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This article is aimed at studying and analysing the changes made in Chile’s restructuring proceedings with Law No. 20,720, which replaced the former bankruptcy procedure of Law No. 18,175 in 2014. A general comment is made about Law No. 20,720 and its procedures, with special emphasis on the main innovations it includes in the restructuring sphere. The article also mentions some Chilean cases, as well as the bill that is currently being discussed in the Chilean Congress, which seeks to amend and improve Law No. 20,720. Finally, we make comments on certain aspects that need further improvement in the Chilean system.
- Bankruptcy and reorganisation of debtor companies
- Changes introduced by Law No. 20,720
- Review of the reorganisation proceedings
- Reform of the current law
Referenced in this article
- Law No. 20,720
- Law No. 18,175
- Case C-1659-2022 from the 17th Civil Court of Santiago
- Case C-1661-2022 from the 17th Civil Court of Santiago
- Case C-3270-2022 from the 17th Civil Court of Santiago
- Case 28256-2018 from the Supreme Court of Chile
History of Law No. 20.720
Law No. 18,175 was in force in Chile until 2013 and its main objective was to promote the payment of companies’ debts by liquidating the bankrupt’s assets. However, there was a shift of paradigm in 2014 with the enactment of Law No. 20,720 (the Law), which obeys a series of factors.
First, the scarce use of the former bankruptcy system reflected its inefficiency. The former Bankruptcy Law was so unattractive for debtors that only an average of 155 companies went officially bankrupt every year, while about 2,000 companies solved their situation informally. That is, only 9 per cent of all companies going through insolvency applied for bankruptcy, although all of them could have resorted to it. This was alarming, even compared to other Latin American countries and the Organisation for Economic Co-operation and Development.
Second, proceedings under Law No. 18,175 were usually time-consuming and expensive. A common bankruptcy procedure lasted 3.2 years on average, compared to 1.7 years in developed countries and 2.9 years in other countries in the region. This posed an issue because such a length of time could mean a debtor had to disburse up to 15 per cent of its assets. In addition, the probability that the company going bankrupt would reorganise afterwards was very low. And the recovery rate reached only 30 per cent, compared to 70 per cent in developed countries and 36 per cent for Chile’s Latin American neighbours.
With these challenges in mind, Chile adopted a new paradigm with respect to bankruptcy proceedings, which aimed at being a motor for the economy, in accordance with international standards:
[We see Law 20.720] as a tool for economic growth, business development, promotion or stimulation of entrepreneurship and as a mechanism for the elimination of legal barriers to entrepreneurship.
The objectives pursued by the Chilean legislative body when dictating the Law can be summarised as follows:
- the several interests of the stakeholders: the state’s objectives on the one hand, enabling the effective reorganisation of viable companies, and the provision of legal tools on the other, in order to allow companies to overcome the temporary difficulties they may face; and
- enabling the fast liquidation of non-viable businesses, thereby stimulating the resurgence of entrepreneurs through new initiatives.
Thus, the Law provides elements to either replace or modernise the outdated roles and institutions from the former Bankruptcy Law, namely, the roles of the insolvency examiner and the insolvency trustee, the creditors’ committee and the insolvency and entrepreneurship agency. All of these are now defined in section 2 of the Law, which outlines the most important terms used in this new Law. However, it is striking that a law focused on reorganisation and liquidation has not defined the word ‘insolvency’, a core concept in a reorganisation.
The current law ends assertively with the former unitary model, in which the same bankruptcy instruments were available for all types of debtors, and creates a hybrid model instead. The new law sets forth two separate procedures that distinguish the company from the debtor. These two new procedures are reorganisation and liquidation. The pursuit of one procedure or the other depends on the debtor’s objective and the company viability: it can either serve to restructure economically and financially viable companies, or to liquidate non-viable ones both quickly and effectively. It is important to note that both reorganisations and liquidations can be voluntary or mandatory.
The following analysis will only refer to the reorganisation procedure.
Reorganisation and its modifications
Reorganisation proceedings can be started at any time, since it is not necessary to meet any admission requirements other than the formal aspects and certificates that must be enclosed with the application. In accordance with the provisions of section 54 of the Law, companies may start proceedings filing an application with the corresponding Civil Court.
