The commercial relationship between a debtor company (the "Debtor") and its creditors (the "Creditors") is set forth in the Venezuelan Commercial Code (Código de Comercio), as well as the Civil Code (Código Civil). The Law on Mortgages over Moveable Assets and Pledges without Transfer of Possession (Ley de Hipoteca Mobiliaria y Prenda sin Desplazamiento de Posesión, the "Special Mortgage Law") and the Law on Trusts (Ley de Fideicomisos, the "Trust Law") are also relevant.
The Commercial Code is a very old law. The bankruptcy and moratorium proceedings are not appropriate for dealing with the problems that arise in modern cases of insolvency or near-insolvency. In addition, traditional security interests, as set forth in the Commercial Code and the Civil Code, as well as the Special Mortgage Law, are, to a great extent, incompatible with modern restructurings. Accordingly, negotiated non-judiciary solutions and the innovative use of new security interests are recommended, and it is advisable to avoid starting a bankruptcy procedure.
Indeed, the bankruptcy and moratorium proceedings are established in the Commercial Code, which is a hundred years old and has not been updated in this respect. There are two cases that must be distinguished: (i) the condition of the Debtor who is not able to pay its debts as they fall due and whose assets, if liquidated, would not be sufficient to discharge its liabilities, and (ii) the condition of the Debtor who is not able to pay its debts as they fall due and whose assets, if liquidated, would be sufficient to discharge its liabilities. The bankruptcy procedure applies in the first case and the moratorium procedure applies in the second case. Both procedures are very rigid and require an active involvement by the judge, a court appointed syndic or trustee (síndico) and the Creditors, in addition to the Debtor. In many cases, this procedure allows the judge and the court appointed syndic not to act in the best interests of the Creditors, as well as those of the Debtor’s workers and shareholders.
We shall now describe the moratorium procedure briefly, so as to show its rigidity:
A moratorium procedure may be started by the Debtor if its assets exceed its liabilities and it needs to delay all payments due to a lack of liquidity caused by non-foreseeable events1. After the court receives the application for a moratorium, it (i) establishes monitoring measures regarding the Debtor’s activities; (ii) appoints the syndic and (iii) appoints a committee of three major Creditors2. The court then calls for a meeting of all the Creditors, in which the syndic and the creditors’ committee may give their opinion3. After the meeting, the court must consider the reports presented by the Debtor, the syndic, the creditors’ committee and any individual creditor, in order to make a decision about the petition for a moratorium4. In case said petition is granted, the decision of the court must establish (i) the term of the moratorium, twelve months being the longest period permitted by law; (ii) the Debtor’s obligation to present evidence of payment —or evidence of having entered into agreements concerning payments— of all its debts within such term; (iii) preventive measures to preserve the Debtor’s assets; and (iv) the Creditors which shall integrate a committee in charge of monitoring the management, administration and liquidation of the Debtor’s assets5. The Debtor’s directors and executives continue to manage the Debtor’s business6. However, the judge has to authorize the following acts: selling assets, granting securities, contracting debts, settling court cases, collecting or paying debts and other acts which are deemed necessary for the purposes of the liquidation7. Further, the committee of creditors appointed by the judge is allowed to supervise the administration and liquidation of the Debtor’s assets8. The judge may establish whatever preventive measures he or she deems necessary and must solve the controversies between the Debtor and the committee of creditors9. The Debtor and the Creditors may enter into agreements, which must be approved by a group of Creditors representing at least ¾ of the Debtor’s debts, provided such group takes the appropriate measures in order to allow other Creditors to obtain pro rata payments. If an agreement affects the rights of one or more of the Creditors and if the approval thereof was not granted by all of the Creditors, then such agreement must be reviewed by the court, taking into consideration the opinion of the creditors’ committee10. The moratorium, which cannot be granted for more than twelve months, can be extended, but the extension cannot be granted without the favorable opinion of a group of Creditors representing at least 50% of the Debtor’s unpaid debts11.
If the court denies the petition requesting a moratorium, it must declare that the Debtor is in bankruptcy12. Even if the moratorium petition is granted, the court may revoke such moratorium and declare the Debtor to be bankrupt, provided (i) one or more debts have not been disclosed by the Debtor; (ii) one or more of the debts and/or credits or assets reported by the Debtor do not really exist; (iii) the Debtor does not comply with its obligations concerning the management, administration and liquidation of its assets; (iv) the Debtor has been acting in bad faith; or (iv) the assets belonging to the Debtor are not sufficient to cover all its debts, or at least 2/3 of such debts13. In addition, if the judge reaches the conclusion that Debtor has ceased payments of its obligations, that is, the Debtor has become insolvent because its liabilities exceed its assets, then the moratorium will end and the bankruptcy procedure will begin14.
