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Chile

Last Verified on Thursday 9th January 2020

    Actions prior to a formal proceeding

    • Chile

      The directors, shareholders or officials of a company in insolvency must act with great responsibility towards their creditors to attain the true information on their financial situation.

      In the case of companies that are regulated by the Commission for the Financial Market, they must inform this entity of any financial problem affecting them.

      Directors also have the obligation to inform to stockholders of any financial difficulties of the company.

      Last verified on Thursday 9th January 2020

    • Chile

      Before starting insolvency proceedings, all creditors have the possibility of exercising the collection actions arising from their securities. However, once the respective bankruptcy procedure has been initiated, these actions will be suspended because the creditors must attend this process.

      Last verified on Thursday 9th January 2020

    • Chile

      Prior to the start of a bankruptcy proceeding, secured creditors may exercise all the actions that emanate from their securities.

      In the case of a judicial reorganisation process, they may only exercise such actions if they do not attend the agreement meeting or express their intention not to vote.

      In the liquidation process, the board of creditors will determine the minimum price, and the secured creditor takes preference in the payment of credit.

      Last verified on Thursday 9th January 2020

  • Formal proceedings

    • Chile

      Chilean law considers two types of insolvency proceedings. First, there is a restructuration proceeding, an exclusive option for the debtor, which aims to ensure the continuity of the business by renegotiating its payment structure, either establishing the same terms for all creditors or determining conditions based on the nature of the credit and its utility to the debtor. Second, the law considers the liquidation proceedings as such, which can be requested by the debtor or any creditor, supposedly in this last case one of the instances considered by the law is fulfilled. The insolvency proceeding aims to liquidate the debtor's assets in the most speedy and efficient manner to ensure quick payment of credits and to allow the debtor to start up new initiatives. The law also considers these two options for individuals, with some minor differences in the name of the reorganisation proceeding (calling it renegotiation for individuals). 

      Last verified on Thursday 9th January 2020

    • Chile

      Pursuant to the Insolvency Law, neither municipalities or states (called regions, an administrative separation without independent administration from the central government) can be subject to an insolvency proceeding as its terms and definitions limit the scope of the law to natural or private legal persons. Despite this, Chilean law gives the central government the possibility of participating in the ownership of legal persons as any other business, corporation or individual, without any change in market conditions or legal framework in which the state-owned entity must operate, including its subjection to insolvency proceedings of any type. 

      Last verified on Thursday 9th January 2020

    • Chile

      In Chile, under the new Insolvency Law in force since 2014, there is no obligation for a company to start an insolvency procedure of any kind. In the case of voluntary proceedings, the company may start a reorganisation or liquidation procedure. In the first case, this option is exclusive of the debtor as both a direct action and as a defence against a liquidation request from a creditor. In both cases, the law considers these options as an exclusive right of the debtor and, as such, subjects to its exercise without any requirement beyond formal ones intended to display the debtor's financial situation. Saying that, it should be noted that courts tend to make more substantial reviews than the mere examination of the information being provided, even to the point of making a valuation of the company's real financial state. In the case of forced insolvency procedures, the only option available to creditors is a request for the debtor's liquidation, which can be made provided the debtor is in one of three situations: the debtor has ceased payment of an obligation on a creditor to register an enforceable title; the debtor has ceased payment of two or more obligations registered in different enforceable titles; or the debtor or its administrator can’t be found, having closed their offices without leaving a representative. To start a forced liquidation procedure a creditor must provide a bond of 100 Unidades de Fomento, a unit of account in Chilean pesos automatically adjusted for inflation, to cover the first expenses of the procedure.

      Last verified on Thursday 9th January 2020

    • Chile

      In the case of a reorganisation, as the company keeps its administration structure and ownership, there should not be any major implications for its subsidiaries or affiliates provided there isn’t a collateral share structure. Even though the risk of affecting the operations of subsidiaries or affiliates is minimal, the business conglomerate could take measures to arrange the assets of the company in a manner that ensures the continuity of other branches or subsidiaries, at the same time maintaining any assets that sustain the company’s projections by an organised corporate restructurisation. In the case of a liquidation proceeding, the scenario is a little different, as all participation of the debtor in other companies must be considered as assets subject to liquidation to pay creditors. In any case, any insolvency proceeding will always be of a single juridical person, as the law does not allow for the holding of a proceeding that groups entities owned by the same person or corporation.

      Last verified on Thursday 9th January 2020

    • Chile

      The court’s determination that accepts the request must be published in the bankruptcy bulletin, a web page set up for this purpose by the law. At the same time, the first hearing in which the court hears any allegations made against one or more creditors or the conditions in which they were verified is the process to establish every creditor's right to vote. At the same time, the hearing to vote on the debtor proposal by the creditors, or to decide the conditions of liquidation, is fixed as of the publication of the resolution, as the term is set by the law. Once the process has started, creditors can be in one of two positions: their credit was informed by the company or their credit was not informed. In the latter case, creditors can verify their credit in the process by giving enough evidence of the credit’s existence and amount adduced by them, a verification that will be considered by the court as true if no participant challenges it.

