Chile: Recent Changes Made to Restructuring Proceedings
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This article aims to analyse the recent changes made to Chile’s restructuring proceedings under Law No. 20,720, which replaced the former bankruptcy procedure of Law No. 18,175 in 2014, along with the recent enactment of Law No. 21,563, which modified some aspects of reorganisation and liquidation proceedings. This article also discusses some current Chilean cases. Finally, comments upon 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 reorganisation proceedings
- Reform introduced by Law No. 21,563
Referenced in this article
- Law No. 20,720
- Law No. 18,175
- Law No. 21,563
- Case C-110-2023, Civil Court of Porvenir
- Case C-12.426-2023, 15th Civil Court of Santiago
- Case C-12429-2023, 6th Civil Court of Santiago
- Case C-16.059-2023, 5th Civil Court of Santiago
- Case C-497-2023, 23th Civil Court of Santiago
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 highlights 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 to be a motor for the economy, in accordance with international standards:
[We see Law No. 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 creating the Law can be summarised as follows:
- the several interests of the stakeholders: the state’s objectives are enabling the effective reorganisation of viable companies and the provision of legal tools to allow companies to overcome 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 of 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. 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, as 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, 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, as 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.
The reorganisation proceeding was subject to some relevant procedural modifications by the enactment of Law No. 21,563, which entered into effect in August 2023.
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 must 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, 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, as 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 No. 1 to No. 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.
The reorganisation ruling establishes a stay period of 60 business days (extended by the recent modification introduced by Law No. 21,563), which can be extended up to 60 additional days with the support of two or more creditors that represent 30 per cent of the voting rights (for an extension of 30 days) or 50 per cent of the voting rights (for an extension of 60 days).
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 15 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.
One of the main modifications included by Law No. 21,563 in this regard is that creditors that are not considered by the debtor and that do not file their proof of claim within the proceeding may file a motion for the plan to be applicable to them once it is approved.
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, as 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 and its recent modifications
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.
One of the main modifications introduced by Law No. 21,563, is the extension of the stay period from 30 to 60 business days, which can be extended up to 60 additional days with the support of two or more creditors that represent 30 per cent of the voting rights (for an extension of 30 days) or 50 per cent of the voting rights (for an extension of 60 days).
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 SA 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.
Recent modifications to Chilean Insolvency Law and improvements needed
In August 2023, Law No. 21,563, which modifies Law No. 20,720, entered into effect. The modification includes some improvements to simplified insolvency proceedings for small and medium-sized companies, in addition to some procedural improvements to reorganisation and liquidation proceedings.
In summary, the modifications include:
- the creation of a simplified reorganisation proceeding for small and medium-sized companies;
- the possibility for creditors that did not appear in a reorganisation proceeding to demand the application of the plan to them;
- the extension of the original stay period from 30 to 60 business days;
- flexibility of the requirements for DIP financing with regard to the quorums needed for its approval by creditors;
- more requirements for the initiation and termination of a liquidation procedure; and
- restrictions to the extinctive effect of the termination of a liquidation procedure.
Although this reform includes some positive improvements, they are mostly procedural. Therefore, the reform fails to deal with some other important material aspects of this type of process, which, in our opinion, are:
- the impossibility of restructuring the debt of a group of related companies in the same process;
- an automatic stay that operates from the filing of the reorganisation request; and
- the ability to obtain financing.
Currently, in Chile, company owners and controllers, along with related companies, are the main source of financing in reorganisations.
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 allow capital increases, favouring the entry of new external investors, similar to proceedings under Chapter 11 in the United States.
Relevant recent cases
Reorganisation proceeding of Nova Austral
Nova Austral, a Chilean salmon farmer is currently restructuring its US$560 million in debt in an in-court reorganisation proceeding, which is being held before the Civil Court of Porvernir (case C-110-2023), in the far south of Chile.
The plan proposed by Nova Austral to its creditors contemplates a US$487 million capital increase to the majority of its US$560 million debt into stock, followed by a potential sale of the company’s assets. However, this proposal is still pending approval by the creditors on a hearing that was scheduled for late October 2023.
Debt restructuring of Mainstream subsidiaries in Chile
In July 2023, Mainstream Renewable Power (Mainstream) initiated two reorganisation proceedings for its energy power subsidiaries Huemul Energía SpA and Cóndor Energía SpA.
Through these proceedings, Mainstream seeks to restructure its outstanding debt and regain sustainability after the losses suffered by the renewable energy sector in Chile.
The total amount of the liabilities subject to these proceedings is approximately US$1 billion.
Debt restructuring of Winia Electronics (Daewoo)
Winia Electronics Chile, the Chilean branch of the Korean electronics company Winia (Daewoo), filed for its reorganisation before the 5th Civil Court of Santiago (Case C-16.059-2023), after X Capital, one of its main creditors, sought the liquidation of an outstanding debt of US$2 million.
In this process, Winia seeks to continue its operations in Chile by the restructuring of a total debt of approximately US$10 million. Winia’s main creditors are X Capital, Cencosud and the Chilean National Treasury.
The reorganisation plan that will be proposed by Winia to its creditors will be voted on December 2023.
Liquidation proceeding of Maria Elena Solar
On 4 April 2023, the 23rd Civil Court of Santiago declared the liquidation of María Elena Solar SpA, a Chilean renewable energy Company owned by Solarpack Corporation, after a claim was filed by its main creditor, the German Bank KfW IPEX-Bank GmbH. The total debt subject to this process is approximately US$91 million.
This is the first case of an active renewable energy company entering into liquidation. However, the appointed insolvency administrator ordered the continuation of the debtors’ activities to allow a sale of the company or its main assets.
 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.