No Compliance Summary

The Trade and Commercial Law Assessment on Costa Rica published in January 2005 by Booz Allen Hamilton notes that the legal framework for insolvency in Costa Rica focuses on liquidation rather than on reorganization of companies in financial distress, and does not provide for equitable treatment of creditors. Further, the report points out that despite having a basic legal framework for bankruptcy, there is no functioning bankruptcy system in Costa Rica as there are very few officially sanctioned bankruptcies. One of the reasons the report emphasized is the rigid legal procedural formalism focusing on the letter and not the spirit of the law, which obfuscates the bankruptcy process and discourages filings. Regarding Costa Rica's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank, the report states that Costa Rica’s legal framework for bankruptcy is inefficient, non-transparent, and unreliable, and thus does not comply with the World Bank principles. The report recommends strengthening the existing legal framework, harmonizing bankruptcy law with other commercial laws, and building judicial capacity.

General Overview

At the request of the United States Agency for International Development (USAID), Booz Allen Hamilton published in January 2005 a Trade and Commercial Law Assessment on Costa Rica. The Booz Allen report notes that Costa Rica provides for liquidation, but does not directly allow for the type of restructuring seen in Chapter 11 procedures of the United States. The report points out that despite having a basic legal framework for bankruptcy in Costa Rica there is virtually no functioning bankruptcy system in Costa Rica as there are very few officially sanctioned bankruptcies. One of the reasons the report emphasizes is the rigid legal procedural formalism focusing on the letter and not the spirit of the law, which obfuscates the bankruptcy process and discourages filings. Five additional reasons are provided that explain why Costa Ricans tend not to rely on the bankruptcy procedure: (1) high concentration of family-owned businesses who prefer to seek out-of-court agreements; (2) high degree of social stigma attached to bankruptcy which can destroy a merchants credibility for an extended period of time; (3) the law favors liquidation; (4) the danger of a possible removal of management with appointed government curadores; (5) companies have found alternatives to bankruptcy such as the use of trusts.

Furthermore, according to the Booz Allen Hamilton report, only merchants may avail themselves of the protection of the bankruptcy law, while non-merchants may find relief in a separate set of rules, which differ from the bankruptcy provisions. Articles 851–967 of the Commercial Code No. 3284 regulate commercial bankruptcy, while liquidation of financial institutions are contained in the Regulation to Assess the Economic-Financial Situation of Controlled Entities No. 24-00, which was issued by the General Superintendent of Financial Institutions (SUGEF). Opining on the bankruptcy and liquidation process available to financial entities, the report finds the laws to be inefficient and incorrectly balancing between reorganization and liquidation, which results in a lack of trust in the financial system that retards its ability to mend itself in the event of a financial crisis.

Moreover, Booz Allen cites weaknesses in the judicial capacity of the courts of general jurisdiction handling bankruptcy proceedings for both commercial and nonfinancial entities, instead of relying on specialized bankruptcy courts. Furthermore, declarations of bankruptcy abroad do not apply in Costa Rica, which is inconsistent with the principle of comity prevalent in other Latin American countries. Regarding Costa Rica's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank, the report states that Costa Rica’s legal framework for bankruptcy does not comply with the World Bank principles. It cited an inefficient, non-transparent, antiquated, and unreliable commercial legal framework. The report recommended strengthening the existing legal framework, harmonizing bankruptcy law with other commercial laws, and building judicial capacity.

According to the "Doing Business 2009" snapshot offered by the International Bank for Reconstruction and Development and the World Bank, Costa Rica ranks 98th out of the 181 economies surveyed for the factor measuring the effort it takes to close a business, an increase of 9 slots from 2008. The report tracks three aspects of the business-closing process to identify problem areas in insolvency regimes. These include the time it takes, on average, to complete the process, expressed in years; the average cost of the procedure, expressed as a percentage of the debtor estate; and the average recovery rate, expressed in cents on the dollar. The report also offers comparable figures for the region and for the member states of the Organization for Economic Co-operation and Development (OECD). In Costa Rica, it takes an average of 3.5 years to complete a bankruptcy proceeding, whereas the average time for the region is 3.3 years and the time required in OECD states averages 1.7 years. It costs an average of 15 percent of the estate in Costa Rica, compared to an average regional cost of 15.9 percent and an OECD average of 8.4 percent. The average recovery rate is 25.4 cents on the dollar in Costa Rica, compared to an average of 26.8 cents in the region and 68.6 cents on the dollar in the OECD countries.