Insolvency 2019 Second Edition

Last Updated November 20, 2019

Chile

Law and Practice

Authors



Castañeda Abogados is a boutique firm, founded in 2018, specialising in insolvency law. The firm has led highly complicated bankruptcy and business reorganisation procedures, providing a complete legal and financial advice and seeking to obtain personalised agreements that protects the interests of their clients, whether they are debtors or creditors. The team comprises of ten members, including four counsel professionals, four associates and two partners, who have participated in some of the most important insolvency procedures in Chile of the last 20 years, including companies as Isapre Masvida, CCAF La Araucana, La Polar, SuBus, PescaChile, Pescanova (España), Grupo Cantoblanco (España). In the last year, the firm has dealt with bankruptcy and financial restructuration of companies, including Clinica Mora Pavic, E-Money, TPI Chile, Astaldi Chile, Intersport, Minera El Toqui, Grupo Femoglas, Clinica del Maule, among others.

Five years have passed since Law No. 20,720 came into force, substantially modifying Chilean insolvency regulation.

The main objective of the new regulation was to make insolvency proceedings accessible to a greater number of natural persons and companies, to reduce the duration of these processes and bring them closer to the international standards validated by the OECD.

Since the inception of this new law, statistics allow us to conclude that both objectives have been reasonably fulfilled. The average duration of liquidation procedures (bankruptcies) is now less than one year, which compares positively with the average three year duration experienced under the old regulation.

Regarding accessibility, statistics show that natural persons and companies make more intensive use of liquidation and reorganisation procedures, confirming a wider understanding of the regulation.

Despite this, two aspects must be improved. First, some norms of the Law have not justified their preservation in the regulation and, furthermore, gaps have been detected within the legislation. Second, it has been noted that liquidation of natural persons has been abused, seen by the increase of unjustifiable requests. Although this problem has an important ethical component, it is necessary to register it as a reality in this subject.

The most relevant impact of this new regulation has been the accessibility of formal credit; banks have raised the standards for granting loans. On the one hand, restricting the granting of loans to natural persons and, on the other hand, increasing the requirement of guarantees to companies.

The sectors primarily involved in insolvency proceedings are construction, agriculture and mining. However, it is expected an increase will be seen in the services and retail sectors as a result of the negative economic cycle, at international level, and various projects of legal reform within Chile regarding tax, labour and environmental matters, which will imply higher costs for Chilean companies.

Of primary concern are the actions companies at risk of insolvency may or may not execute. It is a possibility a court, when aware of the insolvency proceedings, will void acts or contracts executed up to two years before said proceedings. This forces companies to properly advise themselves so as to incur these situations.

The judicial reorganisation procedure for companies offers an extraordinary opportunity to those national or foreign investors interested in acquiring an insolvent Chilean company. The structure of this Procedure, the information required, the terms considered and the existence of preferential financing, among other considerations, makes clear the eventual acquirer forces the insolvent Company to benefit from a judicial reorganisation as it represents clear due diligence and facilitates an acquisition with much lower risks.

The new loans could be capitalised if the judicial reorganisation is approved. Also, is a possibility to capitalise all or part of the original debt.

The current regulation of the procedures for liquidation and reorganisation of companies are within the Law 20,720, which entered into force in 2014. This law contained two major modifications of its predecessor. First, it sought to create a mechanism to provide effective assistance to companies going through a period of temporary insolvency, presenting the necessary conditions for their future viability. Second, it sought to establish an expedited procedure for liquidation so that the actors involved obtained a quick solution, thus allowing the re-entrepreneurship of those subject to liquidation.

Furthermore, the liquidation and renegotiation of natural persons was regulated for the first time.

This implies that any company that suffers from temporary insolvency is faced with a simple decision. If the company presents the operational conditions necessary to operate in a controlled debt regime, the option is its judicial reorganisation. If the company, for any reason, does not have the capacity to continue operating in the future or its liability is such that surviving is not feasible, the option is liquidation through an expedited mechanism.

Law 20,720 creates two broad categories. The reorganisation of a company will always be a company decision, allowing the choice between a judicial or extrajudicial reorganisation process (also called Simplified Reorganisation). In the case of liquidation, this can be voluntary or forced (at the request of the creditors).

Under Law 20,720, the company is not obliged to benefit from any type of judicial or extrajudicial process of reorganisation or liquidation.

There is no obligation for the company to benefit from a specific process, which does not prevent it from being able to voluntarily benefit from a reorganisation or liquidation procedure.

Creditors can only request the forced liquidation of the company when one of the three situations indicated by law occurs. First, when payment of an obligation consisting of an executive title has ceased. Second, when there are two or more expired executive titles, with at least two individual executions in progress and in these, the debtor has not been able to present sufficient assets to fulfil its obligations. Third, when the debtor or its representatives cannot be located or have closed their offices without having appointed a representative with sufficient powers.