When discussing these issues, it was decided that instead of creating specialised courts, the Civil Court of the domicile in which the company is located would hear these matters. Thus, in order to integrate a specialisation factor in agreement with the guiding principles, it was established that courts would be trained in bankruptcy matters, which would be taught regularly by the Academia Judicial (the Judicial Academy). This probably responds to a historical rather than a legal fact, since the cost of implementing specialised courts is high, apart from a series of administrative issues that must be solved to implement them, such as their number, composition and distribution throughout the country.
Subsequently, to start reorganisation proceedings, the appointment of an overseer must be requested before the Insolvency and Bankruptcy Office (the Office). To appoint an overseer, the following records and documents (listed in section 55 of the Law) must be submitted, and must also be filed with the civil court hearing the case:
- a copy of the petition to start the procedure; and
- a certificate issued by an independent auditor of the debtor, who must be registered with the Agency’s External Auditors Register.
The overseer shall be nominated in accordance with the procedure laid out in section 22 of the Law. The Office must notify the three largest creditors, who must propose an overseer and an alternate overseer. The incumbent overseer, voted by the largest majority, shall be selected. If no proposals are received, the overseer will be nominated by random selection.
With regard to notifications, in order to reduce costs, publications of notices in the Legal Gazette (which previously had to be paid for individually and were costly for debtors) are replaced by publication in the Bankruptcy Newsletter, an open and free electronic platform managed by the Insolvency and Bankruptcy Office.
This system has been criticised, since it requires a person to specifically search for a company to be declared insolvent, which more inexperienced creditors might find difficult, thus losing their opportunity to verify their claims in a particular proceeding. However, it seems that modernisation is a vital part of the new bankruptcy system, especially if we take into account that – like any new law – its implementation may result in a period of greater uncertainty without this meaning that the change is detrimental to creditors.
Once the overseer’s nomination has been approved, the court must proceed with the reorganisation procedure. To do so, the debtor company must file the documents listed in Nos 1 to 5 of section 56 of the Law. Five days after this submission, the court will render the decision that opens the reorganisation proceedings, leading to the next step of the proceedings: determining liabilities and creditors.
Liabilities and creditors are determined, first, by considering the accounting certification submitted by the debtor company and, then, by means of the creditors’ credit checks, which must be carried out within eight days of the reorganisation resolution’s notice. This procedure was simplified by introducing a final deadline for the insolvency reorganisation proceedings. Under the procedural speed principle, the remedies applicable to the procedure are restricted to a handful of remedies previously established by law, especially regarding the appeal and bankruptcy collateral issues.
Once creditors’ claims have been verified, they will be published in the Bankruptcy Newsletter, where they can be challenged by the debtor, the overseer and the creditors, within eight days. If challenges are raised, they must be remedied. If they cannot be remedied, the relevant claims and commercial appraisal shall be considered contested. The overseer must submit a list of contested claims to the court. The court shall then schedule a single oral hearing to rule on the challenges. Once the liabilities have been determined, the overseer sets a list of creditors entitled to vote at the creditors’ meeting, where the proposed reorganisation agreement submitted by the debtor company is discussed and decided upon.
Once the proposal is informed at the creditors’ meeting, it is considered accepted if the debtor consents to it and there is a concurrent vote of, at least, two-thirds of the creditors present, representing at least two-thirds of the total liabilities with voting rights, as established in section 79 of the Law. If the debtor does not appear at the creditors’ meeting, the court must immediately issue a liquidation resolution, ending the reorganisation procedure and thus leading to a mandatory liquidation of the debtor.
If amendments are to be made to the agreement, they must be adopted in the same way as the agreement was originally adopted, namely, in accordance with the procedure laid down in section 79 of the Law. Section 85 et seq. include the possibility to contest the judicial reorganisation agreement. In this case, a single hearing will be held, at which the contest will be resolved. The agreement will be considered approved and will become effective once the term to contest it has expired, or once all challenges have been resolved.
