On October 9, 2014, Chile’s entire bankruptcy regulation experienced the most profound modification in decades. The new Law of Insolvency and Re-Entrepreneurship provides a completely new set of rules for bankruptcy and insolvency, including new debt reorganization proceedings for companies and for individuals. The law was designed to simplify and shorten insolvency and bankruptcy procedures and make them more efficient and flexible.
Judicial reorganization procedure for companies
This new reorganization procedure increases the likelihood that an insolvent company will reach an agreement with its creditors that may allow it to pay its debts and avoid bankruptcy.
Commencement of the proceedings
The debtor company commences the procedure by making a request to the court. With that request, the company must also make a presentation to the Superintendence of Insolvency. The Superintendence will appoint an observer (“veedor“), i.e., an officer charged with promoting an arrangement between the debtor and its creditors for the payment of the debts. In selecting the observer, the Superintendence will consider the name proposed by the debtor’s larger creditors. After the observer has been appointed, the debtor must present to the court comprehensive financial information regarding its assets and debts.
Moratorium; preservation of assets
With this presentation, the court issues the resolution by means of which the procedure formally begins. The resolution grants the debtor a Financial Insolvency Protection for an initial term of 30 days, subject to extension for 30 or 60 additional days. During this time no requests for bankruptcy may be presented against the debtor company, and no executive proceedings can be commenced against it (and the ones currently in course are suspended). Contracts entered into by the debtor remain in force with the same payment conditions. No early termination or acceleration clauses may be enforced based on the starting of a reorganization process. Also, the debtor becomes subject to the intervention of the observer, and is prevented from transferring or encumbering its assets (other than those sales or transfers necessary for its normal operation). This court resolution is to be published in the web-based Insolvency Bulletin.
Proposal for reorganization
After the court resolution has been issued, the debtor, with the assistance of the observer, must present its proposal for a Judicial Reorganization Agreement, which is then subject to analysis at the meeting of creditors. In parallel, all the creditors must request the court to consider their credits in the proceedings.
Meeting of creditors
The meeting of creditors takes place on the last day of the Financial Insolvency Protection period. The observer will issue a report with respect to the proposal, addressing its feasibility and legality, as well as the percentage of the credits that the creditors may expect to recover.
The meeting of creditors decides about the proposal of Judicial Reorganization Agreement presented by the debtor. The quorum to approve it is at least 2/3 of the creditors that attended the meeting, who hold at least 2/3 of the total debt owed by the debtor.
Judicial Reorganization Agreement
The Judicial Reorganization Agreement establishes the terms of payment of the debtor company’s debts, and may also establish the restructuring of its assets and liabilities for this purpose.
The Judicial Reorganization Agreement is binding on all of the creditors of the debtor company, regardless of whether they attended the meeting that approved it.
Non-judicial (simplified) reorganization procedure for companies
The new law also provides a procedure whereby a debtor company may agree with its creditors on a reorganization of its debts, subject to the final approval of a court on the debtor’s request. The court considers the Simplified Agreement, which must be executed by creditors holding at least 3/4 of the total debt owed by the debtor, as well as a report from an observer with respect to the agreement, addressing its feasibility and legality, and the percentage of the credits that the creditors may expect to recover.
With this request, the court issues an order to publish the Simplified Agreement in the Insolvency Bulletin, and the Agreement is then subject to vote by the creditors. If it is approved by creditors holding at least 3/4 of the total debt owed by the debtor, then the court will approve it, and it will be binding on all the creditors of the debtor.
The new law also provides a liquidation procedure for companies, which may be commenced by the debtor or by one or more of its creditors; a renegotiation procedure for individuals; and a liquidation procedure for individuals.