In Peru, out-of-court financial restructurings are possible due to the principle of private autonomy established in Article 1354 of the Peruvian Civil Code, which allows parties to freely negotiate agreements as long as they do not violate public policy rules. This means that a financially distressed company can renegotiate the terms of its debt directly with creditors without resorting to judicial or formal bankruptcy procedures.
However, for any agreement to be enforceable against all of a debtor’s creditors, it must be carried out within a bankruptcy proceeding.
Under the Bankruptcy Law, mechanisms similar to a “cram-down” exist to enforce restructuring agreements even if some creditors dissent. These mechanisms apply in procedures overseen by INDECOPI:
According to Peruvian legislation, the restructuring, reorganization, insolvency, and liquidation of business entities and partnerships are primarily governed by two legal frameworks: (i) the Law No. 27809 – Ley General del Sistema Concursal (the “Bankruptcy Law”), and (ii) the Law No. 26887 – Ley General de Sociedades (the “Corporate Law”).
Below is a summary of these legal regimes and their corresponding legal basis:
1.1. Bankruptcy Law (Law No. 27809)
This law establishes the legal framework applicable to the procedures of financial restructuring and insolvency of companies facing financial distress. The authority responsible for administering these procedures is the Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual (the “INDECOPI”).
a. Main Bankruptcy Procedures:
b. Legal Basis:
1.2. Corporate Law (Law No. 26887)
This law regulates the provisions applicable to companies regarding reorganization, dissolution, liquidation, and extinction. It establishes internal mechanisms that companies may adopt when they need to reorganize or cease operations.
a. Main Procedures:
b. Legal Basis:
1.3. General Overview
These legal frameworks facilitate the management of financial distress in companies, protecting the interests of creditors and ensuring orderly processes for restructuring or market exit.
In Peru, corporate restructuring processes are governed by the Bankruptcy Law. The two primary mechanisms to address financial distress are the Ordinary Bankruptcy Procedure and the Preventive Bankruptcy Procedure. These procedures are overseen by INDECOPI.
ORDINARY BANKRUPTCY PROCEDURE
The Ordinary Bankruptcy Procedure is designed for companies that are insolvent and need to either restructure their debts or liquidate their assets under INDECOPI’s supervision.
Stages, Timelines, and Company Obligations:
1. Filing and Admission of the Procedure:
2. Publication of Admission:
3. Suspension of Collection Actions:
4. Recognition of Claims:
5. Creditors’ Meeting:
6. Approval of the Restructuring or Liquidation Plan:
7. Functions of the Creditors’ Meeting and Representatives:
PREVENTIVE BANKRUPTCY PROCEDURE
The Preventive Bankruptcy Procedure allows companies to address financial distress early by negotiating with creditors under INDECOPI’s supervision.
Stages, Timelines, and Company Obligations:
1. Filing and Admission of the Procedure:
2. Publication of Admission:
3. Suspension of Collection Actions:
4. Negotiation of the Agreement:
5. Approval of the Agreement:
6. Functions of the Creditors’ Meeting and Representatives:
In the case of bankruptcy proceedings, Bankruptcy Law establishes certain priorities and preferences depending on the type of bankruptcy proceeding under which the debtor is involved.
What is common to both proceedings is that when creditors obtain recognition of their claims before INDECOPI, they are classified according to the nature of their claims. This classification is as follows: (i) labor and social security claims; (ii) food claims; (iii) secured claims; (iv) tax claims; and (v) unsecured claims.
In the ordinary restructuring insolvency proceeding, the following rules must be followed:
(i) Of the funds or resources allocated per year for the payment of credits, at least 30% shall be allocated in equal parts to the payment of labor obligations.
(ii) Labor creditors may not waive the preferential collection of their claims.
(iii) Tax credits will not be capitalized or forgiven.
(iv) In the event that any of the debtor’s fixed assets are sold, the price must be distributed among the creditors in the following order: (1) labor and social security claims; (2) food claims; (3) secured or guaranteed claims; (4) tax claims; and (5) unsecured claims. As will be seen below, the same price distribution rule of a liquidation scenario will apply.
As mentioned above, the Creditors’ Meeting may decide on the form of payment of the claims, as long as the rules described above are observed. This applies to any type of credit, provided that there is no discriminatory differentiation between one type of creditor and another, being that the differentiation must be based on objective criteria. In both cases -preventive bankruptcy proceedings and ordinary restructuring proceedings- secured creditors will not have priority over the assets to which their collateral relates if the Creditors’ Meeting so decides.
A particularity that does not apply to the preventive bankruptcy proceeding but does apply to the ordinary restructuring proceeding is that creditors whose claims are recognized before the administrative authority, in this case, INDECOPI, have preference in the collection with respect to creditors whose claims are not recognized. In other words, once all the claims recognized and registered before INDECOPI have been paid, the claims not recognized or registered before said administrative authority will be paid.
On the other hand, in the case of bankruptcy liquidation proceedings, the order established in bankruptcy law must be respected for the payment of claims, which is as follows: (1) labor and social security claims; (2) food claims; (3) claims with guarantees or secured claims; (4) tax claims; and, (5) unsecured claims.
Likewise, the preference in the collection of recognized creditors over creditors whose claims are not recognized will also be applicable.
