- 1.What actions are available to creditors prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceeding?
In a pre-insolvency scenario, any creditor may pursue judicial actions against debtors for collection of monies. In protection of these actions, creditors may request judicial attachments (prior to and during the proceedings) in order to secure payments. When a debt is secured, actions for the foreclosure of security interests may be inmediate and in the case of pledges, Peruvian legislation has incorporated private foreclosures; mortgages may only be foreclosed judicially. In addition, certain types of documents, like promissory notes and bills of exchange that comply with certain formal requirements, constitute prima facie evidence of indebtedness and collection of the amounts represented in them may be pursued through a special type of proceeding called proceso ejecutivo. This type of procedure is intended to be more expeditive by making the evidentiary process much simpler.
- 2.What duties do directors or officers of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? is there a standard of care towards third parties? in what circumstances can officers and directors be found liable for continuing to operate a company in financial difficulties? Can they be found criminally liable?
Pursuant to the Peruvian Corporations Law or Ley General de Sociedades, if the assets of a company are insufficient, or such insufficiency should be presumed, the board of directors is obliged to immediately summon a shareholders’ meeting in order to inform the situation and, within 15 days of summoning this meeting, summon the company’s creditors and request, if the case may be, the declaration of insolvency of the company.
Consequently, the failure to act as mandated by the law means that the directors and general managers could be liable towards the shareholders, the company or interested third parties. In general, officers and directors are liable for damages caused by breach of their obligations, abuse of powers, wilful misconduct and gross negligence.
Criminal liability may be attributed to directors and officials in certain cases, for example forgery of financial statements or providing false information regarding the financial situation of the company to shareholders, auditors or interested third parties.
- 3.Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? if so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?
Under Peruvian Legislation, mortgages (that is, securities over land or real estate property) can only be foreclosed by means of a judicial proceeding.
However, pledges (that is, securities over moveable assets) have a different regulation. The Ley de Garantías Mobiliarias does allow for foreclosure as direct adjudication of the pledged assets by creditors, as well as by private sale. The Ley de Garantías Mobiliarias requires that parties agree in advance in the security agreement to a certain value of the asset or at least to an independent mechanism to determine the value. Also, parties must designate a third person that will conduct or execute the private sale.
- 4.What types of insolvency proceedings are available in your jurisdiction? are different insolvency proceedings available for individuals and companies? is there any distinction made between ‘preventative’ insolvency proceedings and ‘actual’ insolvency proceedings?
The Peruvian Insolvency Law or Ley General del Sistema Concursal, foresees two kinds of insolvency proceedings that are applicable to both individuals and companies, these are:
- The Preventive Insolvency Proceeding (PIP): this is an abbreviated proceeding that can be only initiated by those debtors who do not qualify for an Ordinary Insolvency Proceeding. The sole purpose of the PIP is to set an appropriate forum for the debtor to reach a debt financing arrangement with its creditors, via the approval of a Global Refinancing Agreement (GRA).
- The Ordinary Insolvency Proceeding (OIP): which can be initiated either by debtors or creditors. Within an OIP, the debtor is driven by its creditors in one of two directions:
- Reorganisation proceeding: in which the creditors’ assembly decides that the debtor still has prospects for success and therefore approves a reorganisation plan that allows the debtor to pay all of its insolvency claims, while maintaining its activities. The creditors’ assembly replaces the shareholders in its duties and rights, and is entitled to decide about the future of the business as well as to ratify or appoint new management.
- A liquidation proceeding: in which the creditors’ assembly decides that the debtor has no prospects for success, and therefore decides that it should be liquidated according to a liquidation plan, also approved by the creditors’ assembly. From the date the liquidation plan is approved, management is replaced by a liquidator or liquidating entity.
Please bear in mind that, whilst in the PIP and in the reorganisation proceeding the concept of “insolvency claims” includes all claims originated before the date of release of the publication in the Peruvian Official Gazette informing the beginning of the insolvency proceeding (the Bar date), in the liquidation proceeding this concept includes all claims, disregarding the date in which they were originated.
- 5.On what grounds may a debtor company be placed into an insolvency proceeding? who may do this? what are the grounds for a voluntary proceeding? if an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? what effect, if any, does a filing have on a subsidiary or affiliate of the debtor? are there any grounds for consolidating or coordinating insolvency proceedings involving related parties? are inter-company or affiliate claims treated differently in terms of recovery or voting?
