Restructuring and insolvency law in Peru

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

Peruvian bankruptcy proceedings are governed mainly by Peruvian Bankruptcy Law No. 27809 and supplementary by the General Corporate Law No. 26887. 

This means that in cases in which the Bankruptcy Law does not provide a specific regulation, the General Corporate Law will apply.

Note that in Peru the term “Bankruptcy” is used to make reference to either reorganisation or liquidation.
Recently, Legislative Decree No. 1511 which regulates the Accelerated Bankruptcy Refinancing Proceeding (“PARC”), has been issued. This proceeding will be open to legal entities (companies and associations) affected by the financial crisis caused by the COVID-19 pandemic. This proceeding allows debt refinancing, and will be in force, initially, only until 31 December 2020.

2. How are insolvency proceedings or restructuring proceedings initiated?

Peruvian bankruptcy proceedings in Peru are handled by a national administrative agency, INDECOPI, through its Bankruptcy Commission. According to Peruvian Bankruptcy Law, a debtor can be subject to one of the following proceedings: 

  • a voluntary Preventive Refinancing Proceeding, which is initiated exclusively at the debtor’s request, or
  • a voluntary or involuntary Ordinary Restructuring Proceeding, which may be initiated by the debtor or its creditors.  

In May 2020 a new temporary bankruptcy proceeding called the Accelerated Bankruptcy Refinancing Proceeding(PARC) has been created in order to provide financial relief to companies affected by COVID-19. This proceeding may only be initiated at the debtor’s request.

Under Peruvian legislation, a company may be part of a bankruptcy proceeding when it is going through a financial and/or economic crisis situation (a crisis caused by the loss or reduction of assets). Even though our Bankruptcy Law does not provide exact definitions of financial and economic crisis situations, it does define the requirements needed to commence the filing of voluntary and involuntary bankruptcy petitions as follows: 

Ordinary Restructuring Proceeding

Voluntary:

Any debtor can file a voluntary petition and request either the reorganisation or liquidation of its business if: 

  • more than one third of its liabilities are due and unpaid for more than 30 calendar days, or
  • its carried-forward losses less retained earnings exceed one third of its paid-in capital.

However, a debtor is forced to request liquidation if its carried-forward losses less retained earnings exceed its paid-in capital. 

Involuntary:

An involuntary petition is commenced by the filing of a petition by one or more creditors holding claims of more than 50 Tax Units (UITs)  in the aggregate. These claims need to be due and unpaid for more than 30 days.

Voluntary Preventive Refinancing Proceeding

Any debtor who is not included in one of the two requirements of the above-mentioned Ordinary Restructuring Proceeding may request the commencement of a voluntary Preventive Refinancing Proceeding. This proceeding has been designed for non-severe crisis, in which the debtor retains a certain capital or financial solvency. In this proceeding, the debtor maintains control of its business since its highest-ranking corporate body is not replaced by the creditors’ meeting, as occurs in the Ordinary Restructuring Proceeding.

Accelerated Bankruptcy Refinancing Proceeding (PARC)

Any debtor who is not included in one of the two requirements of the above-mentioned Ordinary Restructuring Proceeding may request the commencement of an Accelerated Bankruptcy Refinancing Proceeding. In order to do so, it must prove that its financial and/or economic situation has been affected specifically by the COVID-19 pandemic. In this proceeding, it is foreseen that the benefits of the “automatic stay” can be obtained in just 10 business days, and the debtor does not lose control over the business.

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

As explained before, our legislation provides three different types of bankruptcy proceedings which allow negotiation between the debtor and its creditors with the purpose of maximising the value of the debtor’s assets.

Ordinary Restructuring Proceeding

This can be initiated voluntarily at the request of the debtor, or involuntarily by one or more creditors. This proceeding is applicable to debtors who are immersed in a financial and economic crisis situation, and in order to qualify, they must meet certain requirements provided in the Peruvian Bankruptcy Law. 