If the creditors reject the reorganisation agreement because the necessary approval quorum has not been obtained, or because the debtor does not consent to it, the court must issue a liquidation resolution, unless the creditors’ meeting provides otherwise by a special quorum. In this case, the debtor, through the overseer must publish a new proposal for a reorganisation agreement in the Bankruptcy Newsletter, a proposal that must also be filed with the court. If the new proposal is not submitted, the court must issue a liquidation resolution.
The latter is known as ‘derived bankruptcy’, whereby a company is forced to go into liquidation without the need for the creditor to request the debtor’s liquidation. This is a safeguard for both the procedure as a whole and the creditor, who will not be affected even if the debtor is not complying. Therefore, it is a widely used mechanism throughout the Law.
Simplified or out-of-court reorganisation agreement
The simplified or out-of-court reorganisation agreement is an ‘agreement entered into between a Debtor Company and its creditors for the purpose of restructuring its assets and liabilities, and which is submitted for court approval subject to the procedure set forth in Chapter III, Title 3 [of Law No. 20,720]’.
This mechanism is rarely used because it does not adhere to the bankruptcy logic, since an individual arrangement has obvious limitations when a greater goal is sought, which can only be achieved by the creditors as a group. This out-of-court agreement still needs to be approved by the court. Moreover, a single vote against it (from any of the creditors) may lead to it being entirely rejected. This hold-out right the creditors are entitled to is one of the great reasons why agreements are mostly never reached through the simplified or out-of-court reorganisation agreement.
After the question of the need of individuals for a financial fresh start has been set aside, the remaining main role of bankruptcy law has been and should relate more to procedure rather than to substantive law. That goal is to allow the assets owner to use those assets in a way that is most productive to debtors as a group in the face of incentives by individual owners to maximize their own positions.
Main remarks of the reorganisation procedure of the debtor company
Having already commented on the procedure in general terms, we would like to point out some innovations that are worth mentioning separately: tools created in favour of the debtor company, with the modern understanding that a reorganisation works better when they are used.
Bankruptcy financial protection
This is the term this law grants to the Debtor filing for Bankruptcy Reorganisation Procedure, during which its liquidation may not be requested or declared, nor may summary collection proceedings, enforcements of any kind or surrenders in lease disputes be started against it.
The term shall be the time between the Reorganization Resolution notice and the Judicial Reorganisation Agreement, or the period fixed by law if the latter is not agreed. ,,,
Bankruptcy financial protection plays a fundamental role in the reorganisation procedure governed by the Law. It eliminates the risk of imminent enforcements, allowing adequate negotiation to take place, thus improving the possibility of reaching a better agreement, especially if we consider that the debtor company keeps managing its businesses during the procedure, though with certain restrictions, that allow it to continue developing its usual business activities.
During the reorganisation period, the debtor company must still ensure that its suppliers will keep providing the goods and services necessary to continue with the activities. To enable this, the lawmaker offers incentives to suppliers.
The first incentive is that invoices issued during reorganisation proceedings will be paid on their agreed dates, subject to the judicial reorganisation agreement being approved, without the need for creditors to verify their claims.
The second incentive implies that if the reorganisation agreement is not approved, and the liquidation of the company is declared, the credits regarding these supplies will be paid preferentially, provided that they are dated after reorganisation proceedings have started.
This concept can be clearly seen in Case No. 28256-2018 from the Chilean Supreme Court: HDI Seguros de Garantía y Credito S.A. v. Agrícola y frutícola San Andres del Romeral Ltda.
This case dealt with the possibility of collecting credits that had been previously included in a reorganisation agreement under the concept of supply continuity – in accordance with section 72 of the Law. The credit consisted of a series of supplier invoices, all of them issued after the bankruptcy had been filed, but prior to the bankruptcy resolution, therefore making suppliers potential beneficiaries of the first incentive stated above. All three courts (the Civil Court, the Court of Appeals of Santiago and the Supreme Court) agreed that the credits were not enforceable because they were subject to the specific benefits of the reorganisation agreement.
Current legislation reform and the need for further improvement
Chilean Congress is currently discussing a bill that will amend the Law. It is expected to be voted in December of 2022 or in early 2023, and then enacted in 2023.
