Back to Latin-America Rankings

CHILE: An Introduction to Chile

CHILE: HOW IT IS OVERCOMING THE GLOBAL ECONOMIC CRISIS WITH ITS INSOLVENCY LAW

Chile is the only country in the world that has suffered three crises in less than six months: the one generated by the social outburst unleashed in October last year, the current stoppage of companies as a result of the health emergency, and the economic downturn currently affecting all the world's economies. This serious situation has been a cross-cutting reality that has affected large, medium-sized and small companies in different commercial and industrial industries indiscriminately. The Chilean insolvency law is now being put to the test, amidst the efforts to solve the economic problems of these companies.

Law No. 20.720, on the Reorganisation and Liquidation of Companies and Individuals, came into force in October 2014. As described by the Bankruptcy Commission for Chile's New Commercial Codification, this insolvency law "established modern rules for the economic and financial restructuring of viable companies that may be suffering liquidity problems, and set procedures for the liquidation of the assets owned by unviable companies, within a framework that seeks to protect employment and productive units, speeding up proceedings and lowering their costs, in order to increase creditor claim recovery."

The perverse incentives that prevented the debtor's timely disclosure of its insolvency for fear of bankruptcy stigmas were removed. This law provided tools for companies to agree on a restructuring with their creditors, establishing rules that protect the debtor while negotiations are being held, such as "bankruptcy financial protection," consisting of the suspension of collection or liquidation trials for 30 days upon commencement of the proceedings, a period that can be extended for up to 60 additional days, in agreement with the creditors. The continuity of the ailing company's provisioning of supplies and financing is allowed during this period, granting preferential payments to those who continue providing it with supplies or granting it operational loans. Creditors were protected through the company's legal intervention by an overseer elected by the majority creditors. The participation of secured creditors in the agreements with the debtor was established, without it implying the loss of their preferences, as was the case under the former bankruptcy law. The recovery of the value-added tax (VAT) and the deduction of the taxable net income as a necessary expense was allowed, charging them to the amounts in connection to which a debt cancellation is granted, thus acting as an incentive for the restructuring.

The new law instated an agile procedure for the liquidation of assets in cases in which the company is unviable, also establishing a free access technological platform (Bankruptcy Bulletin), publishing the actions taken in the corresponding proceedings and auctions of assets, reducing the expenses stemming from the former system and facilitating the access to information.

An innovative system was created for individuals to renegotiate their debts, in a free administrative procedure before the Insolvency and Restructuring Superintendence (SIR), and rules were established to liquidate their assets in an orderly manner. In this way, a different bankruptcy statute was created for this type of debtors, who were subject to the same regime as companies under the former bankruptcy law.

A new criminal insolvency regime was established to effectively punish those who deliberately provoke or aggravate insolvency, transferring to the Criminal Code the provisions that clearly address the unlawful behaviours, and setting exemplary punishments for economic offenders.

New labour provisions were established to protect workers, who may now collect their salaries and severance payments in a prompt manner and without incurring legal counsel costs, with their corresponding quitclaims serving as sufficient title for the collection of the sums owed to them. Additionally, they may immediately collect unemployment insurance, minimising the considerable damages that stem from losing their source of employment.

To overcome the serious economic problems currently faced by companies, it is essential that they choose to subject to a judicial restructuring instead of voluntarily requesting their own liquidation, because the former allows creditors to grant the debtor company new term and interest rate conditions for the payment of their debts, including a grace period that can extend up to one year, during which the payment of their credits cannot be enforced. The idea behind this is that, during that period, the company may calmly generate working capital in order to get back on its feet. The support of financial creditors and suppliers (who are duly aware that bankruptcy and liquidation scenarios are a poor way out) is crucial to achieve the foregoing.

Judicial restructuring of companies has increased during this crisis. However, the statistic that is crucial here is not the number of companies that are undergoing restructuring, but rather the level of liabilities that can be restructured. The debts held by important companies were restructured prior to the crisis, during the five years in which Law 20,720 has been in force. Although the number of cases does not seem particularly relevant (169 companies restructured during these five years), what is profoundly important is that the credits restructured during this period amounted to 1.769 billion dollars. This figure speaks for itself when we analyse the implementation of this law.

The scope of participants in the credit restructuring procedure (which is currently available only for natural persons) could be extended, in order for small businesses lacking the resources to pay for legal and financial advice to find in this insolvency law the solution to their economic troubles. For this purpose, the Insolvency and Restructuring Superintendence should provide economic insolvency advisers, free of charge, who could receive a fixed fee borne by the state, and be entrusted with the task of counselling these companies in order for them to reach a favourable payment agreement with their creditors, through a free procedure conducted before this insolvency oversight authority.

Author: Nelson Contador, Permanent Professor of Commercial Law in the School of Law of Universidad de Chile, Managing Partner at NELSON CONTADOR & CIA