As explained above, the Insolvency Law distinguishes between the:
- Voluntary OIP: in which case the debtor files the insolvency petition before the Insolvency Authority (INDECOPI), requesting either the reorganisation or liquidation of its business. The debtor must prove that:
- more than one-third of its outstanding liabilities have been due for more than 30 days; or
- its accumulated losses minus retained earnings exceed one-third of its paid-in capital. However, if its accumulated losses minus retained earnings exceed its paid-in capital a debtor may only request liquidation. In addition, if the debtor is an individual, decedent’s estate or community property, it will need to prove that:
- more than 50 per cent of its income comes directly from one economic activity of the debtor; or
- more than two-thirds of its liabilities were originated by such activity or a third party with respect to which the debtor has assumed liability.
- Involuntary OIP: in which case it is one or various creditors that file the insolvency petition before the Insolvency Authority. The creditors will have to prove that their outstanding unsecured credits amounting more than 50 tax units (currently approximately US$65,000) have been due for more than 30 days. There is no need for a bond to be posted, nor are the creditors liable for filing the action (unless they have forged documents or liabilities in order to obtain the initiation of the OIP).
PIPs can only be initiated by those debtors who do not qualify for an OIP. As to the effect on subsidiaries, the beginning of an insolvency proceeding of any determined company does not have any effect on its subsidiaries or affiliated companies. The Insolvency Law does not provide the possibility of consolidating insolvency proceedings involving related parties.
As to treatment of claims from affiliates, these do have a different treatment in terms of voting in the creditors’ assembly. Whenever the recognised affiliate claims amount to more than 50 per cent of all recognised claims, any decisions pertaining to either:
- the approval of the reorganisation or liquidation of the debtor; or
- the approval of the liquidation plan, reorganisation plan or GRA.
These must be voted separately by the affiliated creditors and the non affiliated creditors. Furthermore, when deciding to allow a proof of claim filed by an affiliated creditor, the Insolvency Authority must be stricter and verify the existence, legitimacy and amount of the alleged claims by all means it deems appropriate.
- 6.What notifications and meetings are required after the company has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? what must they show to prove their ownership interest in the underlying debt?
After the Insolvency Authority declares the beginning of the insolvency proceeding, it has to make a publication in the Peruvian Official Gazette informing this situation and requesting creditors that have credits originated before such publication to file their proofs of claim (within a term of 30 business days) in order to be allowed to participate in the process. Claims filed after the referred 30-day period will not be entitled to vote but will participate in the reorganisation plan or liquidation plan, whichever may be agreed.
In addition, various other notices could be given to creditors throughout the proceeding, including but not limited to, the approval or refusal of their proofs of claim, the date and time of any creditors’ assembly meeting, and any disputes against their proofs of claim, among others.
Under the Insolvency Law, there is no limitation on the number of times creditors’ assembly meetings can be held. The meetings held during an insolvency proceeding include:
- meeting to approve the debtor’s reorganisation or liquidation;
- meeting to approve the debtor’s reorganisation plan or liquidation plan; and
- meeting to designate or replace the debtor’s administration or liquidator.
The Insolvency Law does not expressly regulate the participation of bondholders in the proceeding. However, all creditors with insolvency claims are comprehended within the insolvency proceeding and are therefore entitled to submit their proof of claim before the Insolvency Authority, in order to be able to participate within the proceeding. These creditors can submit any documents they consider convenient in order to prove the existence and amount of their claims. The representative of the bondholders (equivalent to an indenture trustee) could do the submissions for bondholders, although this should not restrict each bondholder’s ability to act individually if this does not occur.
- 7.How are contingent creditors dealt with? How are inter-company claims handled? if so, has this been challenged and with what result? are there special rules for certain contracts?
Contingent creditors who file their proof of claim will be registered by the Insolvency Authority as such (contingent creditors). Although contingent creditors who filed their proofs of claim within the term of 30 business days after the Bar date can attend (and participate in) the creditors’ assembly meetings, their voting rights will be suspended until their claims stop being contingent and are allowed by the Insolvency Authority.
The Insolvency Law does provide special rules for those claims related to leasings. Although all of the instalments that were due before the Bar date qualify as insolvency claims and are comprehended within the proceeding, it allows the creditor to decide whether to also include within the proceeding the instalments that were not due until after the Bar date, or not.
As to the treatment of inter-company claims, please refer to question 5. To our knowledge, the participation of inter-company claims has not been challenged in cases where the affiliation of the creditor with the debtor was recognised and the appropriate voting proceedings for the creditors’ assembly meetings were complied with.
