CHILE Law and Practice Contributed by: Macarena Ravinet and Federico Espinosa, Cuatrecasas
Distribution of Proceeds Among Secured, Unsecured, and Subordinated Creditors Secured creditors are then paid from the proceeds of the specific collateral over which they hold perfected security interests, after satisfaction of the higher- ranking statutory claims. If the value of the collateral is insufficient to satisfy the debt, the secured creditor participates in the insolvency as an unsecured creditor for the balance. Unsecured creditors, including trade creditors and lenders without collateral, are paid on a pari passu basis with whatever proceeds remain. Finally, subordinated creditors are satisfied only after all other claims have been paid in full, which in prac- tice often means they recover little or nothing. Distinction Between Liquidation and Reorganisation Proceedings This order only applies in the case of liquidation pro- ceedings. In reorganisation proceedings, the payment conditions will be the ones agreed upon by the credi- tors in the relevant reorganisation plan. In any case, note that labour-related claims, social security and certain tax obligations are not subject to the reorgani- sation plan. 7.3 Length of Insolvency Process and Recoveries In Chile, reorganisation proceedings typically last three to five months, while liquidations can extend from one to three years, depending on the complexity of assets and the number of creditors. Creditor recoveries vary: secured creditors fare better, especially in reorganisations that preserve collateral, but outcomes depend on the plan’s feasibility. In liquidations, secured creditors recover from collat- eral sales; however, statutory preferences for labour and tax claims reduce the available amounts. Unse- cured creditors often recover little. Overall, Chilean insolvency procedures are orderly and transparent, but recoveries are generally modest due to delays, statutory priorities, and forced asset sales. 7.4 Rescue or Reorganisation Procedures Other Than Insolvency Out-of-court restructurings under Chilean law enable financially distressed companies to negotiate private
outside the insolvency process and must instead par- ticipate in the collective proceeding administered by the insolvency court. However, if the debtor considers that the assets over which the securities are granted are not essential to their economic activities, secured creditors maintain their right to enforce their guaran- tees outside the insolvency proceedings. During reor- ganisation, secured creditors may also be bound by the terms of a restructuring agreement approved by the required creditor majorities and confirmed by the court. Secured Creditor Rights and Priority in Liquidation Proceedings In the event of liquidation proceedings, secured credi- tors retain a preferential right over the proceeds of their collateral; however, this priority is subject to cer- tain statutory claims, most notably labour obligations, social security contributions, and certain taxes, which take precedence. In liquidation, secured assets are generally sold and the proceeds distributed according to the statutory priority scheme. Enforcement of Guarantees and Practical Considerations for Lenders During Insolvency Guarantees follow the same principle: they may be enforced, but if the guarantor itself is subject to insol- vency proceedings, the creditor must assert its claim within that process. In practice, insolvency signifi- cantly delays recovery and can affect the value of the collateral, which is why lenders in Chile place empha- sis on proper perfection of security and contractual protections before default occurs. 7.2 Waterfall of Payments Statutory Priority of Claims in Chilean Insolvency Proceedings In Chile, the order of payment of creditors in insol- vency is governed by the Bankruptcy and Insolvency Law. First in priority are expenses of the insolvency process itself, which include court costs and fees of the liquidator or administrator. Next are labour-related claims, including wages, severance payments, and unpaid social security contributions, all of which enjoy a statutory preference over secured and unsecured creditors. Certain tax obligations owed to the Treasury also take precedence over secured claims.
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