New Chilean Insolvency Law Promotes Reorganizations
A new insolvency law was approved by the Chilean Congress at the end of 2013 and became effective in October 2014. The legislation substantially overhauls Chile's prior insolvency law, particularly with respect to business insolvency cases. It incorporates a number of provisions that permit the reorganization of financially troubled businesses, with a view toward preserving enterprise value and jobs, as well as expediting and enhancing creditor recoveries. The new law represents a marked departure from the previous regime, which was focused on the liquidation of debtors' assets.
Principal features of the new law include:
- The assignment of insolvency proceedings to specialized insolvency courts, rather than randomly selected civil tribunals.
- Enhanced protection of the debtor and its assets, including a provision that makes a plan of reorganization approved by creditors holding at least two-thirds of a debtor's liabilities binding on all secured creditors, which will be prevented from foreclosing on collateral deemed essential to the debtor's reorganization.
- A provision prohibiting termination of contracts due to the debtor's insolvency or failure to make payments prior to the commencement of an insolvency proceeding; claims held by creditors violating these rules will be subordinated.
- A provision authorizing the avoidance of transactions effected in bad faith and to the detriment of creditors during the two years previous to the commencement of an insolvency proceeding.
- A provision authorizing the avoidance of certain non-ordinary-course payments and pledges of collateral to secure previously unsecured debt effected during the year preceding the commencement of an insolvency proceeding.
- Invalidation of amendments to a debtor's bylaws within six months of an insolvency proceeding filing that cause a decrease in the debtor's equity.
- The implementation of procedures permitting the debtor to contest an involuntary liquidation petition filed by a creditor.
- The implementation for the first time in Chile of regulations governing cross-border insolvency proceedings, including provisions authorizing a Chilean court that has recognized the pendency of an insolvency proceeding abroad to, among other things: (i) stay the commencement or continuation of any litigation against the debtor or its assets; (ii) enjoin the debtor from transferring or encumbering its assets; (iii) obtain discovery of information regarding the debtor's assets, business, rights, obligations, or liabilities; and (iv) request the appointment of a foreign receiver responsible for the administration or sale of the debtor's Chilean assets.
- Disenfranchisement of insiders in reorganization and liquidation proceedings and reduction of the threshold required for approval of pre-bankruptcy reorganization agreements from creditors holding at least three-quarters of liabilities to creditors representing at least two-thirds of liabilities.
A comprehensive discussion of Chile's new insolvency law can be accessed here.