- 8.What effect does the commencement of an insolvency proceeding have on the debtor and its operations? is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?
With the release of the publication (Bar date), an automatic stay is imposed and all obligations of debtor as of that date become temporarily unenforceable. The automatic stay suspends enforcement of any insolvency claim against the debtor’s estate until a GRA, reorganisation plan or liquidation plan is approved.
In addition, from the Bar date, all execution proceedings for collection, foreclosures of collateral as well as injuctions against the debtor’s estate are stayed.
Enforcement of claims originated after the Bar date is not suspended, and, therefore, creditors can initiate collection actions against the debtors with respect to such claims.
The automatic stay applies to a PIP and a OIP, except if under the PIP the debtor waives this right when filing the insolvency petition.
The sole commencement of the insolvency proceeding does not entitle the debtor to terminate or reject contracts to which it is a party.
- 9.How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? How are unsecured creditors treated? How are equity holders treated? Could an equity holder recover prior to creditors being paid in full?
Within a liquidation proceeding, the liquidator has to pay the allowed claims in the following priority order:
- labour claims;
- alimony claims;
- secured claims if collateral has been granted before the Bar date;
- tax claims; and
- non-secured claims.
This order of precedence sets the base for negotiations among creditors in the context of a reorganisation plan.
Secured claims should be paid with the proceeds of the foreclosure of their respective collateral (unless such collateral has been sold and the proceeds have been used to pay labour or alimony claims). If there should be any unpaid remnant, such amount is paid pro rata with non-secured claims.
Given that once an asset has been transferred within a liquidation proceeding, all liens over the asset are lifted, the secured creditor does not really have any remedy that will allow him to recover an asset over which it holds a lien after it is sold by a liquidator. However, although the approval of such secured creditor is not required to use or dispose of such assets, the affected creditor could hold the liquidator liable to the extent he has acted in disregard of the Insolvency Law and the established priority order.
Equity holders will not be able to recover their investment in the debtor company unless the liquidation proceeding ends and the liquidator has paid (in full) all of the debtors insolvency claims.
Although payments under the reorganisation plan do not have to follow the abovementioned priority order, there are two main limitations:
- at least 30 per cent of all funds used to pay insolvency claims must be used to pay labour claims; and
- claims not allowed by the Insolvency Authority but nonetheless recognised in the debtor’s accounting are paid only after all allowed claims have been paid.
- 10.What is the effect of an insolvency proceeding on current and retired employees?
As explained in our answer to the previous question, all allowed labour credits that qualify as insolvency claims (disregarding whether the creditors are current or retired employees), must be paid in the first priority order within a liquidation proceeding.
As of the approval of the liquidation plan, the liquidator will be able to initiate the collective termination of employment contracts of the debtors’ employees.
- 11.Do directors or officers of companies in insolvency proceedings suffer any consequences?
No. However, those individuals who have been declared personally bankrupt are disqualified from the following:
- incorporating or forming part of companies or legal entities, in general;
- serve as officer, manager, director or representative of other companies or legal entities, in general;
- serve as guardian, executor or legal representative of natural persons; or
- serve as administrator or liquidator of other debtors subject to an insolvency procceding.
- 12.How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority?
The orders of priority referred in question 9 are a basis for negotiations of the reorganisation plan in the sense that no creditor with a high priority will vote for a reorganisation plan that puts him in a worse position than a liquidation. However, the reorganisation plan can alter these priorities, since after all, it is an agreement among creditors. The plan is also subject to the limitations described in the last part of our answer to question 9.
- 13.Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?
Peruvian Constitution establishes that all foreign investors should receive the same treatment as Peruvian investors. In that sense, foreign creditors should not receive a different treatment than local creditors.
- 14.What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be ‘crammed down’? Are there any
substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?
The reorganisation plan must be approved by more than 66.6 per cent of the allowed claims (in the first call of the creditors’ meeting) or more than 66.6 per cent of the allowed claims represented in the creditors’ meeting (in the second call).
All allowed creditors (whether secured or not) participate in the creditors’ assembly meeting in equal footing as the participation of each creditor is determined not by their payment priority order, but by the percentage that their allowed claims represent with regard to the total amount of the allowed claims.
The reorganisation plan must satisfy certain requirements (such as a payment schedule that comprehends all of the insolvency claims, whether allowed or not, and the disposition that at least 30 per cent of all funds used to pay insolvency claims will have to be used to pay labour claims).
