- Although the payment behaviour of domestic companies is generally good, with payments normally taking place within 60 days on average, standard payment terms are very broad (60 to 90 days).
- Courts are trustworthy but the system provides no fast-track proceedings, meaning pre-legal action conducted by collection specialists is the most efficient way to obtain payment without incurring legal costs and delays.
- Debt-renegotiation mechanisms aiming at rescuing companies have been put in place but these are rarely used, with liquidation remaining the default proceeding when it comes to dealing with insolvent debtors. Therefore the chances of collecting unsecured debt through insolvency courts are non-existent.
Collecting in Chile
Availability of financial information
Main corporate structures
Liability for business debts is determined by legal structures, which are described as follows:
- Limited Liability Companies (Empresa Individual) are the most common business structures because they require no minimum capital and ensure shareholders’ liability is limited to their contribution.
- Corporations (SA) allow regrouping of more shareholders, but their management rules are more constrictive. For instance, a board of directors must be nominated.
- Stock Companies (SpA) are also available when greater capital is needed, and its rules of operation are more flexible.
The court system in Chile is divided between the first instance and Appellate Courts, taking geographical localization (debtor´s address) and subject matters (civil and commercial law, criminal law, etc.) into account. At the highest level, the Supreme Court has jurisdiction on the national scale, but its work may be reinforced by Special Courts (dealing with antitrust matters, for example). The rules applicable to business litigation are mainly codified in a Civil Procedures Code (CPC) and a Court Statute Code (Código Orgánico de Tribunales).
It should be emphasized that Chilean courts are independent from executive power and while being equipped with a sensible dose of patience is necessary, commencing legal action before court is fairly reasonable.
Days Sales Outstanding (DSO)
Late payment interest
Late payment is regulated by law and interest rates (interests moratorium) are published periodically by the Central Bank.
Regulations provide for maximum interest rates, but these remain complex to calculate as different indicators would apply depending on the currency used, the amount due and the payment delays.
Debt collection costs
The most common payment methods are as follows:
• Swift bank transfers are among the most popular payment means as they are fast, secured, and supported by an increasingly developed banking network internationally and domestically.
• Export transactions are usually guaranteed through Standby Letters of Credit (a bank guarantees the debtor’s credit quality and repayment abilities) which constitute reliable guarantees to be interpreted as a sign of good faith since they can be triggered as a ‘payment of last resort’ if the client fails to fulfil a contractual commitment.
• Alternatively, confirmed Documentary Letters of Credit (a debtor guarantees that a certain amount of money is made available to a beneficiary through a bank once certain terms specifically agreed by the parties have been met) may be considered.
• Generally speaking, use of checks is very common (but in order to be considered as enforceable debt recognition titles they have to be signed before a public notary) and local bank guarantees can be obtained at reasonable prices.
It is also worth adding that approximately 20% of transactions in Chile are paid in advance.
Amicable settlement negotiation prior to conducting formal legal action is not mandatory by law but remains highly advisable. Firstly, although the courts are reliable, the chances of reaching an acceptable compromise in due time are greater than the chances of obtaining a timely court decision because formal legal action in Chile is time consuming. Secondly, courts in Chile cannot enter summary judgment or fast-track proceedings, which implies that amicable negotiations are the only way to obtain payment without starting formal litigation for small and medium cases in which legal costs would be disproportionate. Finally, the courts are in theory required to establish whether the parties have considered settling the dispute through mediation before initiating the evidence phase (this obligation is observed in practice, but the number of cases where the debtor pays are low).
Before starting legal proceedings against a debtor, assessment of assets is important to verify that the company is still active and whether recovery chances are at their best. In addition, it is essential to be aware of the debtor’s solvency status: if insolvency proceedings have been initiated, it indeed becomes impossible to enforce a debt.
If the amicable phase fails or if the debtor questions the claim, the option of starting legal proceedings remains.
A judicial notice must be served to the debtor by a court clerk (Receptore). The respondent must then answer the complaint within fifteen days but, insofar as there is no summary proceeding for default judgments, the creditor will have to prove their allegations entirely despite the debtor’s absence. Therefore, legal representation is essential.
Chilean courts would then typically render a judgment recognizing a right, ordering a specific performance, or allowing attachment of the debtor’s assets. As a general rule, damages in Chile are to be considered broadly but punitive damages cannot be awarded.
Lodging an appeal
Enforcing court decisions
How long could legal action take?
Obtaining a first instance decision in Chile may take two to three years on average, but this may be at least doubled if the claim is disputed by either party. After such a long period of time, there might be nothing left to recover and in this case pre-legal recovery remains the best option.
In principle, domestic courts would not take longer to deal with cases involving a foreign party than to deal with cases involving domestic parties only. In practice, some extra delays would nonetheless occur depending on the complexity of each case.
How much could this cost?
Alternatives to legal action
Alternative Dispute Resolution methods (ADR)
As a result of the difficulty to obtain timely decisions from courts, Alternative Dispute Resolution methods are increasingly common in Chile for business-related disputes, especially in relation to breach of contract.
As already mentioned, mediation ought to be mandatory during civil proceedings, but this step is not automatic in practice. Arbitration (regulated under the Arbitration Act, Law No. 9307/96) and international arbitration (regulated by Law 19.971 on International Commercial Arbitration) are nonetheless often viewed as being more efficient than ordinary lawsuits because they may offer expeditious and confidential proceedings together with a final and binding award on the merits.
However, all subject matter cannot be considered through arbitration because Chilean courts retain exclusive jurisdiction over various areas of law. To be enforced, arbitral awards must also be recognized by a court of first instance through an exequatur proceeding.
Enforcing foreign awards
Foreign judgments against domestic debtors may be enforced in Chile provided that they have been validated by the Supreme Court through an exequatur proceeding. The claimant must provide the court with a translated and certified copy of the decision as it will verify that the decision is final and enforceable in the issuing country, that enforcement is not incompatible with Chilean public policy, and that the parties both benefited from a due process of law. It should be added that recognition of foreign judgments in Chile strictly operates on a reciprocity basis, meaning that decisions rendered in a country where Chilean decisions are not recognized will not be recognized in Chile.
The whole exequatur process can last from two months to a year. Once recognized, the foreign judgment may be presented to the competent civil court to be enforced as any domestic decision.
In addition, Chile is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. Therefore, domestic courts also ought to recognize and enforce decisions rendered through international arbitration proceedings.
The Chilean insolvency system is regulated by the Chilean Bankruptcy Act (new insolvency law and re-entrepreneurship). As a result, the main purpose of insolvency law is to pay as much as possible of the debts out of liquidation proceedings.
It may be noted that a creditor would normally be entitled to receive a refund corresponding to the VAT (i.e. 19%) paid to the debtor when the latter is declared in compulsory liquidation (bankrupt) by the court.
However, it is extremely rare for an unsecured creditor to get any (non VAT-related) money back at the end of insolvency proceedings.
Restructuring the debt
Since debt restructuration mechanisms are not relied upon, liquidation is the default insolvency proceeding in practice. Liquidation is organized through a single procedure initiated upon demand of the debtor or creditor. In particular, creditors can file for bankruptcy (compulsory liquidation) when a debtor defaults or disappears without appointing an administrator for its business. Once bankruptcy has been declared, a trustee is given responsibility for the debtor’s business and assets.
As mentioned, overall it remains extremely rare for an unsecured creditor to get any money back at the end of insolvency proceedings, because priority rules normally apply while distributing the proceeds to the creditors (under Articles 2472-2489 of the Civil Code).