CHILE: An Introduction to Bankruptcy/Restructuring

Main Aspects of the Reform of the New Bankruptcy Law in Chile

October of this year marks the 10th anniversary of the entry into force of Law No 20,720 on Reorganization and Liquidation of Companies and Individuals (“Bankruptcy Law”), which replaced the regime that prevailed under Law No 18,175 on Bankruptcy of 1982 – and its amendments – which was motivated by:

• the substantial increase in the number and duration of bankruptcy proceedings;
• the economic crisis that the country was going through;
• the need to increase the percentage of recovery of credits; and
• the costs associated with the processing of the proceedings,

among other aspects that led to its enactment.

Law No 20,720 came as a response to those notorious deficiencies and of almost unanimous consideration in the legal forum with respect to the procedures contemplated in the old legislation, establishing, on the other hand, a novel bankruptcy system, efficient and adjusted to the current needs of the country, in order to be an effective mechanism to solve the scenarios and problems of insolvency of companies and individuals.

Thus, among other aspects, the Insolvency Law overturned the processes that existed previously, transforming the Bankruptcy (“quiebras”) and Judicial Agreements (“Convenios Judiciales”) into the procedures of Insolvency Liquidation (“Liquidación Concursal”) and Judicial Reorganization (“Reorganización Judicial”) of the Debtor Company that apply today in Chile, to which are added those special procedures that apply to individuals, and the regulation of cross-border insolvency that responds to the needs of the globalised world.

Since the publication of Law No 20,720 on 9 January 2014, more than 300 Judicial Reorganization proceedings have been processed in Chile, with approximately 64% of them having been approved, representing restructured liabilities of approximately USD4.859 billion. By way of example, the total amount of loans restructured under the Judicial Reorganizations approved in Chile is equivalent to 1.5% of the national GDP and the preservation of more than 45,000 jobs. However, in order to broaden access to the bankruptcy institutional framework and increase the speed of its procedures, Law No 20,720 was subject to an amendment that could be considered one of the most relevant in its ten years of validity.

On 11 August 2023, Law No 21,563 came into force, which reformed and modernised the procedures regulated by the Bankruptcy Law, introducing several formal and substantive changes and creating new procedures for micro and small enterprises (“Bankruptcy Reform”). Among the reforms introduced by Law No 21,563, we will mention those that respond to the need to broaden access to the bankruptcy system and reduce the duration of proceedings, as well as those modifications that constitute incentives to increase the probability of success in existing proceedings.

First, within the amendments to the Judicial Reorganization, the duration of the bankruptcy financial protection period was extended from 30 days to a baseline extension of 60 days, without prejudice to any extensions that may be requested. The aforementioned modification is not trivial since the debtor company will have more time to negotiate with its creditors before the Deliberative Meeting, being under the protection of the effects of the financial protection for a longer period of time.

In the same procedure, a single period of 15 days was established for creditors to prove their legal capacity in the Judicial Reorganization, or for creditors to file their claims if they have not been included in the debtor company’s certificate of debts. In the area of Liquidation, the Bankruptcy Reform expanded the list of information required for a debtor company to request its voluntary liquidation, in order to fully reflect the financial situation of the company and the reasons that led it to make this decision.

Secondly, Law No 21,563 introduced changes in the financing of companies under Judicial Reorganization, reinforcing the payment preferences for the investor that injects fresh resources during the bankruptcy financial protection.

Thus, the Bankruptcy Law allows the debtor company to acquire loans during the bankruptcy financial protection period to finance its operations, in compliance with the legal parameters. In this context, the payment preference granted to the investor was reinforced by the Bankruptcy Reform, since, if the debtor company goes into liquidation for any reason, the investor’s credit will be paid with the preference established in Article 2472 No 4 of the Civil Code; ie, prior to the labour payments.

As can be seen, the change is not minor, since, prior to the Bankruptcy Reform, the investor benefited from the referred preference only in the case of not obtaining the approval and subscription of the Bankruptcy Agreement, in circumstances in which there are several other hypotheses in which a company in Judicial Reorganization may fall into liquidation. Thus, this amendment seeks to reinforce and encourage financing in bankruptcy financial protection, understood as a key factor for the operational continuity of companies, and also constitutes an approach to the DIP (“Debtor-in-Possession”) or DIP financing system that prevails in US legislation.

Finally, the Bankruptcy Reform established a new procedure called “Simplified Reorganization”, which is applicable to companies that qualify as “micro or small companies”.

In order to determine whether a company qualifies as a micro or small business, the Bankruptcy Reform referred to other legal bodies which establish that:

• a micro enterprise is one that has between 1 to 9 employees or an annual revenue of not more than UF2,400; and
• on the other hand, a small company is one that has between 10 to 49 employees or an annual income of more than UF2,400 and that does not exceed UF25,000.

Well, the Simplified Reorganization allows companies of smaller sizes or revenues to have access to a lower cost procedure, with a shorter procedure and in line with their financial needs. Thus, for example, we find a financial protection period of 40 days – as opposed to the 60 days that apply to the Judicial Reorganization – which in itself allows the company’s fate to be settled more quickly and reduces the administrative costs associated with the process.

In addition, the Simplified Reorganization does not contemplate – in an obligatory manner – the holding of a Deliberative Meeting, since the creditors may vote on the settlement proposal by means of a judicial document, thus generating a more expeditious and flexible procedure for the micro and small company.