The law does not require liquidation budgets - voluntary or involuntary - to prove the insolvency of the company. In the case of voluntary liquidation, the company must provide a series of antecedents to the court together with its liquidation request, and the court must conduct a formal examination of the documents before accepting it.

In the case of a forced liquidation, the creditor provides only the documents proving the grounds for invoking the liquidation, which refer to particular situations and to the general status of the debtor. It is important to note that, in the case of voluntary liquidation, the courts analysis goes beyond the formal and requires information not indicated by law. Although this is an extended practice in the judicial system, the Supreme Court has recently indicated that these requirements include a transfer of the powers that the law has granted to the judges for these procedures.

Special laws establish special rules in the case of Banks, Financial Institutions, Isapres and Pension Institutions, among others. However, in all these cases the framework regulation is that delivered by law 20.720, and its accompanying processes.

The current insolvency regulation enshrines the Extrajudicial or Simplified Reorganisation Agreement. It should be noted that the extrajudicial nature is relative because, once agreed, it must be subject to judicial approval.

This procedure will be recommended depending on the liability structure of the debtor company because it has advantages and disadvantages concerning its judicial simile.

The two main advantages are that if no agreement is reached with the creditors, there is no immediate negative effect (in contrast to the Judicial Agreement, whose rejection by the creditors implies bankruptcy of a company), and that the process is private; neither customers, competition nor the press will find out about its procedure.

But there are disadvantages to opting for this type of agreement. It does not prevent the initiation of legal actions or requests for bankrupytcy from creditors during negotiations. The absence of so-called Insolvency Financial Protection makes it difficult for suppliers to maintain a supply of raw materials and goods, and  makes it difficult to obtain working capital.

A different option is presented with direct negotiations between debtors and creditors without having the character of Reorganisation Agreements.

Banks tend to favour this type of agreement as, among other advantages, it does not require an increase in the provisions regarding the credits involved in the negotiation. In addition, negotiations can be frequent and on-going, as well as separate, often resulting in improved guarantees that must then be shared amongst all creditors.

However, for the debtor company, this mechanism is not recommended; it usually ends with a handful of renegotiations with the remaining creditors taking legal actions. It is only recommended where a creditor holds more than 70% of the liability, has sufficient guarantees and is willing to acquire the rest of the credits and refinance them.

It is necessary to consider the sensitive circumstances of a company that initiates a judicial proceeding and the potential loss of clients or strategic contracts that can trigger irreversible insolvency.

It is always recommended that the debtor company, its financial advisors, or investment banks incorporate specialised insolvency and financial restructuring studies for only investment banks may recommend and assume judicial proceedings.

A judicial procedure does not require direct or extrajudicial negotiation as a prerequisite.

As mentioned in 3.1 Restructuring Market Participants, direct negotiation processes are complex, especially as they do not consider all creditors; incorporating them all in an unregulated process is impossible.

In practice, the creditor, or a group of them, carry out an "intervention", forcing the debtor to adopt administrative reorganisation measures, to professionalise the directories and to comply with certain covenants and financial ratios.

The control is normally given to a qualified external professional, ie, an auditor or a law firm with expertise in financial subjects, and is paid by the debtor. This controller meets periodically with a committee formed of senior executives of the creditors and informs them of the progress of the business.

The creditor or creditors involved in this negotiation normally take additional guarantees that give greater recovery options over other creditors. However, it should be kept in mind that if the debtor company ultimately enters insolvency proceedings, the guarantees taken on its assets could be revoked.

If there is anyone interested in injecting new financings, these loans have no preference (unlike those in the Judicial Reorganisation). They can only be guaranteed with the restriction regarding revocation actions already indicated.

A direct negotiation agreement can establish the clauses determined by the parties to the agreement. If there is any breach by the debtor company, the respective clauses of the renegotiation could be executed, however, most likely, an insolvency proceeding is initiated by a creditor or as the debtor's own decision.

Because of their contractual legal nature, credit agreements are only binding on the parties that sign them. Consequently, they cannot impose their terms on minority or dissident creditors; this will only happen in the agreements (judicial or extrajudicial) regulated by the Insolvency Law.

The law recognises all types of guarantees that the debtor has granted and maintains their validity for the purposes of the bankruptcy proceeding, whether reorganisation or liquidation, but only garments and mortgages (real guarantees) are considered as preferential guarantees and granted priority over the rest of the creditors.

At the same time, the nature of the guarantee as personal or real is distinguished. If real, it is made clear if it falls on the good of a third party or the debtor company and if the object of the guarantee is considered essential or non-essential for society. These distinctions are established in order to determine the possibilities of action of the creditors within the procedure.

In both procedures, if the pledge or mortgage preference has not been recognised by the debtor, or if there are differences in the amount of the credit or guarantee, the creditor must verify their credit in the procedure provided with the documents, proving the existence of the obligation and the guarantee.