The main incentive to promote this new law is that it gives answers to a series of issues noted by the authorities, including, but not limited to:
- lack of incentives for the reorganisation of small and medium-sized companies (SMEs);
- lengthy processing of procedures with few assets, excessive formalities and high costs;
- malicious use of bankruptcy procedures; and
- contingency and economic crisis.
Out of many proposals, the new law creates a new, simplified reorganisation agreement, which states that the debtor must submit, among other things:
- a list of all the assets it owns and their commercial appraisal;
- documentation showing ownership of such assets;
- a list of pending lawsuits with effects on equity;
- a statement of debts with creditor names and the credits nature and amount; and
- for debtor companies that are legal entities, a copy of the historical statements of current and demand accounts associated with the debtor, two years before the voluntary liquidation procedure has started.
All of the above promotes the successful restructuring of SMEs, making these procedures more accessible. This is particularly relevant because data collected by the Superintendency of Insolvency and Entrepreneurship in September 2022 shows that the number of companies that choose to start reorganisation proceedings has increased, but the vast majority of them are large companies. According to the information provided, only eight small and medium-sized companies have started reorganisation proceedings, in contrast to 33 large companies that filed for such proceedings. In other words, 64 per cent of the companies are large groups with greater reliability in the market and with sufficient income to continue operating. Following this line of reasoning, the proposal introduces the idea of improving existing out-of-court settlement procedures, allowing SMEs to achieve successful reorganisation.
Although we consider this reform is both necessary and very positive, it fails to deal with one of the most important issues when it comes to the success of a reorganisation: the ability to obtain financing.
Currently, in Chile, company owners and controllers, along with related companies, are the major source of financing in reorganisations. For example, in the judicial reorganisation of the Valle Nevado ski centre, the approval of the creditors was largely influenced by the US$4 million contributed to the operation by its owners.
Mechanisms must be included to allow debtor companies to acquire financing so that they can effectively implement their reorganisation plans – in particular, rules that encourage preferential financing of companies with new money or special preferences for their payment. A good measure would be to include the possibility of allowing capital increases, favouring the entry of new external investors, similar to proceedings under Chapter 11 in the United States.
Debt restructuring of subsidiaries Suaval Garantías, Aval Pyme and Suaval
Suaval Group, a Chilean lending company, restructured a debt of approximately US$97 million of its three subsidiaries: Suaval Garantías, Aval Pyme and Suaval. The operation concluded successfully on 1 September 2022, extending current credit lines and selling some of the company’s assets.
Suaval is a reciprocal guaranteed company, created under Law No. 20,179. According to this law, the objective of reciprocal guaranteed corporations (SAGRs) is to facilitate access to financing for SMEs, through the consolidation of their creditors.
Until 2019, Suaval and its subsidiaries Aval Pyme SAGR and Suaval Garantias SAGR were considered the most liquid and solvent reciprocal guarantee companies in the market. However, the economic impacts caused first by the ‘social outburst’ (the Estallido Social) in Chile in 2019, and then by the covid-19 pandemic in 2020 and 2021, diametrically changed the financial reality of these companies. As a result of the above, Suaval and the developmental guarantee found themselves lacking liquidity, which did not allow them to continue honouring their commitments.
In this scenario, Suaval decided to take advantage of the Law in order to get out of its debt situation, and pay its debts in full, for the sake of continuing with its economic activity.
The reorganisation was challenging, especially because of the market Suaval specialises in. The market is so complex that this was the first time a reciprocal guarantee corporation has been successfully reorganised in Chile. The issuance of bond certificates to SMEs creates insecurity, as they are high-risk companies and the probability of a positive rate of return is low. Notwithstanding the above, the agreement could be moved forward, thanks to the following key points.
On the one hand, despite its illiquidity situation, Suaval has billions of Chilean pesos in real estate properties that are registered in its name, or that are under recovery proceedings, all of which guarantee the company solvency, being a strong safeguard for creditors.
On the other hand, the negotiation was efficient and feasible given the tools and characteristics of the Law. Thus, the agreement was reached thanks to the ease and flexibility granted by the Law. The provisions of the Law allowed a series of amendments to be made to the agreements until the final version was reached. Likewise, the professional legal representation provided by lawyers resulted in fruitful conversations in accordance with the Law requirements, reaching effective agreements between clients. It also highlights the importance of the overseer in charge of the procedure, since accurate data was key when making reliable agreements.