Otherwise, the bankruptcy procedure starts when the Debtor or any of the Creditors files a petition for bankruptcy15. Again, for the judge to grant such petition, he or she must ascertain that the Debtor has ceased payments of its obligations16.
In case a petition for bankruptcy is initiated by one or more of the Creditors, the bankruptcy court, in view of the documents presented by them, may issue an injunction in which it may (i) order the taking of judicial possession over all of the assets; books and documents of the Debtor; (ii) order the taking of judicial possession over all the correspondence addressed to the Debtor, and (iii) order the prohibition of making payments and delivering goods to the Debtor17. After a declaration of bankruptcy is requested by one or more of the Creditors, the Debtor must appear before the court in order to answer said petition, denying its insolvency or even requesting the benefit of a moratorium18. In all the cases in which the court declares the bankruptcy, it must: (i) appoint a syndic; (ii) order the judicial possession of all the assets, books and documents belonging to the Debtor; (iii) order the judicial possession of all the correspondence addressed to the Debtor; (iv) prohibit all payments and transfers of assets; (v) order individuals and corporations which are in possession of goods and documents belonging to the Debtor to deliver them to the court; and (vi) require the Creditors to record with the court all the documents evidencing and supporting the Debtor’s debts19. The most important consequences of the bankruptcy declaration are that (i) the Debtor may no longer manage or dispose of its own assets, nor enter into any agreement with respect to them, because the administration of such assets will be in charge of the syndic on behalf of the Creditors20; (ii) the non-matured debts of the Debtor become immediately due and payable21; (iii) the Debtor’s unsecured debts will not accrue interests22; (iv) the Debtor’s secured debts will continue to accrue interests, but the payment of such interests can only be made with the results of the sale of the secured assets23; and (v) certain acts of the Debtor, done to the detriment of the Creditors prior to the declaration of bankruptcy may be considered to be null and void24. The Debtor and the Creditors may enter into an agreement for the purposes of stopping or freezing the bankruptcy procedure, continuing the operation of the Debtor’s commercial activities, etc.; but this agreement requires a unanimous vote25. Any of the Creditors may propose that the liquidation of the Debtor’s assets be made by the Creditors, rather than by a syndic26. In this case, the Creditors, by a majority vote, may approve or reject such proposition, and, if it is approved, the Creditors, by a majority vote, must present a list of three liquidators to the Judge, who will appoint one of them. The Judge will also appoint a committee of three Creditors in order to intervene in and supervise the administration and liquidation of the Debtor’s assets.
A bankruptcy procedure usually takes several years. The bankruptcy rules were conceived in order to allow all those Creditors who do not benefit from a security interest, to try to obtain pro rata payments, through the orderly sale of the Debtor’s assets, who will cease its business operation. However, in practice, said procedure is very long and complicated, and many Venezuelan judges do not have the background and the infrastructure to attend properly to bankruptcy cases. So the end result is frequently disappointing for the Creditors and very damaging to the Debtor.
Furthermore, since the Venezuelan bankruptcy rules do not establish any difference between subordinated debts and unsubordinated debts, there is a risk that a bankruptcy judge will only take into consideration the distinction between secured debts and unsecured debts, provided in the Commercial Code, ignoring contractual subordination provisions.
Finally, in a recent bankruptcy27, a very dangerous precedent was established by bypassing the bankruptcy judge and allowing a group of workers and their sponsors to take control of the Debtors’ assets, to the detriment of the Creditors and the Debtor’s shareholders.
Accordingly, a negotiated restructuring, as opposed to long, cumbersome and risky moratorium and bankruptcy procedures, is highly recommended, to the extent that the Debtor and its Creditors can reach a reasonable agreement.
But, again, old and rather inflexible rules, with respect to mortgages and pledges, may be a problem. Since traditional security interests are not very suitable for modern restructurings, there have been important innovations in this field.
Indeed, generally speaking, the following traditional security interests may be granted in Venezuela: (i) ordinary mortgages and pledges under the Civil Code and the Commercial Code; and (ii) special mortgages and pledges under the Special Mortgage Law.