The rights creditors may have under their pledge or mortgage will depend on the procedure in which the debtor company is involved in.

Creditors are, preferably, subject to the same procedures and timelines as unsecured creditors.

There are no special procedures. Foreign loans will be granted all relevant rights available as long as the loan was granted in accordance with Chilean law.

Secured creditors adhere to the same procedure as all creditors.

In a reorganisation process, secured credits are a different category  to unsecured credit. In the case of secured creditors, the reorganisation process determines whether the good that guarantees the creditor is essential or non-essential for the business. The actions exercised outside the agreement will depend on this determination. Regarding insolvency, the secured creditors and unsecured creditors have the same rights in the process, and the only difference lies in the priority of payment.

In general, the Reorganisation Agreements seek the restructuring of the liability of payment of all secured and unsecured creditors. In effect, each category (secured and unsecured creditors) votes separately and any rejection from either group implies a rejection of the Agreement. As such, unsecured creditors are equally important.

As mentioned in 5.2 Unsecured Trade Creditors, unsecured creditors are as important as secured creditors, and their rejection of an agreement can cause the declaration of Consequential Insolvency of the debtor. However, unsecured creditors, as with secured creditors, can apply for the forced insolvency. It must be pointed out that both the secured and unsecured creditors must appear at court and validate their credit through a written presentation.

These are not contemplated in Chilean legislation.

The reorganization processes have a durations of 30, 60 or 90 days, depending on creditors support of the debtor. The term that all creditors have to verify their credits in this process is eight days from the publication in the insolvency bulletin. In the case of the liquidation, the creditors will have 30 days to verify in an ordinary period. However, the creditors may verify their credits prior to the signing and execution of the liquidator's administration's final account. These will be considered only in future distributions, and must accept everything previously done.

There is no applicable information in this jurisdiction.

In the case of foreign creditors, there is no special regulation, except that the Liquidation Resolution must contain an order to notify, by the most expeditious mean possible, creditors who are outside the territory of the Republic.

Our legislation contemplates an order of priority of credits for payment purposes, distinguishing five classes:

  • First class: judicial costs that are caused in the general interest of the creditors, expenses incurred to make the debtor's assets available to the mass, workers' compensation and remunerations, social security contributions, tax credits for taxes withholding and surcharge, in general terms.
  • Second Class: creditors with a collateral guarantee
  • Third Class: creditors with mortgage guarantee
  • Fourth Class: tax credits against collectors and administrators of tax assets, credits from national charity or education establishments, and those from municipalities, churches, and religious communities, against collectors and managers of their funds. Those of people who are under guardianship or curatorship against their respective tutors or curators
  • Fifth class: credits without guarantees or preferences.

The order of priority of credits must be respected.

Law 20,720 establishes a mechanism for restructuring assets and/or liabilities called “Judicial Reorganisation Agreements”, defining them as “the one that is signed between a Debtor Company and its creditors in order to restructure its assets and liabilities, subject to the procedure established in Titles 1 and 2 of Chapter III (of the Law).

This mechanism, following Article 54, applies to the debtor company, which, according to Article 2, numeral 13, “is any private legal entity, with or without profit, and any natural person contributor the first category or of number 2) of Article 42 of decree law 824, of the Ministry of Finance, of 1974, which approves the law on income tax”.

Additionally, it must keep in mind that the Insolvency Reorganisation Procedure can only be initiated by the debtor company (that is, it cannot be initiated by the creditors nor they do not have any mechanism that can force the start of the procedure).

The procedure begins with a request submitted to the debtor's domicile court directly or through the Distribution Secretariat of the corresponding Court of Appeals. The request consists of a standard form that is obtained from the website of the Superintendence of Insolvency and Renewal and, as will be seen later, the Proposals of Agreement, containing the specific conditions that will be submitted for approval by the creditors, must be accompanied by no later than the tenth day before the date of the Deliberative Board.

Once this request has been submitted, the nomination of the trustee has to be made, for which the debtor must comply with Article 55, and provide the accompanying information:

  • a copy of the request to open the procedure, with the charge of the court or the Court of Appeals; and
  • a certificate issued by an independent auditor to the debtor, registered in the Registry of External Auditors of the Superintendence of Securities and Insurance, which contains a state of their debts, indicating the name, address and email address of the creditors or their legal representatives; nature of their titles, and the amount of their credits, indicating the percentage that each represents in the total liabilities subject of the Agreement; and, payroll of the three biggest creditors, excluding Persons Related to the debtor.

The three major creditors will have two days to propose, separately, to a titular trustee and a substitute trustee, effective on the trustee List.

