REMARKS ON CROSS-BORDER INSOLVENCY – Opinion Article – Chile
The notable growth and globalization of international trade during the last 15 years led to the creation of instruments that standardize criteria for common or shared application by countries facing the problems generated by a crisis suffered by a multinational company.
This has been particularly relevant for bankruptcy and insolvency, where complex situations involving assets, creditors, and reorganization mechanisms need to be addressed in countries other than the domicile of the company.
This general view should now be directed, unfortunately, to probable insolvency scenarios of relevant international actors, caused by the appearance of Covid-19, its ravages and the economic consequences of the measures taken to combat it.
In January 2014, with Law No. 20,720 on the Reorganization and Liquidation of Companies and Persons, hereinafter the “Law”, a special chapter on cross-border insolvency was introduced into bankruptcy legislation in Chile This chapter was based on the Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law – UNCITRAL – hereinafter the “Model Law” of 1997.
The reform aimed to establish cooperation mechanisms between the courts and other agencies involved in Bankruptcy Proceedings and the courts and authorities of the Foreign States that intervene in cross-border insolvency cases. The adoption of these regulations in Chile has enabled the following situations to be addressed:
– Effects of the Foreign Bankruptcy Proceedings on the debtor’s assets existing in Chile, as well as those affecting the creditors located in our country.
– Bankruptcy Proceedings in Chile that could have effects abroad.
– Bankruptcy Proceedings taking place in parallel in two or more countries.
The reform, therefore, seeks to protect both the interests of the Chilean and foreign creditors and the integrity of the debtor’s assets existing in Chile.
It should be noted that the application of the rules on cross-border insolvency under Law Nº 20,720 is not conditioned to the fact that the respective foreign state may have also adopted the Model Law.
1. Effects in Chile of Bankruptcy Proceedings initiated Abroad
The exequatur (procedure for requesting compliance with judgments of another country, followed before the Supreme Court, and then executed before an ordinary court) is eliminated as a requirement for Foreign Bankruptcy Proceedings to take effect Chile. Instead, the Law defines the “Foreign Proceedings” and “Foreign Representative”. The latter is the person or body authorized to petition directly for the assistance of the Chilean Courts in relation to Foreign Proceedings without subjecting their actions to the examination of the Supreme Court.
The foreign representative may request: (a) the initiation in Chile of a bankruptcy proceeding against a debtor in accordance with national laws, or (b) that the Chilean courts recognize Foreign Proceedings.
Once the Court verifies the eligibility of the foreign representative and the compliance of the petition with the legal requirements, it may enter a judgment of recognition, according to which the Foreign Bankruptcy Proceedings can produce effects in Chile.
For example, upon recognition of Foreign Proceedings, the foreign representative: will be entitled to participate in any proceedings initiated in Chile regarding the same debtor; may request that the commencement or continuation of individual procedures against the debtor be suspended, and may request from the competent Court the application of precautionary measures or the administration of the assets.
It should be highlighted that in granting or denying the action petitioned by the foreign representative, the Courts have the duty to protect the interests of the creditors and other interested parties, including the debtor. In this respect, the law recognizes the equality of treatment between domestic and foreign debtors, subject in all cases to the rules on priority of loans existing in Chile.
An interesting case to observe in this regard will undoubtedly be that of LATAM, a relevant continental airline, which has recently applied in New York for Chapter 11 of the US Bankruptcy Code or Law. It will be interesting to follow this request for cross-border reorganization, in particular the determination of its “center of interests”, “the main and non-main procedures”, how the dilemma of the parent company and its subsidiaries is resolved, the consequences for creditors of different nationalities and origins, as well as other relevant matters.
2. Extraterritorial effects of the Bankruptcy Proceedings initiated in Chile
The extraterritorial effect of a Procedure initiated in Chile will depend of course on the legislation of the country in which one intends to operate. Consequently, if the other country has not adopted the Model Law, the involvement of the national courts or the Chilean representatives could be diminished or even not accepted.
When defining the representatives of Chile abroad, the Law gave this role to the Superintendence of Bankruptcy, which is the body authorized to act in the Foreign State in the representation of a Bankruptcy Proceeding conducted in Chile. The Law also delegates its powers to the liquidator of the firm in bankruptcy.
Chilean Courts can also act directly before foreign courts and foreign representatives without the intervention of the Superintendence. It is interesting to note that if the other State also adopted the rules of the Model Law, the communications between national Courts and foreign Courts do not require the processing of an international letter rogatory, as it will suffice that the Court’s Registrar certifies the fact of the communication and its contents.
Standing out as a real example of the application of the above is the case of the “Grupo Arcano”. Its founder, Alberto Chang, a fugitive from Chilean justice as the creator of a massive Ponzi scheme that collected large investments from national investors, owned companies and assets in Miami, London, and Sydney.
Through the cross-border execution of the bankruptcy declared in Chile, funds have been seized from current accounts and assets in those cities and in the Isle of Man, Zurich, and Mosquito BVI.
3. Parallel Insolvency Proceedings
On this point, the Act establishes several mechanisms to coordinate the actions of the authorities involved, based mainly on communication and international cooperation.
In this area, the distinction between “main proceedings” and “non-main proceedings” plays an important role. According to the Act, the main proceedings are those opened in the State where the debtor has his domicile, that is, the center of his main interests. The main proceedings aim for universal scope and to cover all the assets of the debtor, seeking to extend the effects to the other countries involved; in turn, the non-main proceedings are limited to producing effects on certain goods within the national territory.
4. Possible legal modifications due to Covid 19
A wave of bankruptcies and reorganizations inevitable from the economic recession resulting from Covid 19 has already arrived in the country. Like other nearby countries (eg Brazil with Bill 1,397/2020), various initiatives to modify bankruptcy and reorganization procedures are being discussed, particularly the proposal to improve the situation of loans granted to a company in the process of judicial reorganization.
Our current legislation contemplates and regulates the possibility of granting credit to companies with insolvencies considered transitory and that are in the process of reorganization. It grants creditors a “super preferential” status for payment in the event of failure and liquidation, over taxes, workers, and real guarantees.
But this mechanism is subject to limited and demanding terms, as well as restrictions, and high quorums for the agreement of creditors. Its purpose is to bring it closer to the regulation included in the aforementioned Chapter 11.
However, the granting of fresh resources to a company that is viable but with a liquidity problem, and the providing of “super preferential” status to creditors, will have to be balanced in some way with the rights acquired by previously preferred creditors, in a challenge that does not appear easy.
Hernán Peñafiel Ekdahl, lawyer from the Universidad de Chile, partner at Chirgwin Peñafiel Law Firm and specialist in complex litigation and arbitration.
* Part of this article comes from a publication of Chirgwin Peñafiel Law Firm in the Britcham Chilean Legal Report of 2014 and was written by Claudia Paz Escobar and Martin Molina.