Insufficient Information Summary

There is insufficient publicly available information regarding the Dominican Republic's compliance with the World Bank's Principles and Guidelines for Effective Insolvency and Creditor Rights Systems. Although there is a legal insolvency framework based upon the Commercial Code and a 1956 law aimed at conciliation between debtor and creditor interests, it is very rarely used and has been described in the 2006 publication by the law firm Pellerano and Herrera as "obsolete." The Commercial Code is modeled on the 1807 French Commercial Code, and Part III of the Code sets forth a complex bankruptcy/insolvency procedure. Any business that fails to meet its obligations is considered bankrupt by law, and debtors may face further, criminal penalties, if they are found to have caused the bankruptcy through negligence or fraud.

General Overview

According to the attorneys Pellerano & Herrera, writing in 2006, the Dominican Republic's bankruptcy and insolvency law rests on the foundation of the Commercial Code, which is in turn based on the French Commercial Code of 1807. Part III of the Commercial Code, Articles 437 through 614, comprises a complex bankruptcy regulatory framework. In 1956, Law No. 4582 was enacted, according to which the Secretariat of Industry and Commerce participates in a conciliation procedure as a necessary precondition to the filing of bankruptcy. However, both the Commercial Code provisions on bankruptcy and the terms of the Law No. 4582 are, according to Pellerano and Herrera, "largely obsolete" (p. 92) and today they are rarely used. Still, they remain the legal insolvency framework, however rarely people or companies may resort to them. Any business that can no longer meet its obligations fits the definition of bankruptcy. In such circumstances, a petition may be filed by either party - debtor or creditor(s) - or the court may undertake to begin proceedings on its own once the conciliation procedure with the Secretariat of Industry and Commerce has been satisfied. In this latter case, the parties enter into a payment agreement in order to avoid liquidation of the debtor firm. A bankruptcy judgment first removes control of the debtor estate from the debtor, renders all outstanding obligations due and halts the accrual of interest on unsecured debts. It creates an automatic stay that ceases individual, independent action of creditors against the firm, and it may void certain payments or company acts by the debtor undertaken during the 10-day period preceding the judgment. In liquidations, a bankruptcy judge and trustee are appointed and claims against the estate are verified. If no agreement can be reached between debtor and creditors, the assets are liquidated and distributed among the creditors according to a set priority scheme. First, the costs of the bankruptcy procedure must be paid, after which employees, state obligations, legal fees, secured creditors, and unsecured creditors are satisfied, in that order. If fraud or negligence is found to be at the heart of the insolvency, the debtor may further be found guilty of "bancarrota" in the case of the former or simple bankruptcy in the case of the latter. While simple bankruptcy can call for a year in prison, "baccarat" can result in a punishment of up to five years imprisonment.

The World Bank's "Doing Business in Dominican Republic" for 2008 offers a snapshot of the procedure for closing a business, focusing on three dimensions: time required to complete the process, in years; cost of the procedure as a percentage of the debtor estate; and the average recovery rate for creditors, expressed in cents on the dollar. To add context to this data, the World Bank generally also offers comparable average values for the region and for the member states of the Organization for Economic Cooperation and Development (OECD). For the Dominican Republic, it takes, on average, 3.5 years to close a business. This is a little longer than the regional average of 3.2 and nearly three times as long as the 1.3-year average enjoyed in the OECD member states. The cost is significantly higher for the Dominican Republic when compared to either the regional or OECD, with the Dominican Republic running 38% of the estate, on average, the region averaging 16.4%, and the OECD states averaging 7.5%. In recoveries, the Dominican Republic performs equally poorly, averaging 8.4 cents on the dollar, compared to the 25.9 cents averaged regionally and the 74.1 cents averaged in the OECD member states.