Chile : Insolvency and Creditor Rights Systems

Abstract

The legal and institutional framework
 governing creditor rights and insolvency proceedings in
 Chile reasonably complies with expectations of a modern,
 credit-based economy, although some shortcomings affect the
 full effectiveness of credit risk management and resolution:
 Financial institutions over-rely on real estate as
 collateral. Pledges are not enough developed because
 legislation on secured interests over movable assets is
 fragmented and the publicity and registration mechanism for
 pledges are not sufficiently reliable. Individual
 enforcement proceedings are lengthy and complicated, both
 for secured and unsecured creditors. Enforcement proceedings
 using executory instruments take 1 to 3 years, whereas
 creditors not enjoying such instruments use ordinary
 proceedings whose duration is even longer (3 to 5 years).
 Insolvency legislation is integrated into the country's
 broader legal and commercial system, providing a liquidation
 proceeding whose average duration, however, is 2 to 3 years.
 The Insolvency Law also governs judicial reorganization
 proceedings but classification of creditors for voting is
 not allowed, which may be a relatively significant rigidity
 in an environment where most financial credit is secured.
 Treatment of contractual obligations in insolvency is not
 sufficiently developed in the Insolvency Law, which also
 lacks clear provisions on how to deal with subordination
 debt agreements and financial contracts in bankruptcy.
 Provisions to deal with insolvency cases of a cross-border
 nature are fairly antiquated and not responsive to solve
 main problems typically present in those cases. Corporate
 workouts would be significantly increased if out-of-court
 plans approved by a majority of creditors were able to be
 converted into prepackaged restructuring plans that bind
 dissenting minorities. The judicial framework for commercial
 enforcement and insolvency proceedings is generally
 perceived as being independent and reliable, although most
 courts deal with an excessive number of processes.
 Notwithstanding, there are no commercial courts nor courts
 specializing in insolvency in Chile. Insolvency
 administrators are independent professionals supervised by
 the Bankruptcy Commission, a body meeting the requirements
 of an independent regulatory institution. The Bill on Second
 Capital Market Reform, submitted to Congress, is a relevant
 step in the right direction to make Chilean creditor rights
 and the insolvency system more effective.