This proceeding begins with a publication that generates a framework, which protects the debtor’s estate and suspends the enforceability of its obligations (automatic stay). In this proceeding, recognised creditors adopt decisions at a creditors’ meeting and may choose to reorganise the debtor’s assets or, alternatively, approve its liquidation. If creditors opt for reorganisation, the company must submit a proposed Restructuring Plan that must be approved by a qualified majority of recognised creditors. In Ordinary Restructuring Proceedings, the shareholders’ meeting is replaced by a creditors’ meeting. Also, in certain cases, the debtor’s administration is replaced by an administrative entity registered with INDECOPI. This process concludes with the payment of claims contained in the restructuring plan.

Preventive Refinancing Proceeding

This is initiated exclusively at the request of the debtor and is applicable to those debtors facing a financial crisis, but that still have financial and economic solvency which requires them to refinance their obligations to have better management of their liquidity. 

In this scenario, the debtor faces a temporary impossibility of complying with the payment of obligations to its creditors. The debtor can request a suspension of the enforceability of its obligations (automatic stay) and must propose a Global Refinancing Proposal to creditors. The creditors’ meeting must decide on the viability of the Global Refinancing Proposal filed by the debtor. With the approval of the referred proposal, the proceeding ends and the company exits the insolvency proceeding.

Accelerated Bankruptcy Refinancing Proceeding (PARC)

Taking into consideration the consequences generated by the pandemic, new insolvency legislation was passed in May 2020 approving a proceeding called the Accelerated Bankruptcy Refinancing  Proceeding. This is a transitory, exceptional and electronic proceeding. This proceeding is similar to the Preventive Refinancing Proceeding explained above, as it is initiated exclusively at the request of the debtor and is applicable to those debtors who are facing a financial crisis caused exclusively by the COVID-19 crisis, but who still have financial and economic solvency which requires them to refinance their obligations to have better management of their liquidity. 

Once the commencement of an Accelerated Bankruptcy Refinancing Proceeding is published, an automatic stay is imposed. The automatic stay suspends enforcement of its obligations and protects the debtor’s estate. The purpose of this new legislation is to provide a platform that allows companies to negotiate with their creditors the approval of a Business Refinancing Plan. With the approval of the Business Refinancing Plan, the proceeding ends. In this case, the appointment of a supervisor to verify the compliance of the Business Refinancing Plan is allowed. This is a very short proceeding that shall last between 45 and 90 business days.

5. Are there several types of creditors and what is the effect of a difference?

Peruvian Bankruptcy law only provides a mandatory distinction of creditors when the company is undergoing a liquidation proceeding as it establishes a priority order that must be followed when paying allowed claims. The order is as follows: 

  • labour claims
  • maintenance credits (if the debtor is an individual who carries out economic activity)
  • secured claims (up to the amount of the collateral)
  • tax claims
  • general unsecured claims. 

It is important to mention that our law does not distinguish between types of creditors in a restructuring or refinancing proceeding, except in the case of labour (employee) claims that, as set out in the Peruvian Constitution, have precedence of payment over other creditors. In addition, creditors related to the company (shareholders, directors, affiliated companies, among others) shall vote as a separate class in certain cases if the amount of total related claims exceed 50% of the total allowed claims.

In an Accelerated Bankruptcy Refinancing Proceeding, labour creditors and those who come from a consumer relationship are exempt from filing a proof of claim for recognition as creditors, as well as from participating in the creditors’ meeting, and receive special treatment in the payment of their credits. (50% of what the debtor allocates annually for the payment of credits must be used exclusively for the payment of these creditors.) However, related creditors in this proceeding do not have a right to vote.

6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

In general terms, Peruvian Bankruptcy Law does not provide an obligation to initiate a bankruptcy proceeding. It is generally only commenced voluntarily by the debtor or involuntarily (initiated by the debtor’s creditors) in cases where the legal requirements are met as explained above.