In parallel to the designation of the trustee, the debtor must supply:

  • a list of all their assets, with the expression of their commercial appraisal, where they are located and the taxes that affect them. It should also indicate which of these assets have the quality of essential for the business of the debtor company;       
  • a list of all those third-party assets constituted as collateral in favour of the debtor. It should also indicate which of these assets have the quality of essential for the business of the debtor company; and
  • a list of all those assets that are in the jurisdiction of the debtor in a different quality from that of the owner.

The certificate refers to Article 55, for the determination of the liability related to the Judicial Reorganisation Agreements. The liability established in this certificate must consider the debtor's debts status, with a closing date not exceeding 45 days previous to this presentation, with an express indication of the credits that are guaranteed with either a pledge or mortgage and the commercial appraisal of the goods on which the guarantees fall.

If the debtor has complete accounting, they will present the balance corresponding to his last fiscal year and a provisional balance containing the financial and accounting information, with a closing date not exceeding 45 days before this presentation.

Presented the background indicated by the debtor, in the fifth day the court must dictate the corresponding Resolution of Reorganisation, which will contain the designation of the holder and substitute trustee, by the Certificate of Nomination received from the Superintendence, and also, will provide the following

During the 30 days counted from the notification of this resolution, extendable by the provisions established in Article 58, the debtor will enjoy Insolvency Financial Protection under which:

  • an Insolvency Settlement Procedure may not be declared or initiated against the debtor, nor may be initiated executive trials against them, executions of any kind or restitution in lease trials;
  • the processing of the procedures indicated above and the terms of extinction prescription will be suspended;
  • all contracts signed by the debtor will maintain their validity and payment conditions. Consequently, they cannot be cancelled unilaterally in advance, their compliance must be demanded in advance or make effective the contracted guarantees, invoking the initiation of an Insolvency Reorganisation Procedure. The credit of the creditor that transgresses this prohibition will be postponed until all the creditors who are affected by the Judicial Reorganisation Agreement, including the Creditors Related Persons of the debtor, are paid; and
  • if the debtor is part of any public registry as a contractor or provider of any service, and as long as they are up to date on their contractual obligations with the respective principal, it cannot be deleted or deprived of participating in bidding processes founded on the initiation of an Insolvency Procedure of Reorganisation. If the public entity removes the debtor from its records, or discriminates against their participation based on the opening of an Insolvency Procedure of Reorganisation despite being up to date with their obligations to the respective principal, the debtor must be compensated because of the damages caused by the discrimination or elimination.

During the Insolvency Financial Protection the following precautionary and restriction measures will be applied to the debtor:

  • the debtor will be subject to the intervention of the titular trustee designated in the same resolution, which will have the duties contained in Article 25;
  • the debtor will not be able to encumber or dispose of their assets, except those whose sale is typical of their business or that are strictly necessary for the normal development of their activity; and concerning other assets, the steps of Article 74 will be followed; and
  • in the case of legal persons, they will not be able to modify their pacts, bylaws or regime of powers. The inscription of any transfer of shares of the debtor company in the relevant social records will require the authorisation of the trustee, which will extend it in the way it does not alter or affect the rights of the creditors. The preceding does not apply to open corporations that make a public offering of their values.

The expiration date of the Insolvency Financial Protection determines the date of the celebration of the Deliberative Board.

The order to the debtor to publish, through the trustee, in the Insolvency Bulletin and accompany the competent court, at least ten days before the date set for the Board of Creditors, its proposed Judicial Reorganisation Agreement. If the debtor does not comply with this order, the trustee will certify this circumstance and a competent court will dictate the Liquidation Resolution, without processing.

The date, place and time at which the Board of Creditors called to know and pronounce on the proposed Judicial Reorganisation Agreement the debtor presents. The date of this meeting will be the date on which the Insolvency Financial Protection expires.

After 15 days from the notification of this resolution, all creditors must prove in a competent court to act in the Insolvency Procedure of Reorganisation, with an express indication of the power conferred on their attorneys to know, modify and adapt the Judicial Reorganisation Agreement.

The order for the trustee to register a copy of this resolution in the corresponding Real Estate Registrar, regardless of the registration of ownership of each of the properties belonging to the debtor.

The order to the trustee to accompany the competent court and publish in the Insolvency Bulletin his report about the proposed Judicial Reorganisation Agreement, at least three days before the date set for the celebration of the Board of Creditors that will vote that agreement. The trustee's report must contain the qualification based on:

  • considering the debtor's conditions. if the proposal has a high possibility of being fulfilled;
  • in case of an Insolvency Procedure, the probable amount of recovery that would correspond to each creditor in their respective categories; and
  • the proposal for determining the credits and their preference, as indicated by the debtor and conforming to the law.

If the trustee does not submit the report within the indicated period, the debtor, any of the creditors or the competent court will inform the Superintendence in order to apply the pertinent sanctions. In this case, the Judicial Reorganisation Agreement will be voted on regardless of the trustee's report.

