United States: Chile Embraces The Corporate Rescue Culture Of U.S. Chapter 11 Reorganizations And Facilitates Cross-Border Cases By Revising Its Insolvency Law

Last Updated: May 1 2014
Article by Patrick E. Mears

In 2014, the Chilean Legislature enacted legislation that substantially overhauls its prior insolvency law, liberalizing that law as it pertains to business insolvency cases commenced in Chile. As explained below, this new law incorporates a number of provisions that permit the reorganization of financially troubled businesses. Because of the high volume of trade in goods and services between the United States and Chile, these changes in the Chilean insolvency law are important to businesses based in the United States who are engaged in the import/export trade with Chilean mercantile companies.

Chile's Economy and Trade in Goods and Services Between the United States and Chile

Chile is considered as having the strongest economy in South America at present. The land is blessed with substantial mineral deposits with copper being its primary export; Chile is the world's largest producer of this metal. Agriculture is the occupation of approximately 13% of Chile's population, even though it produces less than one-half of domestic needs. Chile's gross domestic product (GDP) in 2012 was $325.8 billion, which translates into $18,700 per capita. GDP in 2012 grew at a 5.5% rate compared to the prior year. Chile's imports in 2012 were valued at $74.9 billion, with the U.S. being its largest supplier. Chile's primary imports are petroleum and petroleum products, chemicals, electrical and telecommunications equipment, industrial machinery, vehicles and natural gas. Chile's exports in 2012 totaled $78.3 billion, with the U.S. being its second largest customer behind China. In addition to minerals, Chile's primary exports are fruit, fish and fish products, paper and pulp, chemicals and wine.

In 1834, only 16 years after Chile gained its independence from Spain, a treaty of "Peace, Amity, Commerce and Navigation" was ratified by the governments of the U.S. and Chile. This treaty provided, inter alia, for broad trading privileges between the two countries, both of which enjoyed "most favored nation" status with respect to tariffs. International trade between Chile and the U.S. has blossomed ever since. In 2003, a free trade agreement was ratified by the two governments, which agreement came into force on Jan. 1, 2004. Trade has mushroomed ever since. The existence of this substantial level of trade, however, creates the risk of loss arising from the insolvency of American and Chilean business enterprises engaging in this trade. The remainder of this article will outline the primary provisions of the new Chilean insolvency law and will explain how these changes affect this insolvency risk.

Background and Purpose of the New Chilean Insolvency Law

The new Chilean insolvency law was approved by Congress at the end of 2013, and will become effective in October 2014. The primary aim of the new Chilean insolvency law is to change the legislation's approach to insolvency in Chile, from a view that strongly disapproves of those entities responsible for their insolvency and focuses on the liquidation of the debtor's assets, to a perspective that is less harsh regarding the debtor, that facilitates its reorganization, and encourages the preservation of enterprise value and jobs. Another important objective of the new law is to establish a procedure that is faster and less expensive for creditors and that allows them to obtain higher recoveries.

Most Important Changes Introduced by the New Chilean Insolvency Law

Financial Protection in Case of Reorganization Agreements

The former insolvency law provided limited protection for the debtor during the reorganization process. The new Chilean insolvency law however, because of its focus on reorganization, increases this protection. One critical innovation is that, if a reorganization plan is approved by creditors representing 66% of the debtor's liabilities, secured creditors will be bound by the terms of this plan, even if they voted against it. This could mean, for example, that secured creditors, in the absence of a plan provision to the contrary, will not be allowed to foreclose on assets that secures their claims provided, however, that the court determines that this collateral is essential to the debtor's reorganization. This is a major shift from prior law, under which secured creditors could foreclose on liened assets, even when the reorganization proceedings were on course.

Another substantial amendment involves the early termination of contracts based on the debtor's insolvency. Under the new Chilean insolvency law, during a period of time following the debtor's filing of a reorganization plan, the debtor's contracts may not be terminated on the grounds of insolvency. Also, payment terms in contracts to which the debtor is a party will remain unaltered but these contracts may not be terminated by the non-debtor party due to nonpayment. Claims held by creditors violating these rules will be subordinated, and be paid after unsecured and "insider" creditors.

Revocatory Actions

This new law also improves the regulation of both subjective and objective revocatory actions (RAs), granting more legal certainty to creditors that provide loans or enter into transactions with the debtor before its declaration of bankruptcy.

A subjective RA allows a challenge to transactions executed during the two years previous to the commencement of the debtor's insolvency proceedings if the following conditions are present: (i) bad faith of the non-debtor party concerning the transaction; and (ii) the transaction caused harm to creditors. This is a major improvement over prior law - - it grants legal certainty to third parties and introduces an objective standard of judicial review (i.e., the market conditions and fairness tests).