Notwithstanding the foregoing, our General Corporate Law provides that if a company loses half or more of its capital stock, or if such loss is presumed, the board must immediately summon a general shareholders’ meeting in order to convey this situation. If the assets of the company are insufficient to satisfy its liabilities, or if such insufficiency should be presumed, the board should immediately call a general shareholders’ meeting to report on the situation; and within 15 days from such date, should call for a meeting and decide whether an insolvency proceeding should be commenced.

Furthermore, our General Corporate Law provides that when a company which is under a corporate liquidation does not have enough assets to pay its creditors, it must request a judicial declaration of insolvency in accordance with Peruvian Bankruptcy Law.

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

Under Peruvian Bankruptcy Law, once the debtor files for bankruptcy, or is given notice of an involuntary filing, all actions by its representative bodies (management) (a) during the prior year (“Preference Period”), and (b) from that date on and until the date the creditors ratify or replace management (“Avoidance Period”), are put under scrutiny using two different tests. These tests may result in such actions being declared void.

Preference Period

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

Avoidance Period

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

  • payment of non-due 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
  • mergers and spin-offs if they have a negative impact on the net worth of the insolvent.

Additionally, representative bodies must comply with the provision of all documents and information requested by the administrative authority in a truthful and accurate manner. 

Furthermore, when the debtor is part of a liquidation proceeding and the company’s representative bodies are replaced by the creditors’ meeting, the company’s representative bodies must cease their operations. 

When a company is undergoing a restructuring proceeding, the creditors’ meeting may:

  • decide to maintain the debtor’s original representative bodies in charge of the company’s administration
  • appoint an administrator who is registered before INDECOPI, or
  • appoint a mixed administration regime.

When a company is part of a liquidation proceeding before INDECOPI, its representative bodies must cease their operations and be replaced by the creditors’ meeting and a liquidating entity or individual. 

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

In general terms, when a company is part of a bankruptcy proceeding, its representative bodies have to maintain the duties explained in point 7 above. These obligations may extend to shareholders only if they have powers of representation and act on them before third parties.

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

Generally, shareholders are not directly involved in bankruptcy proceedings, meaning that shareholders’ personal assets are not part of the proceedings.

According to our General Corporate Law, shareholders’ responsibility is limited. This means that shareholders do not answer personally for corporate debts, they only respond up to the amount of stock capital that each has contributed.
The obligations of a company generally lie exclusively on directors and managers of the company, being such persons responsible before the company and third parties.

Note that in the case of an irregular company, shareholders only respond when they act as administrators, representatives or as persons who enter into any contract or legal acts on behalf of the company. This means that this responsibility covers the fulfilment of obligations and compensation for damages. Such responsibilities are generated before the company and third parties, as the case may be.

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

A solvent liquidation is only permitted in a corporate liquidation framework, under the terms of the General Corporate Law. This means that when:

  • the company’s assets exceed their liabilities, and
  • the company is able to pay all of its creditors in full

the company must undergo a corporate liquidation and cannot request a bankruptcy proceeding before INDECOPI.

Yes, debtors may request the commencement of a Preventive Refinancing Proceeding, which is exclusively used when the company is facing a financial crisis, but still has financial and economic solvency which requires the company to refinance its obligations to have better management of its liquidity. 

Furthermore, if such financial crisis is due to the consequences of the COVID-19 pandemic, the company may request an Accelerated Bankruptcy Refinancing Proceeding, which is similar to the Preventive Refinancing Proceeding but has less requirements and is solved within a shorter time frame.

13. What is the average success rate after completed restructuring / insolvency proceedings?

Several companies have successfully recovered after a reorganisation or a Preventive Refinancing Proceeding. Recovery rates for creditors vary depending on how the restructuring or refinancing plan has been implemented. In addition, an important factor is whether an investor or buyer has financially supported or acquired the company. We estimate that the new PARC will provide for a faster process and, therefore, less loss and more recovery for creditors.

Picture of Michelle Barclay
Michelle Barclay
Partner
Lima
Picture of Victor Farro
Victor Farro
Counsel
Lima
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Carolina Pinzas
Associate
Lima
Ivanna Escala
Ivanna Escala
Associate
Lima