In accordance with the order set forth in the two preceding paragraphs, an exclusive priority is established among the different types of creditors by class and depending on whether they have their claims recognized before the insolvency authority.
In other words, all recognized labor and social security credits must be paid before proceeding to the payment of the recognized maintenance credits, and these, in turn, must be paid in their entirety before proceeding to the next order.
Once the payment of the recognized creditors has been completed, the payment of the creditors not recognized before the insolvency authority will proceed in the order determined by class. In other words, the first step is to pay the unrecognized labor claims in their entirety, and then to proceed to pay the maintenance claims in their entirety, and then to continue with the next order.
A peculiarity of the liquidation procedure is that, in this case, secured creditors have a preference in the collection of the price of the asset on which their security interest rests. This rule will not apply when, having exhausted the debtor’s cash flows, there are still preferential claims for collection such as, for example, labor creditors, being necessary to foreclose the secured asset of the commercial creditor in order to pay labor claims. However, such commercial creditor will maintain the preference in the collection “prorrata” in the next execution in the proportion that was affected.
Regarding the rights of creditors in a restructuring or insolvency scenario, these will depend on a key moment: the filing before INDECOPI. The beginning of this moment is marked by the publication of the bankruptcy proceeding in the Bankruptcy Bulletin of INDECOPI, of national circulation, and ends thirty (30) business days after such moment.
During such period, creditors must file their claims before the bankruptcy authority, that is, INDECOPI, requesting the recognition of their claims in order to have their claims recognized and to have the right to speak and vote at The Creditors’ Meeting. This, provided that the authority verifies the entitlement, legitimacy, existence, origin and amount of the claim.
Once said term has elapsed, in the case of the preventive bankruptcy proceeding, the requests of the creditors filing before INDECOPI will be declared inadmissible. In other words, they will not have access to the recognition of their claims and will not be able to have a voice or vote at The Creditors’ Meeting.
In the case of ordinary bankruptcy proceedings for restructuring and liquidation, the requests of creditors that files before INDECOPI after the filing deadline may be recognized in the bankruptcy proceedings and be entitled to the accordance order or priority; however, they will not have the right to speak and vote at The Creditors’ Meeting.
The statutory process, procedures and mechanisms for reaching and effectuating a financial restructuring or reorganization plan or agreement, in the Peruvian legislation, are governed by both Bankruptcy Law and Corporate Law.
Under the Bankruptcy Law, the restructuring proceeding is overseen by INDECOPI in the framework of an Ordinary Bankruptcy Procedure whilst under the Corporate Law such proceeding is carried out solely by the company (without a third party’s supervision).
For further details of the statutory process, procedures and mechanisms for reaching and effectuating a financial restructuring or reorganization plan or agreement under Peruvian legislation can be found in sections 1.2. and 2.2. of this document.
The insolvency and liquidation proceedings, in the Peruvian legislation, are governed by both Bankruptcy Law and Corporate Law.
Under the Bankruptcy Law, the liquidation proceeding is overseen by INDECOPI in the framework of an Ordinary Bankruptcy Procedure whilst under the Corporate Law such proceeding is carried out solely by the company (without a third party’s supervision).
For further details of the insolvency and liquidation proceedings under Peruvian legislation can be found in sections 1.2. and 2.2. of this document.
The Bankruptcy Law does not address cross-border insolvency; however, it provides for the recognition of foreign judgments through the “exequatur” procedure. In practice, this process is notably slow, typically taking approximately two years to complete. Consequently, in a bankruptcy proceeding, a potential creditor would need to wait two years for their claim to be recognized. This situation is particularly concerning, as it highlights the significant delays creditors may face before being able to assert their rights.
Furthermore, it is essential to note that, under the provisions of the Peruvian Civil Code, the “exequatur” procedure is limited to being applied in the context of liquidation. This excludes any alternative use of the debtor’s assets, such as restructuring.
Notwithstanding the foregoing, in the year 2023, a bill was introduced to amend the Bankruptcy Law in order to contemplate a Cross-Border Insolvency Procedure, which would be governed by the Principle of Reciprocity, which postulates the recognition, collaboration and mutual coordination with foreign authorities in cases of cross-border insolvency or bankruptcy.
Thus, if the aforementioned bill is approved, the Cross-Border Insolvency Procedure would apply in the following cases:
(i) when a foreign court or foreign representative requests assistance in the Republic of Peru in connection with a foreign bankruptcy, insolvency, bankruptcy or similar foreign proceeding;
(ii) when assistance is requested in a foreign State in connection with a proceeding under the Bankruptcy Law;
(iii) when a foreign proceeding and a proceeding in the Republic of Peru are being conducted simultaneously with respect to the same debtor; or,
(iv) when creditors or other interested persons, who, being in a foreign State, have an interest in requesting the commencement of, or participating in, an ordinary bankruptcy proceeding under the Bankruptcy Law.
Santiváñez Abogados
Av. República de Panamá N° ;3461,
Lima 15036, Peru
Call: +51 1 2028000
Fernando Martinot
Partner
Yanira Becerra
Partner
Katia Matallana
Associate
Adriana Cangalaya
Associate
Carlos Bossio
Associate
We work together to deliver local business intelligence and value with global depth and reach.