An objective RA may be sought to revoke or avoid some transactions executed during the year preceding the commencement of the proceedings, where one or more of the following conditions are present: (i) early payments made by the debtor to a third party; (ii) payments made in due time, but in a different manner than as originally agreed (e.g., accord and satisfaction); and (iii) mortgages and pledges granted in the debtor's assets to secure pre-existing debts. In these cases, to avoid invocation of the RA remedies of avoidance and recovery, the debtor or the third party must prove the transaction did not harm the debtor's creditors.

Finally, amendments to the debtor's bylaws made within six months preceding the commencement of insolvency proceedings may be avoided if they cause a decrease in the debtor's equity.

Debtor Opposition to Involuntary Liquidation Proceedings

The former insolvency law did not permit a debtor to oppose an involuntary liquidation petition filed by a creditor. Under the new law, the debtor may contest an involuntary petition through a special proceeding based only on a limited catalogue of exceptions. This proceeding contemplates two hearings: an evidentiary hearing and a sentencing hearing. In order to balance the rights of the parties, an observer will be appointed to monitor the debtor's activities during the opposition procedure. The petitioner may file for injunctive relief during the same period.

Cross-Border Provisions

For the first time in Chile, regulations regarding cross-border insolvency have been adopted. The new regulation addresses (i) the procedures required for Chilean courts and agencies regarding insolvency proceedings commenced abroad; (ii) the procedures required for foreign courts and agencies regarding insolvency proceedings commenced in Chile; (iii) the procedures for a debtor who is undergoing insolvency procedures simultaneously in Chile and abroad; and (iv) the procedures when foreign creditors wish to commence or participate in an insolvency proceedings in Chile.

The new Chilean insolvency law's cross-border provisions provide that all creditors, Chilean or foreign, shall have the same rights regarding the commencement of an insolvency proceeding and with respect to creditor participation in those proceedings.

Furthermore, under the new Chilean insolvency law, a Chilean court that has recognized the pendency of an insolvency proceedings abroad may take any of the following actions: (i) suspending the commencement or continuation of any individual proceedings against the debtor; (ii) suspending any process against the debtor's assets; (iii) suspending the debtor's right to transfer or encumber its assets; (iv) demanding information regarding the debtor's assets, business, rights, obligations or liabilities; (v) requesting the appointment of a foreign receiver responsible for the administration or sale of the debtor's assets located in Chile; (vi) granting injunctions; and (vii) decreeing any other measures that, under the new Chilean insolvency law, may be granted to Observers or Liquidators.

These new provisions will undoubtedly be of help for American investors, as they facilitate the cooperation between the insolvency institutions and courts in Chile and the United States.

Plan Voting Rights and Quorum

In contrast to prior law, new Chilean insolvency law prescribes that related persons have no voting rights regarding both reorganization plans and liquidation procedures. Formerly, related persons were able to vote concerning liquidation procedures. Another change is that the quorum for approval of pre-bankruptcy reorganization agreements has been amended, being lowered from creditors representing 75% of the debtor's liabilities to creditors representing 66.6% of the debtor's liabilities. This change is aimed at hastening the pace of Chilean reorganization cases.

Specialized Courts and New Insolvency Authorities

Insolvency cases will henceforth be assigned to special courts that have deep knowledge of insolvency laws and procedures. Bankruptcy cases will not be randomly distributed among civil judges as they formerly were.

In order to achieve higher efficiency and effectiveness through specialization, the new law creates authorities such as the observer, who is a person in charge of the reorganization process and the liquidator, a person in charge of the liquidation of assets.

Online Platform

A free online platform has been created on which court decisions will be published for notice purposes. This innovation will make reorganization cases faster and less expensive, as it replaces the former paid publications in the official gazette.


The new Chilean insolvency law will result in a faster and less expensive insolvency procedure, with substantially more emphasis on reorganization than liquidation, and will allow investors to acquire insolvent companies in a much safer, swift and efficient manner. This focus on reorganization has some short-term disadvantages for secured creditors, such as the reduction in the certainty and quality of their collateral and their ability to realize upon those assets quickly. Comprehensively considered, however, we believe the new regulation will benefit both creditors and debtors, favoring entrepreneurship, improving the Chilean business climate and economy, and likely resulting in an increase in the creditors' recovery rate. In the words of Chile's first European explorer, Pedro de Valdivia, Chile continues to prove itself to be "no better land in the whole wide world to live and thrive".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions