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Although the current French and Spanish insolvency laws have no influence on Chilean law, Chile belongs to the civil law tradition that follows French and Spanish nineteenth century insolvency laws. This means that the current law has two origins: the original French Commercial Code, which regarded reorganisation with suspicion (only available in a liquidation procedure), and Spanish civil procedural laws, which permit pre-emptive reorganisation and reorganisation achieved in a liquidation proceeding. These traditions were merged in 1929 through Law No. 4,558. This was replaced by Law No. 18,175 of 1982, which was in turn replaced by the current Law No. 20,720 of 2013. The latter incorporated certain devices into Chilean law that are common in Western insolvency systems, namely the use of fresh money in the reorganisation proceedings, categorisation of debtors and creditors (though the categories are very limited), the consumer's insolvency proceeding, a form of automatic stay, and the introduction of the UNCITRAL Model Law on Cross-Border Insolvency.

Civil cases in Chile are dealt with using a digital platform ( There is also a special digital platform for serving judgements to the parties in insolvency proceedings (

It is beyond the scope of this chapter to explain all of the changes introduced in Law No. 20,720, but in our opinion this law requires a number of substantial amendments to be considered suitable.

The new law was enacted principally because of two findings in the World Bank's Doing Business 2009 report. The first was that Chilean proceedings took too long (an average of 4.5 years compared to 1.8 years in other OECD countries), and the second was that the outcome or proceeds of the average case were low compared to other countries (ie, below the average of 21 per cent). In fact, regarding the first point, most cases lasted less than a year (ie, liquidation and distribution of the proceeds to creditors) but were formally kept open for longer, mainly because of the time limits to claim the trustee liabilities. According to the former and current law, the trustee can be sued only after he or she has presented his or her final account, but the time limits apply from the actual breach, which means the trustee delays giving the account until the time limits have elapsed. The second finding was accurate as debtors in Chile normally wait too long to file for bankruptcy protection. One reason for this is that debtors do not regard this process as protection but as a threat of criminal prosecution. In addition, this process is considered to effectively end the debtor's commercial career, and there is a certain stigma attached because, following the Latin tradition, it is still believed that an insolvent must also be a fraudster.

Before explaining how insolvency proceedings work in Chile, it may be useful to describe the impact of Law No. 20,720. Before the new law was implemented, there were, on average, 176 liquidation cases and 33 reorganisation cases annually. However, the majority of the reorganisation cases were 'agreed' liquidation proceedings (ie, achieved through a reorganisation scheme). This is explained by the fact that while the old French Commercial Code was in use, a formal judicial resolution of insolvency or bankruptcy was needed before a prosecution for bankruptcy could be initiated. Without this, bankruptcy crimes were not prosecutable. Reorganisation was mainly a means of avoiding criminal prosecution. Therefore, before the current law was initiated in Chile, most of the formal bankruptcy proceedings were actually liquidations. Furthermore, the application for reorganisation often resulted in damage to the debtor's reputation; this discourages suppliers and clients from using the company, which effectively guarantees the end of the debtor's career. This is why, under the current system, it is more sensible for reorganisation to be carried out primarily by out-of-court arrangements with all or at least the main creditors.

Today there is a second reason for preferring a reorganisation: according to Law No. 20,720, the trustee (observer) appointed in restructuring proceedings is prohibited from being the trustee (liquidator) of a converted liquidation proceeding after the creditors' refusal of the debtor's plan, so the trustee promotes conventional liquidation among the parties of the reorganisation to be the appointed liquidator within that scheme, where no incompatibilities exist.

The current law attempts to address the weaknesses of the former laws by being more debtor-friendly. After the law was enacted, statistics changed considerably. We expected reorganisation to be chosen over liquidation, but the balance remains in favour of liquidation. From October 2014 until January 2017, there were 1,117 cases of business bankruptcy, of which only 9 per cent were reorganisations. However, liquidations more than doubled. In the first eight months of 2018 there were 892 liquidations and only 36 reorganisations. This is because the new law is an exception in comparative law, as all liabilities are automatically discharged when the liquidation proceedings are terminated. Medium-sized companies are most likely, on average, to become bankrupt because they are financed by banks or other financial institutions that normally require external guarantees from the owners of the company or even third parties. Debtors, by filing for liquidation, not only liquidate the entity but also release the external collateral or guarantees.

Another issue is that the success rate of approved reorganisation cases is low. This is largely owing to Chile's strict banking law, which obliges banks to make huge financial provisions for their stressed debt. This refers not only to the original credit, but also to any new loans. For this reason, banks are reluctant to accept further risk as this will entail further provisions.

For the reasons given above, it can be said that Chile does not have a good judicial reorganisation system. Generally, reorganisations continue to be done out of court, through arrangements with the relevant creditors (usually banks). Judicial reorganisation is regarded as a last resort, to be used when one of the main creditors is unlikely to support the out-of-court plan.

