Chile: The Effects Of A Reorganization On The Pending Contracts Of The Debtor

Last Updated: 22 December 2017
Article by Ricardo Reveco

Law 20.720 On the reorganization and liquidation of companies and individuals, enacted in Chile in 2014, regulates different insolvency proceedings applicable to companies with financial difficulties, allowing the restructuration of their assets and liabilities or their liquidation (bankruptcy). Both the start of a reorganization proceeding ("Reorganization") and the approval of a Reorganization Agreement, have substantial effects on the debtor's contracts, especially concerning the remedies available to its counterparties (mainly regarding ipso facto clauses). These effects will be briefly analyzed in this article.

With the filing by the debtor of the motion for the start of the Reorganization, the court issues the Reorganization Resolution that opens the so-called Insolvency Protection Period (which lasts at least 30 working days extendable to up to 90 days depending on the support received from creditors). The Reorganization Resolution - among other effects- suspends executions and liquidation claims against the debtor (stay order similar to that established in Chapter 11 of the US Bankruptcy Law), and also orders that contracts maintain their terms and conditions of payment, prohibiting their termination due to the start of a Reorganization.

Below, we will review the main effects of the start of the Reorganization for the creditors of the debtor. First, during the Insolvency Protection Period, judicial enforcement of contracts against the debtor is restricted: specific performance is restricted because the debtor will not be able to encumber or dispose of his assets, except in the ordinary course of business; and starting foreclosure proceedings against the debtor is also restricted. The exercise of ipso facto clauses, that is, those that pursue the automatic termination of a contract, the acceleration of credits or the execution of guarantees, is also restricted.

Chilean law – faced with the dilemma of authorizing or forbidding the early termination of contracts due to the start of a Reorganization – has opted for an intermediate solution. Thus, it impedes creditors from early terminating contracts due to the start of the Reorganization, but allows them to early terminate for different reasons. In this way, Chile recognized the principle of preservation of business of the company, expressed in the maintenance of the current contracts of the debtor company. The sanction to the creditor who infringes the legal prohibition is even more drastic than the nullity of the early termination. The infringer is postponed in the payment of its claims until both unsecured creditors and related entities creditors have been fully paid. If we consider that the average recovery in Chile in bankruptcy liquidations is less than 35% of the capital, this legal sanction means that, as a general rule, the infringer creditor will never be paid.

A second relevant effect of the Insolvency Protection Period is the creation of new general preferences that affect all assets and creditors of the debtor, creating a "super preference" in favor of suppliers and financiers that allow the company to continue during the negotiation of the terms of an eventual Agreement. These incentives benefit suppliers of goods and services that are necessary for the operation of the Company; those who finance foreign trade operations; and loans contracted for the financing of its operations. All these contractors have in their favor, as creditors, a first-class preference in the payment of their credits, even higher than workers' and tax credits, in the event that the reorganization is frustrated and results in liquidation.

Third, the law implemented the principle of subjective universality, by which the Reorganization Agreement will be a collective agreement affecting all creditors, whether secured or unsecured, making a radical change to the previous legislation that in principle was only binding for unsecured creditors. Therefore, if the Agreement is approved, all the credits that are part of the proceeding will be understood to have been remitted, novated or renegotiated, as appropriate, for all legal purposes, which means that the debtor's and its creditors' patrimonial relationships are modified. In this way, the contracts will have to be adjusted to the conditions agreed in the Reorganization Agreement, whether related to the enforceability of the obligations (due to their renegotiation) or to the extinction of these (either by remission, cancellation, etc.1).

Fourth, given that the approved Reorganization Agreement is universally binding to creditors, the credits of creditors benefiting from collateral and personal guarantees affecting essential assets of the debtor company are also bound by its terms. Therefore, if a guarantee falls on an essential good, i.e. an asset which is necessary for the debtor's business, the credit will be bound by the terms of the Agreement. On the other hand, if the guarantee falls on a non-essential good, the creditor may separately foreclose its guarantee and be paid preferably from that foreclosure.

With the four effects described, Law 20.720 seeks to consolidate the principle of preservation of the company, establishing benefits for the debtor and allowing the debtor company to continue with its business by means of the reorganization of its assets and liabilities through the Agreement with its creditors. This regulation undoubtedly allows Chile to adjust its insolvency proceedings to international standards, since the initiation of a bankruptcy proceeding in our country is no longer synonymous with the termination of the debtor's economic activities and the termination of its contracts.

Previously published in The Quarterly Journal of INSOL International.

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

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

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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