In Panama, starting in 2017, a new regulatory regime began, to address the insolvency problem. This is the coming into force of Law 12 of May 19, 2016 (L12 / 16), “Which establishes the Regime of bankruptcy and insolvency proceedings and dictates other provisions.” ¬†

Among the novelties that L12 / 16 brings, the regulation of a bankruptcy process of reorganization of the insolvent debtor is noteworthy. Until the approval of the aforementioned law, there was no legal institution in our country that would allow the insolvent debtor to propose, discuss and reach an agreement with its creditors, destined to survive as an entity that generates financial resources.  

The regime contained in L12 / 16 is not limited to the aforementioned reorganization, since it also regulates matters related to the judicial liquidation of the insolvent debtor and cross-border insolvency. However, of the 3 components of the bankruptcy regime, it the institution of restructuring that stands out for its direct impact on the country’s credit industry.

The legal regime of financial restructuring of companies and court-ordered liquidation of companies, called the general regime, that is included in L12 / 16, applies equally to all companies, with the exception of the following:

  • Public entities, municipalities, autonomous, semi-autonomous and decentralized entities and other entities governed by public law;
  • Banks;
  • Insurance or reinsurance companies;
  • Companies regulated by the Superintendence of the Securities market;
  • Companies in which the State has a shareholding equal to or greater than 51%;
  • In the case of private capital companies that are dedicated to providing public services, the L12 / 16 regime applies after the intervention of the entity with powers to do so ceases.

All these exceptions have a special intervention regime for the restructuring or liquidation of the company in distress. The special regimes for restructuring and liquidation are as follows:

  • Decree Law No. 9 of 1998, regulates the banking business. It sets forth bank restructuring and liquidation procedures.
  • Law No. 12 of 2012, which regulates the insurance business It rules the procedures for restructuring and liquidation of insurance companies.
  • Law No. 63 of 1996, which regulates the reinsurance business. This law together with Law No. 12 of 2012, mentioned above, comprise the legal regime for restructuring and liquidation of reinsurance companies established in Panama.
  • Decree Law No. 1 of 1999, which regulates the securities market; it regulates the procedure for restructuring and liquidation of companies regulated by the Superintendence of the Securities Market.

What constitutes debtor reorganization?

It is a judicial process, that is, a trial.  The purpose of this trial is not to administer justice in the common sense of the expression, since, in principle, there is no lawsuit as such. It is a trial because it is a procedure that is directed by a judge, since, while there is no litigation per se, there is a conflict of interest that emerges between the debtor seeking reorganization and its creditors seeking satisfaction of their claim. It follows that, in that process, decisions are required that must be imposed on the will of the parties, that is, the debtor and its creditors. To this should be added the quality of the effects of the acts involved in a credit reorganization that, for the above reasons, affect the assets of those involved.

¬†On this point it should be noted that L12/16 provides for the creation of new courts specializing in insolvency matters, in fact, the name that the law provides for these courts is “Insolvency Circuit Courts‚ÄĚ[1]. It should be pointed out that these courts, located in the Province of Panama, are also responsible for handling executive processes.


Who can benefit from the Restructuring process?  

Any natural person who is a merchant or commercial company, provided that the credits are commercial, in principle, are entitled to the protection of the provisions of the aforementioned law. In this regard, it should be noted that the insolvency law includes three different processes, including restructuring, which is the common insolvency regime.

However, the fact that it is common does not mean that it applies to all insolvent debtors equally, for various reasons, including the nature of the debtor’s person or the activity in which the debtor is engaged.¬† Based on the above, L12/16 does not apply in the following cases[2]:

According to the nature of the person:

  • Public entities: as this is the insolvency regime for commercial debtors, persons (entities) under public law are not eligible to be covered by L12 / 16.
  • The State as majority shareholder: those corporations in which the State owns 51% of the share capital.

According to the regulated activities:

  • Provision of public service: commercial companies whose business purpose is public services. This is the specific case of companies that participate in the electricity market, electricity generators, for example[3].
  • Provision of activities of public interest: Banks, insurance companies and companies regulated by the Superintendence of the Securities Market.

In which credits can the Financial Reorganization regime be applied?

The L12/16 was approved in May 2016, however, its entry into force was provided in the same law, to start on January 2, 2017. In this same line, it should be noted that the unpaid credits that could generate the need to resort to the judicial process of restructuring, do not have to have arisen at the date of initiation or effectiveness of the L12/16; they can be credits that arose or existed before its effectiveness.

What is the insolvency reorganization process?

The aim of this type of judicial procedure is to enable the insolvent debtor to reach an agreement with his creditors, which will allow him to restructure his assets, in order to restore financial prosperity and continuity of his operations. The means envisaged to achieve these objectives include, but are not limited to, debt forgiveness, restructuring or capitalization, merger or division of the debtor in the case of commercial companies, and the sale of the debtor’s lines of business as going concerns. The condition to achieve this great agreement, is that the agreement reached between the debtor and its creditors, is a better situation for them than the one that would bring them a scenario of a court-ordered liquidation of the debtor[4].

Who Can Request Financial Reorganization?