The Insolvency Authority may declare the nullity of any reorganisation plan that does not satisfy these legal requirements, either at its own initiative or at the appeal of allowed creditors representing at least 10 per cent of the votes in the creditors’ assembly.
- 15.May creditors trade their claims during the course of a reorganisation? what impact, if any, will it have on voting for a plan?
Creditors can trade their claims during the course of the reorganisation. In order for a creditor to be able to exercise the voting rights of any acquired claims, they must obtain the Insolvency Authority’s recognition of the credit assignment.
Unless the assignor or the assignee are affiliated to the debtor, the assignment of the claims should not have any effect on the composition of the creditors’ assembly as a whole, or on the approval of the reorganisation plan.
- 16.Does the government tend to play an active role in insolvency proceedings? What factors determine this?
The Insolvency Authority (INDECOPI) should be the only governmental authority playing an active role in insolvency proceedings. Please refer to our answer to question 17 regarding the matters that are subject to the Insolvency Authority’s venue.
Nontheless please bear in mind that in cases where the allowed tax claims are significant, the tax authority may also have an active and influential participation within the insolvency proceeding but only as a participant in the creditors’ assembly without any ability to exert any of its powers.
- 17.What kind of court supervision is there in each type of insolvency proceeding? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to
control operations during the insolvency proceeding? Can creditors form creditors’ committees? what formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the
trustee, receiver or other court-appointed officer?
Peruvian insolvency proceedings are followed before the specialised Insolvency Authority (INDECOPI), as opposed to a court or judicial authority.
The Insolvency Authority does actively participate throughout the insolvency proceeding mainly:
- declaring the beginning of any insolvency proceeding (as per requested by either the creditors or the debtor);
- deciding on whether to allow the proofs of claims; and
- enforcing the Peruvian Insolvency Law and making sure that no legal dispositions are being violated by the debtor, the creditors, the administrators or the liquidators.
However, it is the creditors’ assembly who decides most matters regarding the administration or winding-up of the debtor and its assets, as it is the body in charge of, among others:
- approving the reorganisation or liquidation of the debtor;
- approving the reorganisation or liquidation plan; and
- designating the administrator or liquidator.
The creditors’ assembly may designate a creditors’ committee and delegate on it all its powers, with exception of the power to decide on the reorganisation or liquidation of the debtor and the power to approve the reorganisation or liquidation plan.
There is no impediment under the Insolvency Law for more than one reorganisation plan to be submitted for the approval of the creditors’ assembly. However, the creditors’ assembly can only approve one reorganisation plan that shall be enforceable against all insolvency claims.
- 18.May a debtor obtain financing while in insolvency will the lender enjoy special rights or preferences for providing debtor-in-possession financing?
As long as the creditors’ assembly has authorised the administrators to do so, debtors under a reorganisation proceeding could obtain financing while in insolvency. As the financing will have its origin after the Bar date, these obligations will not qualify as insolvency claims, will not be comprehended within the insolvency proceeding, and therefore may be paid under their own terms.
Additionally, the reorganisation plan could provide special rights or preferences regarding the payment of those insolvency claims held by creditors who provide new financing to the debtor.
- 19.What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?
Any liquidation proceeding should end with the extinction of the debtor company. However if, after the sale of all the debtor’s assets, there are no proceeds left for the payment of certain claims, the liquidator has the obligation to file a petition before the civil judge in order for the same to declare the debtor’s judicial bankruptcy. The judge will issue certificates of non-recovery on behalf of unpaid creditors.
Otherwise, once all of the debtor’s creditors have been paid in full, the liquidator can give any remnant to the equity holders.
The reorganisation proceeding ends only once the Insolvency Authority verifies that all of the insolvency claims contemplated in the reorganisation plan have been paid (or as in a recent case, where an insolvent debtor was allowed to novate certain of its obligations into new obligations). There is no discharge of prior claims. Once the reorganisation proceeding ends, the shareholders reasume all of their rights and faculties.
- 20.How long do restructurings last? is there a formal deadline?
There is no formal deadline for reorganisation proceedings. The duration of these proceedings depends mainly on the amount of insolvency claims and the willingness of the creditors’ assembly (or the controlling creditors) to pay all insolvency claims and file for the ending of the proceeding. In our experience, reorganisation proceedings rarely last less than five years and some last too long.
- 21.Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work?
- 22.May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does it require court approval? Can creditors recover the expense of participating in the process? if so, how is that dealt with?