During the fifth day, after the notification of this resolution, the debtor and the three major creditors indicated in the certification of the independent auditor accountant referred to in Article 55 must attend a hearing. This diligence will be carried out with those who attend and it will deal with the proposal of fees made by the trustee. If there is no agreement on the amount of the fees and the method of payment, or none of those mentioned attend to the hearing, those fees shall be fixed by the competent court without further recourse.

The payment of these fees are the responsibility of the debtor, and the debtor must provide the trustee with a copy of all the accompanying records.

A figure called Insolvency Financial Protection is incorporated, which searches that the Debtor Company can negotiate with its creditors, without being subject to threats or effective exercise of actions against it.

The Law grants to the debtor company 30 business days from the publication of the Reorganisation Resolution, during which the following effects will occur:

  • the Insolvency Settlement Procedure cannot be declared or initiated against the debtor; neither be initiated executive judgments, executions of any kind or restitution in lease trials against them;
  • the processing of the procedures indicated in the previous numeral and the terms of extinction prescription will be suspended;
  • all contracts signed by the debtor will maintain their validity and payment conditions; they cannot be terminated unilaterally in advance, nor compliance must be demanded in advance or the contracted guarantees to become effective, invoking the initiation of an Insolvency Reorganisation Procedure. If a debtor infringes this prohibition, their credit will be postponed until all the creditors who are affected by the Judicial Reorganisation Agreement, including the creditors' related persons of the debtor, are paid; and
  • If the debtor is part of any public registry as a contractor or provider of any service, and as long as they are up to date in their contractual obligations with the respective principal, it cannot be deleted or deprived of participating in bidding processes founded on the initiation of an Insolvency Procedure of Reorganisation. If the public entity removes the debtor from its records or discriminates against his participation, based on the opening of an Insolvency Procedure of Reorganisation despite being up to date with their obligations to the respective principal, the debtor must be compensated because of the damages caused by discrimination or elimination.

After 30 business days of insolvency financial protection can be extended, with the approval of the creditors. If the debtor obtains the support of two or more creditors, who represent more than 30% of the total liabilities, it is extended by 30 business days and for another 30 business days if it obtains the support of two or more creditors representing more than 50% of total liabilities, excluding related creditors.

Restriction measures of the debtor company during the insolvency financial protection period:

  • it will be subject to the intervention of the titular Trustee designated in the Reorganisation Resolution;
  • the Debtor will not be able to encumber or dispose of their goods, except for the exceptions contemplated in the Law;
  • in the case of being a legal person, they will not be able to modify his pacts, bylaws or regime of powers; and
  • the inscription of any transfer of shares in the social records will require authorisation from the Trustee, unless they are open companies that make a public offer of their values.

Continuity of supply during the insolvency financial protection period is an established a system that favours continuity of supply to the suppliers of goods and services that are necessary for the operation of the debtor company.

These providers will get two benefits:

  • Their credits will be paid on the dates originally set; and
  • If the Reorganisation Agreement is not approved, the Liquidation Resolution of the debtor company will be dictated, the credits from the supply will be paid with the preference established in numeral 4 of Article 2472 of the Civil Code.

On the contracting loans during the insolvency financial protection period, the debtor company may acquire loans to finance its operations, only if they do not exceed 20% of its liabilities. Exceptionally, these loans which exceed the indicated percentage will require the authorisation of creditors representing more than 50% of the debtor's liability.

These loans will not be considered in the payrolls and will preferably be paid on the set dates if the Trustee accredits that they were used to finance their operations.

If the Reorganisation Agreement is not approved, these credits will be paid in preference to any other credit, including labour or tax.

For the approval of the agreement, the consent of the debtor and the assent vote of two thirds or more of the creditors present are required, representing at least two thirds of the total liabilities with voting rights corresponding to the respective class or category (guaranteed and valid).

For a modification of the Agreement, the same rules are followed as for the agreement itself.

We have to remember that all creditors are bound by the decision of the legal majority. As such, dissenting creditors only have the possibility to object or request the nullity of the Agreement, according to the procedures established in the Law.

There are special terms to object (five days) or request nullity (one year).

The reorganisation is conceived as a singular procedure. If is necessary to reorganise a group of companies (two or more), individual processes must be initiated for each one.

The debtor will not be able to encumber or dispose of their assets, except those whose sale is typical of their business or that are strictly necessary for the normal development of their activity. Other special cases need the creditors authorisation.

There are no special restrictions other than the trustee must be informed.

They can be released if the general requirements have been fulfilled.

The debtor company may acquire loans to finance its operations, only if they do not exceed 20% of its liabilities. Exceptionally, these loans which exceed the indicated percentage will require the authorisation of creditors representing more than 50% of the debtor's liability.