Debt restructuring of Latam Airlines
In May 2020, LATAM Airlines Group SA and its affiliates in Chile, Peru, Colombia, Ecuador and the United States filed a voluntary reorganisation and restructuring of their debt under Chapter 11 protection in the United States. This reorganisation, caused by the effects of covid-19 on the worldwide aviation industry, gave LATAM ‘an opportunity to work with the group’s creditors and other stakeholders to reduce its debt, access new sources of financing and continue operating, while enabling the group to transform its business to fit this new reality’.
There are many reasons why a company would choose to be reorganised under US law. The most attractive option is Chapter 15, under which the United States has adopted the cross-border insolvency provisions contained in the United Nations Commission on International Trade Model Law on Cross-Border Insolvency. This allowed US judges to interact with judges from other countries, with the goal of achieving the objectives of insolvency proceedings, and with the United States being a jurisdiction with sufficient experience and particularly prone to international cooperation.
 European Commission Recommendation, March 2014, found in ‘Nuevo Derecho Concursal Chileno’ Gonzalo Ruz, June 2017.
 ‘Insolvencia y Quiebra en Chile, Principales estadisticas desde 2018 a la fecha’ Chilean Minister of Economy, June 2015.
 ‘Insolvencia y Quiebra en Chile, Principales estadisticas desde 2018 a la fecha’ Chilean Minister of Economy, June 2015.
 ‘Nuevo Derecho Concursal Chileno’ Gonzalo Ruz, June 2017.
 ‘Nuevo Derecho Concursal Chileno’ Gonzalo Ruz, June 2017.
 ‘La reforma de la legislación concursal chilena’ Juan Luis Goldenberg, 1-2015.
 ‘Nuevo Derecho Concursal Chileno’, Gonzalo Riuz, June 2017.
 ‘Mirada Critica a la Ley 20.720’ Juan Esteban Puga, in La Ley No. 20.720, a un ano de su vigencia Eduardo Jequier May 2016.
 ‘Mirada Critica a la Ley 20.720’ Juan Esteban Puga, in La Ley No. 20.720, a un ano de su vigencia Eduardo Jequier, May 2016.
 Section 2, No. 2, Law No. 20.720.
 ‘El concurso desde una perspectiva procesal’ Nicolas Carrasco, Vol.27, 2020.
 See ‘Extrajudicial Agreements from the Privatistic Approach of Bankruptcy Laws’, Juan Luis Goldenberg, 1° semester, 2014.
 ‘The Logic and limits of bankruptcy law’, found in ‘El concurso desde una perspectiva procesal’ Nicolas Carrasco, Vol.27, 2020.
 Section 2 No. 31, Law No. 20.720.
 The period is that of the notification of the reorganisation resolution and the judicial reorganisation agreement, or the deadline set by law if no agreement has been reached.
 See section 57, Law No. 20.720 for the effects. The same thing happens with the issuance of the liquidation decision contained in sections 130, 134 and 135.
 ‘Nuevo derecho Concursal Chileno’ Gonzalo Ruz, June 2017.
 All data extracted from the Chilean Senate’s web page. https://www.senado.cl/noticias/pymes/conocen-detalles-del-proyecto-que-moderniza-los-procedimientos-concursales.
 ‘Superintendencia de Insolvencia y Reemprendimeinto’ https://www.superir.gob.cl/.
 Data extracted from the Agency of Insolvency and Re-enterpreneurship, posted in El Mercurio Newspaper, 13 October 2022.
 Francisco Cuadrado: ‘¿Y el financiamiento para reestructurar empresas en crisis?’, available at https://www.df.cl/opinion/columnistas/y-el-financiamiento-para-reestructurar-empresas-en-crisis.
 A social uprising that developed in October 2019.
 Isaac Stevens, ‘“Chapter 11” como una alternativa para la reestructuración de compañías latinoamericanas’ for the Chilean newspaper El Mercurio Legal, available at: https://derecho.udp.cl/chapter-11-como-una-alternativa-para-la-reestructuracion-de-companias-latinoamericanas/.