      Last verified on Thursday 9th January 2020

    • Chile

      All contingent credits should be verified conditionally in the proceeding, on the understanding that the verification does not allow them to vote in the process approving the debtor’s proposal. In the case of a liquidation, the fulfilment of a contingent credit may only be requested once the credit becomes enforceable. Inter-company credits have a different treatment depending upon the proceeding. In reorganisations, all intercompany credit payments are postponed until all credits with non-related companies or individuals have been fulfilled. In the case of liquidation proceedings, the inter-company or affiliate claims concur on the same terms as all other creditors in the process.

      Last verified on Thursday 9th January 2020

    • Chile

      In insolvency proceedings, the judicial resolution produces an immediate termination of the current administration to the court officer nominated, pending its ratification by the first creditors' meeting, in the presence of the judge on the case. In the case of reorganisation proceedings, the court resolution produces a “financial protection” phase from the resolution to the call for a hearing to pronounce on the debtor's proposal. This protection assures the debtor that no liquidation proceeding will be initiated in the intermediate time, all contracts subscribed to by the debtor will keep their validity and payment conditions and all public records participating in public tenders will remain the same provided the debtor is up to date with its records obligations. In addition, the law expressly states that no contract can be terminated unilaterally invoking as a cause the court’s reorganisation resolution.

      Last verified on Thursday 9th January 2020

    • Chile

      The law considers two situations in which transactions prior to the insolvency proceeding can be challenged. First, any transaction that took place in the year before the insolvency resolution can be challenged and revoked if the operation caused any detriment to creditors. Second, any transaction in the two years prior to the insolvency resolution can be challenged, in which case the challenger will have to prove that the act caused detriment to the creditors and that the third party knew of the bad state of the debtor’s business. This second case, therefore, carries the burden of proving foreign intent. Even though there are recorded cases of these actions, it is not the general rule in insolvency proceedings.

      Last verified on Thursday 9th January 2020

    • Chile

      The only secured creditors recognised by law are those who have either a mortgage or securities. Both will allow the creditor to obtain realisation of the product before any other creditors within the liquidation process, with the only exception being debts to employees or to the government for taxes. In the case of reorganisations, the debtor must identify whether its assets are essential to the business and, based on this, secured creditors will have a chance to execute the collateral independently, permissible in all cases in which the collateral has not been classified by the debtor as essential to the continuity of the business. However, when the asset is not essential, the creditor will have the power to execute the collateral separately from the proceeding, and will be paid from the product of the operation.

      Last verified on Thursday 9th January 2020

    • Chile

      All unsecured creditors meet in any insolvency proceeding, with voting rights in the process proportionate to their credit. Equity holders do not participate in the process given that their “credits” consist in their contribution to society, “credit” that can only being demanded at the company's dissolution, which is only verified at the termination of the liquidation if there are credits that could not be paid by the debtor’s assets.

      Last verified on Thursday 9th January 2020

    • Chile

      First, any debt with current or retired employees enjoys a preference against other debts up to a certain amount. In the case of employees who keep their contracts, a reorganisation procedure does not affect them beyond the measures that the debtor itself could adopt to ensure continuity of the business. In the case of liquidation proceedings, the court officer that takes control of the debtor has six days to terminate all labour contracts, notwithstanding the fact that employees needed to maintain the operation of the company while the court officer determines pending income or to avoid any other major damage to the company's property could be rehired.

      Last verified on Thursday 9th January 2020

    • Chile

      The insolvency law does not consider any special consequence for directors of a company in an insolvency procedure, notwithstanding, that corporate law establishes a sanction in regard to directors of companies in liquidation proceedings, prohibiting them from participating as directors of any other company within a year of the liquidation. Also, it is possible for directors to be subjects of criminal responsibility as regards their administration that led to the company's insolvency.

      Last verified on Thursday 9th January 2020

    • Chile

      The law establishes the preference of tax and labour claims above all; labour claims are limited to a specified amount. The excess beyond the preferential tax and labour claims is treated as an unsecured credit, in the same way as other unsecured credits. In addition, all secured creditors will have preference in respect of their credits up to the amount needed to realise their collateral, with the excess beyond the realisation of the collateral treated in the same manner as other unsecured credits.

      Lastly, the law considers a special credit with a preference over any other in respect of the credit given to the debtor once the court resolution has started the process and is intended to finance the company’s operations in the process.

      Last verified on Thursday 9th January 2020

    • Chile

      A reorganisation procedure is subject to two quorums for approval. First, it requires the approval of 67 per cent of the passive creditors with voting rights. This is all creditors that have verified in the process or that have concurred with the information on their credits provided by the company, and it also requires the approve of two-thirds of the creditors in the hearing regardlesss of how many verified or concur. Secured creditors vote in a different class that groups them under the same quorum requirements. Once the agreement has been approved, it is binding on all creditors regardless of their role in the voting or assistance. 