These loans will not be considered in the payrolls and will preferably be paid on the set dates if the trustee accredits that they were used to finance their operations.

If the Reorganisation Agreement is not approved, these credits will be paid in preference to any other credit, including labour or tax.

The debtor company may acquire loans to finance its operations, only if they do not exceed 20% of its liabilities. Exceptionally, these loans which exceed the indicated percentage will require the authorisation of creditors representing more than 50% of the debtor's liability.

These loans will not be considered in the payrolls and will preferably be paid on the set dates if the trustee accredits that they were used to finance their operations.

If the Reorganisation Agreement is not approved, these credits will be paid in preference to any other credit, including labour or tax.

The debtor must inform the relevant parties of the amount of the credits at the beginning of the procedure. If a creditor has been omitted or the credit is higher, the creditor can verify it. Also, the debtor, the trustee or any creditor could object any credit. Ultimately, a Judge makes the final decision.

Once approved, the Agreement is mandatory for the debtor and all creditors.

The effects of the Agreement do not affect third parties, except debtors for personal guarantees as surety or guarantor.

In the Liquidation, it is not possible to set-off credits between debtor and creditors, except in the case of related operations. In Reorganisation, after the Agreement is approved, there is no problem in implementing it. Before the approval, there are risks that set-off is considered as a preferential payment.

If there are no waivers, the liquidation of the debtor will be declared.

The shareholders maintain ownership of the debtor company during the term of the Agreement, unless a differing agreement is made.

Our legislation contemplates three types of Liquidation:

Volunteer: Requested by the Debtor

Voluntary liquidation will begin with the company making a liquidation presentation to the competent court of letters, which must include:

  • a list of assets;
  • a list of the goods legally excluded from the Liquidation;
  • a list of pending judgments;
  • debt status;
  • name, address and contact details of creditors, as well as the nature of their credits;
  • payroll of the workers; and
  • if the debtor has full accounting, their last balance.

A competent court will review the debtor's presentation and, if the requirements are fulfilled, dictate the resolution of liquidation once it receives, from the Superintendence of Insolvency and Renewal, the certificate of liquidation nomination. The Superintendence shall notify the three major creditors, those unrelated to the debtor, so that each may propose, in writing or by email, a titular liquidator and an alternate liquidator. When making the decision, all creditors will be considered equally.

Forced: Requested by a Creditor

Any creditor can demand the initiation of the Insolvency Settlement Procedure of a Debtor Company, appealing to any of the cases contemplated in the Law, these are:

  • if the debtor ceases to pay an obligation that is recorded in an executive title with the requesting creditor;
  • if there are two or more expired executive titles against the debtor, coming from various obligations, with at least two executions initiated, and not possessing sufficient assets to respond to the benefit due and its costs; and
  • when the debtor company or its administrators have left their offices or establishments without assigning an agent to comply with their obligations and answer new demands.

Once the request for forced liquidation has been submitted, a court will set a hearing where the debtor may, in writing or verbally, consign funds, smooth up, take advantage of the Reorganisation Procedure and oppose any demands.

Should the debtor neither appear, nor perform any of the other actions indicated, the liquidation resolution will be issued. Any opposition will trigger a Trial of Opposition.

Reflect: As Result of the Rejection of a Judicial Reorganisation Agreement or Losing the Trial against Forced Liquidation

Once the liquidation process begins, the creditors must be in attendance to verify their credits in order to establish themselves as recognised creditors, which will entitle them to receive administrative or regular payments and receive the dividends the liquidator distributes.

The creditors will agree on the form of sale of the debtor's assets, following the rules established in bankruptcy legislation.

A purchaser acquiring goods in a sale of assets will have a title that is "free and clear" of claims and liabilities asserted against the company.

In this process, secured and unsecured creditors participate equally, allowing, in certain cases, the secured creditors to execute their guarantees outside the process, but guaranteeing the payment of the first class.

It is not possible to effectuate pre-negotiated sales transactions following the commencement of a statutory procedure. However, creditors could agree on the direct sale of the debtor's assets to a third party that has made an offer.

A failure to observe the terms of an agreed or statutory plan can declare and act null and void.

If the creditors approve the continuing of business, new money generated will be paid to the creditors of this new operation with a super preference. If there is a balance of this new money, creditors will be paid in the order of preference.

There are no insolvency proceedings for liquidating a Corporate Group within our legislation.

Creditors will hold a creditors' meeting, during which all decisions will be made. Additionally, this creditors' meeting will elect a board.

A company's assets may only remain in use when creditors agree on the continuation of business as usual.

In the case of leased assets, the creditors must decide, at the first ordinary meeting of creditors, if they should continue to fulfil the contracts, exercise the purchase option or terminate them, which is an option within current bankruptcy legislation.

The foreign representative designated in a foreign proceeding, prior accreditation of his quality, can request the recognition of said proceeding before the competent Chilean courts.