One major problem with respect to these traditional security interests is that there is a reasonable doubt in Venezuela as to the validity of mortgages over real estate under the Civil Code and special mortgages and pledges under the Special Mortgage Law in all the cases in which the secured amount is an amount in a foreign currency. Accordingly, it is advisable to establish any such traditional security interest in local currency (bolivars) and to update its amount whenever there is a significant devaluation, but this is cumbersome and expensive. In order to solve this problem, a security trust can be established instead of a traditional security interest, because, in a security trust, the secured amount can be established in foreign currency.
Another problem is that ordinary mortgages and pledges under the Civil Code and the Commercial Code, as well as special mortgages and pledges under the Special Mortgage Law, were not conceived for syndicated loans, but for individual loans. So a traditional security interest may only be granted to secure the rights of persons and corporations specifically identified in the corresponding security documents. This may be an obstacle to, for instance, directly securing in Venezuela the rights of (i) bondholders, (ii) a large group of syndicated banks, some of which intend to transfer their rights, or (iii) any other large group of constantly changing persons or corporations. In order to solve this problem, a security trust can be established, because the beneficiary may be an agent for the Creditors.
Further, most traditional security interests are not suited to grant a mortgage or a pledge over future assets. For instance, establishing a traditional security interest over contracts, receivables and other documents can be done by means of a pledge granted after such contracts, receivables and other documents actually exist, and they have to be specifically identified in the security document and delivered to the pledgee or pledgees or their appointee. A trust arrangement does not present these problems, because the Debtor may set up a trust with future contracts, receivables and other documents, described generally.
In addition, if a secured lender under a traditional mortgage or pledge assigns to another secured lender its rights against the Debtor, such assignment must be duly recorded and in many cases even filed at an official registry. This problem does not arise with respect to trust arrangements, because the secured party or beneficiary of the trust may be an agent for the Creditors, rather than the Creditors themselves.
Finally, in some cases, the only way to establish a traditional security interest is by applying the requirements set forth in the Special Mortgage Law; and, under the Special Mortgage Law, an authorization from the Superintendency of Banks or from another public entity is required in order to grant a mortgage or a pledge, which takes time and costs money. Such requirement does not apply to trust arrangements under the Trust Law.
On the other hand, in Venezuela, the holders of a traditional security interest cannot sell the secured assets, nor deliver any document otherwise evidencing the transfer of such assets. This is done by a judge, in a public auction, following a procedure, which begins with a request to the court presented by the mortgagee or pledgee assisted or represented by its attorney, after which many steps must be taken, before such public auction can actually take place. On the contrary, a trust agreement may provide, for instance, that the trustee will sell the assets in trust and use the proceeds to pay one or more of the Debtor’s debts. Further, a trust agreement may include an arbitration clause.
Accordingly, the innovative use of non traditional security interests, namely security trusts, is highly recommended. In fact, trusts have been recently and frequently used in major financings, because the Trust Law is very flexible.
1. Article 898 of the Commercial Code.
2. Article 900 of the Commercial Code.
3. (Article 902 of the Commercial Code)
4. Article 902 of the Commercial Code.
5. Article 903 of the Commercial Code.
6. Articles 898 and 904 of the Commercial Code.
7. Article 904 of the Commercial Code.
8. Articles 900 and 903, number 4, of the Commercial Code.
9. Articles 900, 902 and 904 of the Commercial Code.
10. Article 906 of the Commercial Code.
11. Article 908 of the Commercial Code.
12. Article 911 of the Commercial Code.
13. Article 907 of the Commercial Code.
14. Articles 907, 911 and 913 of the Commercial Code.
15. Articles 914, 924, 925, 926 and 932 of the Commercial Code.
16. Article 925 of the Commercial Code.
17. Article 932 of the Commercial Code.
18. Article 933 of the Commercial Code.
19. Article 937 of the Commercial Code.
20. Articles 939 and 940 of the Commercial Code.
21. Article 943 of the Commercial Code.
22. Article 944 of the Commercial Code.
23. Article 944 of the Commercial Code.
24. Articles 936, 945 and 946 of the Commercial Code.
25. Article 1009 of the Commercial Code.
26. Article 960 of the Commercial Code.
27. An industrial manufacturer of paper and paper-related products.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.