      Even though there is no minimum requirement for the content in an agreement, creditors tend to consider a period without payment of any obligation to allow the company to rebuild its working capital with a back payment term that varies in length and conditions. It is not usual for reorganisation plans to include a condonation of part of their debts.

      Last verified on Thursday 9th January 2020

    • Chile

      The trading of credits during reorganisations proceedings is allowed. The only limitation to which creditors are subject is that the cessation of any credit in the 30 days before the court’s resolution accepting the debtor's request will be excluded from the roster of voting creditors, applying the same prohibition once the proceeding has started. To avoid this, it is usual for creditors to buy others’ credits, which does not effect in any way the credit, the payment or the rights that are born from that credit in a reorganisation proceeding. 

      Last verified on Thursday 9th January 2020

    • Chile

      In both cases of insolvency proceedings, the court names acourt official baesd on the vote of the relevant creditors, depending on the proceeding in question. For reorganisations, the court must name a court official who was voted for by the three largest creditors, who in turn can only vote from a list of people previously qualified for the role of veedor (a “debtor company observer”). The debtor keeps the administration of the company under the direct supervision of the observer, who must authorise all expenses made by the company between the request and the creditors' approval of the reorganisation. Common practice for all reorganisations proceedings is to create a creditors' committee once the reorganisation has been approved. The committee's main job is the supervision of compliance by the debtor of the reorganisation plan.

      For liquidation proceedings, the biggest difference is that the controllers lose control of the company to the liquidator, a court official named by the creditors from a list composed of different persons as veedores to avoid any possible conflict of interest. In these cases, is it also common practice for creditors to set up committees in charge of supervising the liquidation of the debtor's assets.

      Last verified on Thursday 9th January 2020

    • Chile

      The law considers the possibility of obtaining DIP financing in reorganisations, only in the time between the court’s decision of accepting the debtors request and the creditors meeting call to vote the propose agreement of the debtor. This new credit's purpose is to maintain the company’s normal operations or ensure their future transactions, a motive that has to be approve by the court official observer. If all of the prerequisites are ok, then the credit will have a super preference, preferring any other credit, including employees, taxes or credit guaranteed by a real state of asset of the debtor. Even though it is an option available to any debtor, its use it is not very common as creditors then avoid increasing their risk in the operation.

      Last verified on Thursday 9th January 2020

    • Chile

      The Concursal Law prohibits any compensation that has not previously been handled by the Ministry of Law, among the reciprocal obligations of the debtor and creditors, except for related obligations derived from the same contract or the same negotiation, even if they are required in different terms.

      If some type of compensation is needed, the court will decide if it is applicable under the Bankruptcy Law.

      In terms of expenses, creditors do not recover expenses for participating in the process. What they can obtain is a certificate that allows them to register the uncollectibility of their credit.

      Last verified on Thursday 9th January 2020

    • Chile

      At the end of an insolvency (liquidation) procedure, the court will issue a resolution that terminates it, and will also declare the debtor’s rehabilitation and the termination of all credits that have not been paid with the debtor's assets.

      Last verified on Thursday 9th January 2020

    • Chile

      The reorganisation process has a specific duration in the Law. The reorganisation resolution sets the period of "bankruptcy financial protection", which lasts 30 days. Notwithstanding the foregoing, the debtor may request the extension of bankruptcy financial protection for a period of 30 days if it has the support of the creditors holding 30 per cent of the liability, and for 60 days if it has the support of 50 per cent of the creditors.

      Last verified on Thursday 9th January 2020

    • Chile

      There is an extrajudicial procedure called the simplified reorganisation agreement. The approval of this type of agreement requires the support of 75 per cent of the total creditors of the company, unlike the judicial reorganisation process, which requires 60 per cent of creditors who can vote to enforce their rights in the process.

      These types of processes are rarely used in Chile, given the difficulty of approval. We must specify that once the debtors and the creditors have signed them, these agreements also require the approval of the court.

      Last verified on Thursday 9th January 2020

  • Additional considerations

    • Chile

      The current Bankruptcy Law contemplates cross-border insolvency, which allows the recognition of foreign bankruptcy proceedings in the country. Therefore, it is possible to recognise both a reorganisation procedure and a liquidation procedure in Chile, through a recognition ruling by a court.

      Last verified on Thursday 9th January 2020

    • Chile

      Currently, the number of companies that decide to reorganise has increased, which will depend on various factors, such as the viability of the company, the type of debt, the composition of the liability, etc.

      Last verified on Thursday 9th January 2020

    • Chile

      Judicial reorganisation agreements can be challenged by the creditors, which means invoking some of the causes that are specifically indicated in the law.

      For a challenge to suspend the entry into force of a reorganisation agreement, it must be challenged by the creditors of a certain class or category, representing as a whole at least 30 per cent of the voting liability of their respective class or category.

      Last verified on Thursday 9th January 2020

    • Chile

      Our market is constantly exposed to the volatility of foreign credit markets, which definitely influences the number of companies that are reorganising or asking for liquidation.

      Our legislation is relatively new, as it came into force in 2014, so there is no background to support the possibility of modifications.

      Last verified on Thursday 9th January 2020

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