In Chile the term 'reorganisation agreement' does not have the same meaning as in the United States, the United Kingdom or any western European country. It is still the one established by the French Commercial Code after its 1838 amendment, which is simpler in that it is mainly a combination of an extension or forbearance agreement and debt cancellation. These agreements also entail other typical complementary clauses, such as constitution of a creditor's commission to control the administration, some covenants (usually dividend and assets sale restrictions, regular records and performance information, a controller trustee, etc) and the arbitration provisions. These arrangements only rarely contemplate real restructuring of the administration scheme, reduction of costs or expenses, changes in ownership, business plans, mergers, etc. However, they are frequently used to sell the company because they provide some protection to the purchaser, owing to the fact that they affect all the assets and bind all creditors – with the exception of preferred creditors that did not vote for the plan – regardless of whether they are known or unknown, in favour or against the plan. However, this protection is stronger under a liquidation proceeding, so liquidation is often used to sell or buy the debtor's assets as a whole.

The debtor is the only one that may initiate a reorganisation proceeding and the only one that may file a plan. Neither creditors nor third parties can propose a plan, although they make suggestions regarding the plan or some provisions to the debtor, but the debtor has the final word. The majorities needed to approve a plan are two-thirds of the number of creditors present at the creditors' meeting, which represent two-thirds of the total debt with voting rights. If the plan contemplates different categories of creditors (in Chile there are only two: common creditors; and creditors with some liens (mortgages or pledges), whether provided by the debtor or third parties), the same majorities are required within each group. If the plan contemplates discrimination among creditors of the same category (eg, different interest rates, different payment schedules, different payment proportions), it should also be approved by two-thirds of the creditors affected by the discrimination. Creditors with priority have the right to vote, but if they do so, they lose their priority. Normally they do not vote, which is a problem because it means they are not bound by the agreement. Creditors related to the debtor, whether companies or individuals, are not allowed to vote.

The agreed plan has a second stage of approval after the creditors' meeting, where the creditors may object to the agreement, usually because of procedural errors or in case of fraud. This stage, which is a very expedient proceeding, is named the 'approval of the agreement' by the court, in spite of the fact that it is merely recognition that the agreement has not been objected to in a timely manner or that any objections were rejected. It is beyond the court's jurisdiction to assess the agreement's viability or legality. The judge cannot declare the agreement void because of its contents. Furthermore, normally any objections do not postpone the plan's effectiveness or application, unless the objection is raised by creditors affected by the plan representing 30 per cent of the credit – not creditors – with voting rights.

There is also a simplified reorganisation, whereby the plan has already been agreed by the debtor and two or more non-related creditors representing three-quarters of the total liabilities, which is filed before a tribunal in order to attain court approval. There is no creditors' meeting. This proceeding, to the best of our knowledge, has not yet been tested.

Chilean law historically contemplated an automatic conversion of the restructuring procedure into a liquidation procedure if the plan was not agreed on or approved. The new law has made minor changes in this respect. The first is that the debtors representing at least 75 per cent of the debt may withdraw the plan with no consequences (less than 75 per cent results in automatic liquidation). The second is that the creditors' meeting that rejected the plan can allow the debtor to present a new plan with the approval of creditors representing two-thirds of the total debt. The judge can only convert the reorganisation into liquidation proceedings if the proposal is rejected or if the time to present the proposal expires.

Banks and insurance companies (except health insurance companies) have special reorganisation proceedings, which are conducted out of court. The plan should be endorsed by the respective public authorities and then voted on by the same majorities. This regulation came about after the 1982 financial crash that caused the majority of local banks to fail. The subsequent regulation of banks and insurance companies significantly improved their financial stability, with the effect that current restructuring tools have not been used in these sectors.

It is also important to stress that in Chile the insolvency of large corporations is rarely processed through the formal bankruptcy system. It is normally handled by an out-of-court informal rescue similar to the 'London Approach', as overall the arrangements are run and led by banks. The formal legal proceedings, therefore, are used by companies with less than US$100 million in liabilities. In the past three decades there have only been four cases handled in court with liabilities above this level, of which one was a voluntary liquidation.

The current law is ineffective in terms of its structure, wording and also in its foundations. In some respects, it can be said to be fundamentally flawed. First, its structure is overwhelmingly large (almost 400 sections, compared to 240 sections in the previous version); second, it contains many loopholes that unfortunately have not been addressed by case law; and third, it is inspired by the old doctrine that considers company salvation to be of paramount importance, protecting debtors that are not viable without sensibly striking the balance between liquidation and reorganisation. One of the outstanding flaws is the large number of hearings envisaged to resolve almost any conflict, and individual hearings that are supposed to resolve multiple actions. Thus, principles of neutrality and written (rather than oral) procedures are unfortunately ignored. The list of defects is long, and the commonly held opinion is that the law has not fulfilled its promise, to the extent that many regret the loss of the former law. This is an opinion we do not share because the old law was also inefficient, but it is certainly the case that the new law has not been a breakthrough.

Insolvency and bankruptcy law forms only part of the factors that affect the credit market. Good bankruptcy law should help distressed companies but not protect unviable debtors, as this tends to result in an increase in the cost of credit, which harms other companies. The ideology underpinning any bankruptcy law needs to be clear in this respect. In Chile, the flaws in the 2013 law have had a negative effect both on the availability and cost of new credit. There are already moves to correct the more obvious problems but, in our opinion, a new law will be introduced at some point. It is not easy to construct an efficient and effective bankruptcy law – there are technical and political matters that need to be considered. For these reasons it is likely that the introduction of a new bankruptcy law will take a significant period of time.

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