CHILE: An Introduction to Bankruptcy/Restructuring

Overview of the Insolvency and Restructuring Landscape in Chile: Legal Progress, Implementation Challenges and Development Opportunities

In recent years, insolvency and restructuring in Chile has undergone a process of consolidation, driven by economic, regulatory, and financial factors. While the country has a relatively modern legal framework compared to other jurisdictions in the region, the system still faces significant challenges, particularly regarding the financing of distressed companies.

From an economic perspective, international market volatility, inflationary pressures, and tighter credit conditions have heavily affected small and medium-sized Chilean enterprises, which make up the majority of the business sector. These conditions have intensified the need for effective legal mechanisms that enable the continuation of viable operations, helping to avoid the premature liquidation of assets and jobs.

As is the case in most insolvency systems around the world, liquidation is considered a last resort due to the resulting destruction of economic value, low recovery rates for creditors, and the loss of critical sources of employment.

In this context, the judicial restructuring procedure in Chile – regulated by the Reorganization and Liquidation Law for Companies and Individuals (Law No 20.720) – has positioned itself as a key tool for facilitating corporate restructuring. One of the most notable features of this process is the Financial Protection (PF) period, which grants the debtor temporary relief from enforcement actions, contract terminations, and asset seizures. This period begins with the court’s decision to initiate the proceedings, and may be extended up to 180 days with creditor approval.

During the PF period, Chilean law offers an exceptional opportunity for financing distressed companies by granting first-ranking legal priority to loans disbursed during this phase. This super-priority, established in Article 74 of Law No 20.720 and Article 2472 No 4 of the Civil Code, places these loans above all other claims – including taxes, labour debts, and even secured claims. The rationale is clear: to encourage capital inflows into struggling businesses by offering lenders a preferential position if the reorganisation fails and liquidation becomes necessary.

Unlike other jurisdictions, one advantage of this type of financing in Chile is that it only requires creditor approval if it exceeds 20% of the debtor’s liabilities, or if the lender is a related party – circumstances that must be validated by a court-appointed Trustee. In Chilean judicial reorganisations, the debtor remains in possession of its operations, while oversight is provided by the Trustee, who is appointed by the three largest creditors.

This feature is particularly relevant because no court authorisation is required, and if all formal requirements are met, the financing cannot be challenged by creditors within the proceedings. As a result, lenders enjoy strong protection under Chilean law.

However, in practice, the use of this tool is still emerging. New forms of financing – distinct from traditional banking – are gradually entering the restructuring landscape. Commercial banks are generally not the providers of this type of credit. According to Chilean regulatory standards, banks must provision more than 90% of the loans granted to companies undergoing restructuring, which imposes a significant burden on their financial statements. Consequently, this space has been increasingly occupied by private investment funds, which tend to be more flexible and have a higher risk appetite.

From a legislative standpoint, a 2023 amendment sought to reinforce the legal certainty of the priority granted to PF financing. The reform clarified that this privilege remains valid even if the reorganisation fails, whether due to plan rejection, non-compliance, or judicial annulment. This rule enhances the predictability of the system and makes it more attractive to potential lenders.

This system offers considerable opportunities for development. The emergence of specialised players in restructuring finance, the creation of dedicated investment vehicles, and the professionalisation of judicial procedures could represent a significant shift in the years to come. As the ecosystem becomes more familiar with the rules and advantages of PF financing, increased utilisation of this mechanism is expected – further strengthening the role of insolvency law as a tool for economic recovery and value preservation.

In summary, Chile has a solid legal framework to facilitate business restructuring through clear incentives for financing during critical phases. While its practical adoption remains relatively new, the system’s potential is substantial. The key will be to promote understanding of these mechanisms and expand the base of actors willing to invest in the recovery of viable companies.