From the recognition of a foreign proceeding, or even from its single request, the competent Court can:

  • adopt measures to suspend any action against the debtor; and
  • to entrust to the same representative or another person appointed by the court the administration to carry out all or part of the assets.

The foreign representative will also be entitled to file the insolvency revocation actions regulated by the Law.

The functions related to both the recognition and the co-ordination of foreign insolvency proceedings will be executed by the ordinary courts of justice and by the Insolvency Superintendence, and in terms of co-operation with foreign courts will also be accomplished by the insolvency administrators when it is required by the Superintendence.

The Insolvency Law adopts the Model Law on Cross-Border Insolvency of the United Nations Commission for International Commercial Law.

The cross-border insolvency proceeding occurs when the debtor has assets in more than one State, or if some of the debtor's creditors are not in the State where the insolvency proceeding is being processed.

This procedure will only have a practical application in the following cases:

  • a foreign court or representative requests assistance from the Chilean courts or other agencies involved in insolvency proceedings (Insolvency and Renewal Superintendence);
  • when assistance is requested in a foreign State concerning an insolvency proceeding which is processed under Chilean law;
  • when insolvency proceedings in Chile and abroad are processed simultaneously and concerning the same debtor; and
  • when any creditor or other foreign interested parties request the opening of an insolvency proceeding in Chile, following the Law.

The cross-border insolvency system establishes equal rights for both Chilean and foreign creditors, who will be subject to the order of priority of credits contained in the Civil Code. On the other hand, with respect to payments in parallel proceedings, it is established that if a creditor has received a partial payment in a procedure carried out in a foreign State, the same creditor will not receive a new payment for that same credit in a Chilean insolvency proceeding, while the other creditors of the same category do not receive their payment. Both issues reveal the interest of the legislator to protect the equality of creditors.

There are two key figures in Chilean bankruptcy law. The liquidator (liquidation procedures) and the seer (judicial reorganisation procedures). This does not apply in the cases of simplified reorganisation as this must be approved by the creditors before the court. In addition, once the Bankruptcy Reorganisation Agreement is approved, an auditor is appointed. Generally, this will be the same individual who was a seer in the process, even when there is no impediment to the appointment of a different person.

Regarding the seer and the liquidator, the law does not establish a rigid framework for their actions but rather indicates the purpose of the roles and the duties and/or functions that much be fulfilled. As a general rule, the liquidator assumes control of the debtor company while the seer fulfils a supervisory role over the debtor company. In both situations, lack of diligence is seen as an offence. In the case of the seer, the law indicates the main function is “to propitiate the agreements between the debtor and his creditors, facilitating the proposal and negotiation of the agreement”. The liquidator represents the interests of the creditors and the rights of the debtor company both judicially and extrajudicially, for the benefit of creditors.

The appointment of a seer or liquidator is made based on a list held by the Insolvency and Renewal Superintendence. In both cases, a series of requirements must be met, including a knowledge test and a guarantee of faithful performance of their duties.

For both roles, the nominations are made by the three largest creditors of the debtor. Creditors are notified by the Superintendence of Insolvency and Renewal through an email. Each creditor nominates the a primary choice and a substitute. In addition, the law regulates the different scenarios that may arise in the event that there will be no response from any of these creditors or if any have credits exceeding 50% of the total liability of the debtor.

Interaction between the designated official and the debtor company will vary depending on the officials role. The liquidator assumes the representation and administration of the company, therefore, the old administration will fulfil a transitional role, and be present to answer any queries the liquidator may have. The seer supervises the debtor company and authorises only certain acts, which could potentially worsen the creditors conditions. There is no preference regarding formal or informal communication, which may consist of recommendations, warnings or requests to ensure the proper development of the process.

As a general rule, the attorneys of the debtor company and the main creditors are actively involved, all in order to develop a process as expeditious and convenient for the parties as possible.

In the reorganisation processes, it is possible to find various advisors, such as accountants, financial advisors, lawyers, among others. We must point out that the Trustee (inspector) also has an important role as a controller of the process.

Lawyers with greater knowledge of the material work together with financial advisors and accountants to formulate a reorganisation proposal.

In the liquidation processes, there are fewer advisors. The liquidator will have accounting and financial advisors to inform the creditors of the viability of the business continuity or to begin the liquidation of the assets. The role of the lawyer is to protect the rights of the debtor and creditors, depending on who they represent.

In order to perform any of these consults, no authorisation is required. Only the payment must be registered in the accounting.

Only lawyers may represent debtors or creditors before the Courts of Justice.

While they owe responsibility to those who hire them, we must specify that the processes safeguard the interests of the creditors and, therefore, they are required to have a high standard of quality and transparency.

Law 20,720 regulates the possibility of arbitration, reorganisation or liquidation procedures. There are currently no cases in which it is mandatory to resort to a bankruptcy arbitration procedure.

