CHILE: An Introduction to Bankruptcy/Restructuring

LOANS GRANTED DURING INSOLVENCY FINANCIAL PROTECTION

Since the recent entry into force of the Insolvency Law 20.720 (the "Insolvency Law"), the loans granted to a Debtor Company during the financial protection period—that is, the period between 30 and 60 business days during which the Judicial Reorganisation Insolvency Proceeding is being processed—have been regulated in Chile, similar to the DIP Financing regulated in Chapter 11 of the United States Bankruptcy Code. This possibility of granting loans to companies that request the opening of a Judicial Reorganisation Bankruptcy Proceeding has been considered with a special priority in their payment.

In this regard, the Insolvency Law establishes a specific regulation for what it calls "Operating Loans," expressly stating that the Debtor Company may acquire loans to finance its operations, provided that these do not exceed 20% of its liabilities. If the Debtor Company requires more resources that imply exceeding the threshold of 20% of its liabilities, they may be granted as long as they have the authorisation of the creditors representing more than 50% of the Debtor's liabilities.

As is evident, the investor who decides to grant a loan under insolvency financial protection must have a certain degree of security in view of the economic situation of the Debtor Company. The Insolvency Law, foreseeing this situation, expressly provides that those credits that are contracted during the insolvency financial protection will be paid on the dates originally agreed between the parties, provided that this implies a financing of the Debtor's operations, a qualification that must be accredited by the Insolvency Overseer or Trustee and will not be impaired by the Reorganisation Agreement.

Additionally, the Insolvency Law provides these claims with a super seniority if the Company goes into Bankruptcy Liquidation. A contingency that may occur in the Judicial Reorganisation Proceedings is that the creditors reject the proposed Agreement and, consequently, the Resolution of Liquidation of the Debtor Company is issued.

In this situation, the Insolvency Law states that if the agreement is not accepted and, consequently, the resolution of liquidation of the Debtor Company is issued, these loans will be paid as super priority. The protection of this debt is such that the Insolvency Law grants them a preference of better right than even those credits of labour origin that correspond to workers, or those tax credits or those secured by pledge or mortgage.

The relevant issue is that it seems that the Insolvency Law provides for the applicability of the legal preference to loans only in those cases in which the Judicial Reorganisation results in a reflective Liquidation. That is to say, the legal assumption to apply the preference to loans would be the one in which in the Creditors' Deliberative Meeting of the Judicial Reorganisation, the legal quorum of approval is not reached and consequently the creditors reject the Debtor's Reorganisation Agreement.

The question we should validly ask ourselves is the following: what happens in those cases in which a Judicial Reorganisation becomes a Bankruptcy Liquidation, for any other reason?

The Insolvency Law provides that these credits will become super priority only in the event that the Agreement is not executed and, consequently, the Resolution of Liquidation of the Debtor Company is issued, but not in other diverse cases in which the Liquidation may occur prior to the effective repayment of the financing in insolvency financial protection.

The literal wording of the Insolvency Law does not leave much room for interpretation since it limits the applicability of the legal preference only in those cases in which the Reorganisation Agreement is rejected due to the failure to obtain the legal quorum. In view of the above, an amendment to the current Insolvency Law is currently in the legislative process, which extends the super preference of loans granted under insolvency financial protection to other hypotheses of insolvency liquidation of the debtor company.

Nelson Contador.

Senior Partner at Nelson Contador & Compañía.