CHILE: An Introduction to Bankruptcy/Restructuring

CHILE: PROPOSES TO AMEND ITS INSOLVENCY LAW TO ADDRESS THE ECONOMIC CRISIS DERIVED FROM COVID.

Legal rules of any nature have a reactive essence, i.e. they attempt to give normative treatment to a certain phenomenon of reality, which has been considered by the legislature as a necessary object of systemic regulation.

In 2014 Chile required a new bankruptcy legislation, which prioritised the continuity of companies and employment in order to join the international vanguard of a more dynamic and competitive economy. For this reason, the government at the time considered it appropriate and pertinent to take on the challenging task of providing our country with a new insolvency regulation, creating new, efficient procedures adjusted to national and international needs.

The law on Reorganisation and Liquidation of Assets of Companies and Individuals came into force in October 2014. Among its objectives, it had to establish modern standards for the economic and financial reorganisation of viable companies that may have liquidity problems.

During the five years that this law has been in effect, Chile has been able to restructure debts of important companies totalling USD1,769 million. This figure speaks for itself in an analysis of the operation of this law.

However, in these last two years, the Chilean economy has been affected by various crises: the paralysis of companies as a result of the social outbreak in October 2019, involving looting of companies and stand-still of commercial activity, followed by the global economic crisis, derived from the health emergency as a result of COVID-19.

In addition, this latest crisis is characterised by being transversal, indiscriminately affecting large, medium and small companies of different commercial or industrial sectors worldwide.

The practical application in the five years of the new insolvency law, added to the two crises that Chile has had to endure, has tested this law. The government considered it necessary to make some adjustments to contribute - with other economic measures - to overcome the economic crisis, which has been very complex.

At the end of 2019, the legislative process began in the Chilean Congress, with a bill to amend Law No. 20.720. - on Reorganisation and Liquidation of Companies and Individuals (Bulletin No. 13.802-03), which was submitted by the Government to the Chamber of Deputies as the first legislative process. The purpose of this amendment, which is now before the Senate as a second stage, was to modernise the insolvency procedures in order to make it easier for small and medium-sized companies (SMEs) to open reorganisation proceedings more quickly, among other matters.

In Chile, 51.8% of companies are SMEs and generate many jobs. Their workers represent 60% of the country's labour force. Medium-sized companies are those with between 50 and 200 workers and annual sales of between USD95,000 and USD4 million. Small companies are those with between 10 and 49 workers and annual sales of less than USD1 million. SMEs are heterogeneous and include different productive areas. They have lower costs associated with investment and can coexist in the same market creating similar products.

Since SMEs are more vulnerable than large companies and are more exposed to economic crises, this amendment to the insolvency law proposes improvements to the procedures whereby the reorganisation of debts, or the voluntary liquidation of their assets, will be more expeditious and less costly, thus limiting their barrier to entry into these processes.

Regarding the reorganisation proceedings, the information that must be provided about the workers is regulated for the protection of their labour credits. The term of the Bankruptcy Financial Protection (Stay Period) is increased to 40 days and for the submission of credits to 15 days. Loans are encouraged during the Bankruptcy Financial Protection, establishing that preference will be given in any circumstance that results in the issuance of the liquidation resolution. The voting of creditors is enabled by means of a presentation to the court.

With respect to the liquidation procedures, the information on labour credits is also regulated, for their protection. Time periods are shortened by recasting the Constitutive Creditors' Meeting, with the determination of the credits with the right to vote in the Creditors' Meetings. Special credits are excluded from the discharge, such as alimony, indemnifications derived from the commission of crimes or quasi-delicts and those fixed by the court. In the latter case, when the court determines that the debtor acted in bad faith, the discharge will not take place or, alternatively, only certain balances of debts will be declared extinguished. Finally, the concept of debtor company is modified, eliminating the reference to those natural persons who issue fee slips, so that they may have access to the debtor's renegotiation procedure.

These amendments are extremely necessary to overcome certain shortcomings that practice has shown in the current Insolvency Law, and urgent to provide more tools oriented to the new economic needs of the country, and thus achieve the objective of the Law on Reorganisation and Liquidation of Assets of Companies and Individuals. As stated in the message of President Sebastian Piñera Echeñique dated May 15, 2012 that Chile be considered "an even more serious, thorough and reliable country".

Nelson Contador Rosales
Professor of Commercial Law U. de Chile

Senior Partner of NELSON CONTADOR & CIA.