 

This new law, which began its processing in September 2020, seeks to update and strengthen bankruptcy regulations and procedures, especially with respect to micro and small companies, establishing alternative mechanisms to liquidation, more agile and simple. 

Therefore, it was presented an extensive set of measures that seek to solve certain practical problems and adapt the regulations to reality, for both: procedures and of micro and small companies; as well as other rules of a more structural nature, which substantially modify the current bankruptcy legislation. 

Among the reforms of the bill, we can highlight: 

• Modification to the definition of Debtor Company. The new definition of Debtor Company includes only legal persons under private law, and natural persons who, within the 24 months prior to the start of the corresponding Bankruptcy Procedure, have been a first category taxpayer. As a consequence of the foregoing, the concept of Debtor Person (understood as any natural person not included in the definition of Debtor Company) is expanded, allowing liberal professionals who seek to renegotiate their credits not to have to resort to the Debtor Company bankruptcy reorganization procedure, and may opt for this bankruptcy renegotiation procedure. 

• Limits to the extinction of unpaid balances of creditors at the end of a liquidation procedure. Pursuant to current bankruptcy legislation, once the resolution declaring the end of the Bankruptcy Liquidation Procedure is finalized or executed, the unpaid balances of the obligations contracted by the debtor prior to the start of the Bankruptcy Liquidation Procedure are understood to be extinguished. To the above, the new standard incorporates a limitation regarding certain credits that are not extinguished, such as those associated with alimony, obligations derived from crimes or civil or criminal torts, and those determined by the new incident of bad faith of the debtor. 

Additionally, it is established that the extinction of the debtor’s obligations does not imply the extinction of the liability of the guarantors, joint or subsidiary co-debtors, guarantors or third parties constituting real guarantees to ensure compliance with the debtor’s obligations. 

• Bad faith incident. A new incident of bad faith is established in article 169 bis of Law No. 20,720, according to which, as long as the resolution of the termination of the bankruptcy proceeding for the liquidation of the Debtor Company and simplified liquidation is not found firm or enforceable, the declare the bad faith of the debtor in the event that the documentary background or the indication of the debtor’s assets were incomplete or false; or if within the 2 years prior to the Bankruptcy Procedure, the debtor has destroyed or hidden information or documentary records, has carried out acts that imply distraction or concealment of assets or rights of his patrimony; when the court has accepted by means of a final or enforceable judgment an action provided for in Chapter VI of the procedural law; or when the debtor has been convicted, within the framework of the same Bankruptcy Procedure, for any bankruptcy offence. 

As a consequence of the debtor’s declaration of bad faith, the unpaid balances will not be extinguished or only a pro rata percentage will be extinguished with respect to all creditors. 

• New Bankruptcy Procedures. A new bankruptcy procedure for Simplified Reorganization is established, applicable to Debtor Companies that qualify as micro and small companies according to Law No. 20,416 (criterion based on the amount of sales and annual services), and additionally, in accordance with article 505 bis of the Labor Code (criterion in relation to the number of workers). On the other hand, a Simplified Voluntary Liquidation procedure is established for Debtor Persons and Debtor Companies that qualify as micro and small companies. 

• Modification to the lists of observers and liquidators, now each made up of two categories (A and B), depending on the type of bankruptcy procedure in which they participate. 

• Expansion of Bankruptcy Financial Protection in the Bankruptcy Reorganization procedure. During the period of 30 days counted from the notification of the reorganization resolution, the Debtor enjoys Bankruptcy Financial Protection. This term, which is currently extendable up to 2 more times, for 30 days each (meeting the requirements of the standard); now it can be extended for up to 60 days at a time. 

• The term that creditors will have to verify their credits in the Judicial Reorganization procedure is extended from 8 to 15 business days, counted from the notification of the reorganization resolution. 

For more information on how the new procedures will operate and the continuation of those already in progress, as well as the validity and other regulations within this topic, we invite you to contact us and/or review Law No. 21,563. 

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