There has been no mandatory bankruptcy arbitration procedure since Law 20,720 came into force.

There is no obligation to resort to a bankruptcy arbitration proceeding.

The pre insolvency agreements to arbitrate disputes could be applicable, but credits only could be charged in a insolvency or restructuring proceeding.

Law 20,720 establishes the requirements to voluntarily submit an insolvency or restructuring proceeding to arbitration.

An arbitrator will be appointed by the debtor company upon a request made to the civil courts. This request must be made with the support of the absolute majority of creditors.

Law 20,720 does not establish a regime of responsibility for the administration of companies in cases of insolvency. As such, the general liability regime that applies must be analysed. Examinations are made on a case-by-case basis, taking into account whether the directors have the opportunity to send a report to minimises damage, understanding that early communication of insolvency, without having entered an insolvency proceeding, could mean a worsening of the company's financial situation.

Besides civil liability, the directors of the company will be subject to the general liability regime as well as insolvency offenses established by Law 20,720.

There is no mechanism established to pursue such responsibility within Law 20,720, which does not mean that  shareholders cannot go against the directors, in accordance with the current legal regime of civil and criminal liability to which they are subject.

The figure of Chief Restructuring Officer is not used. In general, internal organisations adapt to the company's new scenario and staff changes may occur in key positions, if necessary.

In Chile, the concept of shadow directorship is not used.

It is necessary to distinguish the legal structure of the company. In people's companies, as limited partnerships, the partners, will normally not have responsibility. In the case of capitalist companies, as a corporation liability could be enforced within civil law.

Law 20,720 established the regulations that should be used to achieve the recomposition of the debtor's assets when the latter executes or celebrates acts or contracts that import the decrease of the asset, to the detriment of the creditors, or when a creditor executes any act or contract to unduly obtain a benefit, to the detriment of the creditors of the bankruptcy.

With respect to the acts executed or contracts signed by debtor companies, the Bankruptcy Law provides Bankruptcy Revocatory Actions, and makes a distinction between acts of objective revocability and acts of subjective revocability, highlighting for the former those which are theoretically harmful to the creditors, and highlighting for the latter those acts or contracts that, in general, can be revoked. Depending the kind of act, the look-back period could be one or two years.

Law 20,720 indicates acts or contracts that are revocable in objective terms, which can be summarised as follows:

  • all prepayment, however it took place. It is understood that the debtor company anticipates the payment when it discounts trade effects or invoices under its charge and when it waives the stipulated payment period in its favour;
  • any payment of overdue debts that is not executed in the manner stipulated in the convention. Payment in in the form of trade effects is equivalent to payment in money;
  • any mortgage, pledge or anticresis constituted on the debtor's assets to secure previously contracted obligations; and/or
  • any act or contract concluded free of charge, even if it is brought by a third party.

Also revocable all acts executed or contracts concluded by the Debtor Company with any person, within two years immediately prior to the start of a bankruptcy procedure of either reorganisation or liquidation, provided that adherence to the following is proven in court:

  • knowledge, of the contracting party, of the bad state of the debtor company's business; and/or
  • that the act or contract causes damage to, or alters the position of, the equality that creditors must have in the contest.

Revocatory actions may be exercised by both creditors and the liquidator. However, in the case of objective bankruptcy, revocation actions must be exercised by the liquidator on a mandatory basis.

In the same way, creditors may agree, in an Extraordinary Meeting, the hiring of a law firm for the exercise of revocation actions.

Valuations are not commonly used in insolvency proceedings beyond the internal evaluations performed by the company.

In insolvency reorganisation procedures, the debtor companies themselves carry out an internal valuation of the company to establish the company's payment capacity and its future projection to determine the viable mechanisms of payment of credits.

There is no jurisprudence relating to this.

Castañeda Abogados

Alcántara 271
piso 10
Las Condes

56 22 993 53

contacto@castaneda.cl www.castaneda.cl
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Law and Practice

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Castañeda Abogados is a boutique firm, founded in 2018, specialising in insolvency law. The firm has led highly complicated bankruptcy and business reorganisation procedures, providing a complete legal and financial advice and seeking to obtain personalised agreements that protects the interests of their clients, whether they are debtors or creditors. The team comprises of ten members, including four counsel professionals, four associates and two partners, who have participated in some of the most important insolvency procedures in Chile of the last 20 years, including companies as Isapre Masvida, CCAF La Araucana, La Polar, SuBus, PescaChile, Pescanova (España), Grupo Cantoblanco (España). In the last year, the firm has dealt with bankruptcy and financial restructuration of companies, including Clinica Mora Pavic, E-Money, TPI Chile, Astaldi Chile, Intersport, Minera El Toqui, Grupo Femoglas, Clinica del Maule, among others.

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