Pre-Pack procedure: A possible factor in Chilean bankruptcy legislation?

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What is the practical application of the "Pre-Pack" procedure?

The "Pre-Pack" procedure is an option available to a company facing a severe financial situation, but still possesses a profitable business or at least some assets.

Under a Pre-Pack procedure, the company can sell all or part of its profitable business or assets before entering into a formal bankruptcy proceeding, thus avoiding economic devaluation and reputational damage. Using Pre-Pack can help a company obtain a sale price that is suitable for paying debts and keeping the business active. The procedure is done under the supervision and guidance of a bankruptcy professional who will negotiate the sale terms with the chosen buyer.

In European legislation, several countries, such as Spain and Italy, have harmonised their bankruptcy laws by incorporating the Pre-Pack procedure proposed by the European Commission. All of this is aimed at making bankruptcy proceedings more efficient within the European Union.

Current legal framework in Chile

Given its objectives and benefits, the Pre-Pack procedure is valuable to incorporate into the bankruptcy legislation of any country.

In this context, does the Pre-Pack procedure exist in Chile? The answer is no. According to current bankruptcy regulations, particularly as outlined in Law No. 20.720, there is no provision in Chile for a company to sell all or part of its profitable business or asset to a third party before entering a formal bankruptcy proceeding.

Considering, however, that the Pre-Pack procedure is based on a prior agreement before a bankruptcy proceeding, our legal system has two modalities that could achieve a similar objective.

The first one consists of a regular contractual agreement, through which the debtor company sells all or part of the profitable business or assets to a third party. This is possible since there is no explicit legal prohibition in the Chilean legal system preventing a person from selling their property to another. The guiding principle in our legislation is that anything not expressly prohibited is permitted.

The contractual agreement, however, must ensure that it does not cause any harm to the creditors of the company (especially mortgage or secured creditors). If such harm is verified once the formal bankruptcy proceeding begins, the contractual agreement between the debtor company and the third party can be declared void.

The second modality for implementing a kind of Pre-Pack procedure in the Chilean legal system is through a payment in exchange for the assignment of assets. This allows the company to assign the administration of its assets to its creditors who can then dispose of them and receive the proceeds from their sale.

Nevertheless, it should be noted that the practical use of this modality is limited in our legal system since it is typically used by natural persons and not by legal entities like companies, which may have a high number of creditors, making it nearly impossible to reach an agreement that would satisfy each.

Therefore, not only is the Pre-Pack procedure not established in our bankruptcy legislation, but anyone considering the existing modalities in our legal system that could come close to the desired objectives of a Pre-Pack must necessarily take into account the stated caveats.

For these reasons in Chile, in response to companies that are facing financial difficulties but their business model or part of their assets are still economically profitable, a Pre-Pack procedure should be expressly introduced by legislators, as lawmakers have done in Europe, in order for these companies to avoid falling into irreversible insolvency that would harm their creditors.