Uner L12/16, a request for financial restructuring may be made by the debtor, the debtor’s own creditors, the representative of the creditor’s meeting of that debtor and the representative of a foreign insolvency proceeding. Of the three persons mentioned, only the case of the creditors deserves comment. This is because the creditors’ meeting is the instance within the insolvency process that brings together the accepted creditors of the insolvent debtor.¬† Thus, what is understood is that a single creditor cannot request the reorganization of the debtor, but rather, summoned and accepted in a process or trial initiated for the liquidation of the debtor, they can act jointly and request the reorganization of their common debtor. Thus, it seems plausible to differentiate between legal authorization to apply for the debtor’s reorganization, and to initiate the debtor’s reorganization or bankruptcy proceedings. In the same vein, it is not necessary to point out that the initiation of the reorganization proceeding is subject to the occurrence of any of the following events: the cessation of payments incurred by the debtor, its imminent insolvency or a state of illiquidity[5].

What are the effects of the start of the Financial Reorganization?

Certainly, with the declaration of commencement of the reorganization proceedings, a number of consequences arise for the debtor and its creditors. Due to space limitations, we are forced to select among all of them, those that we consider to have the greatest impact on the banking business, and under this criterion, we consider that the most important is the protection of the debtor. This is composed of two elements, protection against lawsuits (judicial), and protection in relation to contracts or businesses; both converge in an asset protection of the debtor seeking its reorganization. Below is a list of its main features.

Judicial Debtor Protection.

The judicial protection of the debtor aims to avoid the dismantling of the debtor through the initiation by his creditors of judicial and extrajudicial debt collection proceedings, on an individual basis. In a scenario like this, it is thought that the majority is affected if those who arrive first are the only ones who can satisfy their credits; the possibility of saving the company would be lost and with it, the source of jobs and the possibility of generating resources.

  • Concept: This is the period of time during which the debtor cannot be sued for his debts, nor can the extrajudicial execution of guarantees or the extrajudicial restitution of property be initiated [6].
  • Duration: The exact moment of commencement is the judicial declaration of the opening of the reorganization proceedings. Its termination depends on the following causes:
  • Lack of approval by the judge of the agreement reached by the debtor and his creditors.
  • The rejection of the proposal of agreement presented by the debtor to his creditors.
  • Completion of 6 months of the protection period.
  • Completion of the reorganization process prior to the creditors’ vote on approval of the agreement, or the judge’s decision on the viability of the agreement.
  • Scope: Included in this protection, as we saw, is the impossibility of initiating any type of credit execution process against the debtor. It also includes the collection of debts by means of guarantees that do not require legal proceedings, such as trust and pledge guarantees. Also added to the above is the restitution of property, this is a clear reference to leasing contracts.

Contractual Debtor Protection

  • Purpose: The idea is that the contracts entered into by the debtor who requests protection from creditors in order to reach an agreement with them that restructures their assets, remain in force and in this way the status quo of their operating situation is preserved.
  • Concept: It provides for the validity and, therefore, the continuity of the contracts entered into by the debtor, especially those that are called ” contracts of continual performance “, that is, those contracts in which the agreed services or activities are not performed instantly, but are consumed within a certain period of time[7].
  • Scope: The L12/16 does not discriminate in the person or in the object of the contract concerned. Therefore, among the contracts affected by this protection granted to the debtor are those concluded with banks (credit facilities). From this legal provision, contracts concluded by banks with the debtor under protection are directly affected[8] as follows:
  • They cannot be terminated by the bank unilaterally; they remain in force. The exception to this rule is that the cause of breach invoked is different from any fact derived from the financial situation of the protected debtor.
  • Payment terms cannot be altered.
  • Early performance of the agreed obligations cannot be required, provided that the cause for issuing the enforceability of the obligations is different from the financial situation of the protected debtor.
  • The enforceability of the agreed interest is suspended, and in the absence of an agreement on interest, the suspension of the enforceability of statutory interest applies, with the exception of contractual obligations that have a security interest.
  • Renegotiation of contracts, when their terms and conditions are not suitable to the objectives of the protected debtor. In this case, if a modification is not achieved due to the lack of will of the debtor, the protected debtor is authorized to request the termination of the contract from the bankruptcy judge, and the balance owed is entered as a credit to be satisfied with the result of the bankruptcy proceeding.[9].

[1] A Superior Court and circuit courts are created in all the provinces. The Superior Court is called the Fourth Superior Court of Justice of the First Judicial District, and shall have its seat in the Province of Panama. Its function is to resolve the appeals filed in insolvency processes, whether of restructuring, liquidation or cross-border insolvency and in those of execution. The insolvency circuit courts will process insolvency proceedings in the first instance, where the financial reorganization, the judicial liquidation or a cross-border insolvency are sought. Cfr. Art. 17, 19, 21 and 23 of L12 / 16.

[2] Cf. article 5 of the L12 / 16.

[3] In the latter case, there is an intermediate situation as the L12/16 is applicable in a residual way. The point is that, in the event of the insolvency of the company involved in this activity, the State supervisor of the public service concerned, ASEP, by way of example, will intervene in the insolvent company to ensure the provision of the public service in question. Once the intervention has ceased, the supervisor will notify the insolvency courts of the termination, leaving the undertaking in question subject to the application of the L12/16.

[4] Cf. art. 30 of L12/16.

[5] Cf. Art 29 of L12/16.

[6] Cf. numeral 24, of article 4 of L12 / 16.

[7] Cf. Art 39(2) of L12/16..

[8] Ibid.

[9] Cf. Articles 43 and 44 of L12/16.


Jorge Molina CIArb

Senior Partner

Miguel Urriola


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