The Americas Restructuring And Insolvency Guide 2008/2009 - El Salvador

Located in the heart of Central America with a population of

approximately 6.8 million, El Salvador is the most densely

populated country in the Americas. Its legal framework is derived

from the Constitution of 1983. El Salvador is a centralised state,

with some political decentralisation deriving from the

municipalities. The Constitution is the overriding legal text,

followed by international treaties, laws and implementing

regulations.

The legal system was originally based on the French civil code

system. The Legislative Assembly enacts laws tabled by:

the legislature;

the president (through the ministers);

the Supreme Court of Justice (on matters related to the

judiciary, the courts' jurisdiction and the role of notaries

public); and

municipal councils (on matters related to municipal

taxes).

The Peace Accords executed in 1992 introduced important

amendments to the Constitution, focusing on the stabilisation of

democracy and respect for human rights. The Constitution grants a

number of individual rights, including freedom of contract, freedom

of speech, private property, legal equality, the right to legal

proceedings, free disposal of property and the right to resolve

disputes through arbitration.

1. The legal framework and the effectiveness of court

   processes/legal remedies

   1.1 Describe the nature and the effectiveness of the

   following:

   (a) Debt recovery remedies where the debtor has no

   security

   If a debtor has no security, the executor judge appointed by the

   court can seize movable property of the debtor and up to 20 per

   cent of the debtor's monthly salary. The court issues an order

   to the entity paying the debtor's salary requesting that it

   forward the agreed amount to the court. The executor judge can also

   seize the debtor's real estate property; however, such property

   is usually owned under a mortgage with third parties which have

   privileged rights over that property.

   (b) The enforcement of security

   Security is enforced through asset and property seizure

   proceedings within the execution process. In these proceedings the

   court judge appoints an executor judge, who has the legal power to

   seize the debtor's assets. The most effective assets for

   seizure are real estate property. Seizure is carried out by filing

   a notice at the relevant real estate registry office. At that point

   the title to the property is frozen and cannot be transferred.

   Enforcement through seizure of movable goods is harder since the

   executory judge must obtain proof that the debtor is the owner of

   the goods before seizing them. The easiest movable assets to seize

   are vehicles, as proof of ownership can be easily obtained from the

   government office responsible for registering all vehicles.

   Similarly, records pertaining to the registration of intellectual

   property are publicly available at another government office.

   (c) Corporate bankruptcy/liquidation processes

   In El Salvador, real estate mortgages and pledges grant the

   creditor privileged rights to obtain payment from the assets given

   in guarantee ahead of third-party creditors without guarantees.

   Accordingly, bankruptcy proceedings are rare: in the last 20 years

   only two bankruptcy proceedings have been conducted. If a company

   becomes insolvent, usually individual creditors with preferred

   guarantees over specific assets (ie, real estate, accounts

   receivable or pledges over movable property such as machinery and

   equipment) file individual lawsuits based on their guarantees.

   Since the privileged guarantee entitles a creditor to be paid from

   the proceeds of the judicial auction of that guarantee before any

   other creditor, most unsecured creditors are aware that they would

   not obtain payment from the lawsuit of a secured creditor. Hence,

   most unsecured creditors will not join these lawsuits.

   In addition, a creditor can ask the judge to appoint a receiver

   to the debtor. The receiver controls the debtor's cash flow to

   ensure that the corporation operates efficiently and pays the

   creditor out of incoming cash flow. As it is simpler to have the

   courts appoint a receiver, rather than going through bankruptcy

   proceedings before the courts, such proceedings are rarely

   used.

   If creditors with specific guarantees over a corporation's

   assets feel that it is in their interests to allow the debtor to

   continue operations, rather than being paid directly through their

   guarantees, they usually negotiate out-of-court agreements to that

   end.

   (d) Formal corporate rescue processes

   No corporate rescue process is formally established by law.

   Although there are similarities between the corporate rescue

   process set out by US Chapter 11 and the payment deferral procedure

   under Salvadoran law, the latter does not create a shield against

   claims for delinquent obligations of the debtor unless the main

   creditors voluntarily agree to a corporate rescue plan.

   In addition, even if the court has issued a declaration of

   payment deferral, creditors with guarantees over specific assets

   can force payment on those assets. Consequently, an insolvent

   debtor is subject to the will of the secured creditors and the law

   provides for no corporate rescue protection.

   (e) Informal corporate rescue procedures

   The implementation of a corporate rescue process depends on the

   will of the secured creditors. Therefore, informal corporate rescue

   procedures are those negotiated by the parties.

   1.2 What are the formal processes to effect a liquidation

   of the company's assets?

   The formal processes to carry out a liquidation of the

   company's assets vary depending on whether the liquidation is

   voluntary or forced due to insolvency. If the liquidation is

   voluntary, the corporate shareholders meet to decide to dissolve

   the corporation and appoint a liquidator to conduct the liquidation

   process. A public deed of dissolution is granted and recorded at

   the Registry of Commerce. Once this deed is in force, the

   company's name is...