Creditors will only be able to offset debts owed to them against their Insolvency Claims, as long as the liquidation or reorganisation plan, or GRA allows this possibility. Prior to the approval of these documents, the creditors cannot offset any debt owed to them against their insolvency claims.
In a liquidation proceeding the creditors could include the expenses they have incurred into to participate within the proceeding in their proofs of claim, in order for these expenses to be allowed as insolvency claims. However, the Insolvency Authority does not usually allow these claims (as there is no disposition that obliges the debtor to assume these expenses). In a reorganisation proceeding or a PIP, these expenses do not qualify as insolvency claims and therefore cannot be allowed within the proceeding.
- 23.If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?
Yes, as long as the right to use such losses has not expired pursuant to the Peruvian Tax Regulations.
- 24.How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? if a company organised under the laws of your jurisdiction entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?
The Peruvian Insolvency Authority has exclusive jurisdiction over any insolvency proceeding regarding debtors domiciled in Peruvian territory and assets located in Peruvian territory.
According to Peruvian Insolvency Law, when an insolvent debtor is domiciled abroad but has assets located within Peruvian territory, the Insolvency Authority will be competent to initiate a secondary insolvency proceeding in Peru regarding exclusively the assets located in Peru, as long as the insolvency ruling issued abroad is judicially recognised in Peru through the applicable procedure.
- 25.How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? what factors determine this?
Although we do not have official statistics as to how many debtors successfully emerge from reorganisation proceedings, we do know from statistics published by the Insolvency Authority in 2009 that creditors opted for a liquidation proceeding rather than a reorganisation in roughly 95 per cent of all cases.
Through the late 1990s and early 2000s, very few, if any entities came out of insolvency. Owners wanted to hold on to their insolvent businesses now protected by insolvency laws, creditor banks did not have incentives to liquidate and take the losses, and new capital was not interested yet in insolvent businesses. When the Peruvian economy began to prosper, investors became interested in insolvent businesses that presented good business opportunities but had inadequate capitalisation or poor management. Investors became interested in taking control of insolvent entities through the acquisition of credits, in some cases even similarly to hostile takeovers. As a result, those insolvent entities where ownership has changed have received new capital and consequently new opportunities.
- 26.In what circumstances could transactions that were entered into prior to an insolvency proceeding be vulnerable to challenge? By whom?
Under the Peruvian Insolvency Law, once the debtor files for bankruptcy, or is given notice of an involuntary filing, all actions by management during the prior year (preference period), and from that date on and until the date the creditors ratify or replace management (avoidance period), are put under scrutiny with two different tests. These tests may result in such actions being declared void.
The first test covers all actions or transactions performed during the preference period. These will be declared void if they have a negative impact on the net worth of the debtor and are not related to the normal activities of the debtor.
The second test covers the following actions by management if they happen during the avoidance period:
- payment of unmature obligations;
- payment of mature obligations not made according to their terms;
- contracts for consideration that are not in the ordinary course of business;
- compensations among mutual obligations with creditors;
- liens over, or transfers of, property;
- liens created in security of obligations incurred prior to bankruptcy;
- foreclosure on liens and attachments; and
- mergers, spin-offs if they have a negative impact on the net worth of the insolvent. These may be declared void if found to have a negative impact on the net worth of the debtor.
After declaring an act or contract void, the court will order the return of the property to the insolvent party or the termination of the lien, as the case may be. An action against a particular act or contract may be brought before a court by the designated liquidator, management or by any creditor holding an allowed claim. These are general rules that apply either to a reorganisation or liquidation.
- 27.If a debtor company has debt securities, does your jurisdiction’s insolvency or securities law provide for any special treatment for an exchange of those securities?
- 28.Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?
A technique that is usually used by the debtor’s equity holders in order to control insolvency proceedings is acquiring insolvency claims but without reaching the 50:50 ratio between all allowed affiliate and non-affiliate claims, thus avoinding having to vote certain matters separately from the non-affiliate claims. Provided that the equity holders manage to convince other non affiliate creditors to support their motions, this mechanism could enable them to control the creditors’ assembly to a certain extent, ensuring that, for example, the previous management is maintained. If in addition, there are no large creditors who wish to take controlling positions, equity holders in management can in fact control the insolvency proceeding indefinitely.
- 29.Are any amendments to your jurisdiction’s insolvency laws envisaged?
We do not have knowledge of any motions to amend the Peruvian Insolvency Law that could be approved or issued in the immediate future.
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