Insolvency clawback actions from a Peruvian perspective

The proposed EU Directive on harmonisation of insolvency law seeks to set minimum standards for exercising avoidance actions in insolvency proceedings in order to safeguard the insolvency estate from unlawful asset transfers before the initiation of insolvency proceedings.

In Peru, the insolvency system is administrative rather than judicial. Because the administrative authority has limited powers, preference and avoidance actions must be resolved by the Judiciary. In recent years, the use of these actions has become more frequent.

Scope of avoidance actions

Under the Peruvian Insolvency Law (Law No. 27809 including amendments), once the debtor files for insolvency or is given notice of an involuntary filing, all actions by management (a) during the prior year (“Preference Period”), and (b) from that date on and until the date the creditors ratify or replace management (“Ineffectiveness Period”), are scrutinised according to two different tests. These tests may result in actions being declared ineffective.

We must emphasise that our regulation is not focused on the benefit of one creditor over the detriment of others. It also does not contemplate scenarios of voidability or ineffectiveness with aggravating factors, as established by the EU Directive for acts that have intentionally caused harm to creditors and acts involving related creditors. According to the EU Directive, this can result in the suspicion period being extended to four years, which is not the case under Peruvian legislation.

Preference Period

The first test covers all actions or transactions, whether for consideration or not, performed during the Preference Period. These will be declared ineffective if they have a negative impact on the net worth of the company and are not related to the normal activities of the debtor.

Ineffectiveness Period

The second test covers the following actions by management if they happen during the Ineffectiveness Period:

• Payment of non-due obligations.
• Failure to make payments on due obligations according to their terms.
• Contracts for consideration that are not entered in the ordinary course of business.
• Offsetting mutual obligations with creditors.
• Liens over, or transfers of, property.
• Liens created in security of obligations incurred prior to insolvency.
• Foreclosure on liens and attachments.
• Mergers and spin-offs if they have a negative impact on the net worth of the insolvent company.

The EU Directive establishes that legal acts of the debtor against no or manifestly inadequate consideration can be declared void if they are perfected within a time period of one year prior to the submission of the request for the opening of an insolvency proceeding or after the submission of such a request. Peruvian Insolvency Law presumes that once the debtor is notified of an insolvency request, the debtor enters a state in which administrators can only carry out acts related to regular business activities. This means no contracts unrelated to the ordinary course of business can be signed, and such contracts must have reasonable consideration according to what is usual in the market.

Parties authorised to Initiate Preference or Ineffectiveness Actions

An action against a particular act or contract may be brought before a court by the designated administrator, replacing management, or by any creditor holding an allowed claim. These are general rules that apply either to a reorganisation or liquidation.

Consequences of the action or contract being declared ineffective

After declaring an act or contract ineffective, the judicial court will order the return of the property to the insolvent party or the termination of the lien, as the case may be. A third party who in good faith acquires a right from the insolvent debtor for valuable consideration, and whose authority to grant such a right appears in the relevant Registry, will not be affected by the ineffectiveness once their right is registered.

Conclusions

Regarding the EU Directive, our regulation adequately covers clawback actions against any patrimonial detriment, which will ultimately harm creditors (both those carried out one year before the commencement of the insolvency proceedings and those carried out after this point). However, the EU Directive provides insights into possible changes that could perfect our system and detail the consequences of undue benefit by a creditor or third party. Moreover, there is currently a bill in the Congress of the Republic of Peru that establishes more detailed regulations on clawback actions.

For more information about this bill, contact your CMS client partner or these CMS experts in Peru.