Pre-pack proceedings involve the negotiation for the sale of one or more productive units of a debtor company to a third party. This sale aims to satisfy the obligations of the creditors of said company by reaching an agreement on its value before the company formally files for insolvency proceedings. The primary advantage of this negotiation is that the productive units can attain a higher value while the company has not yet suspended its operations due to its precarious financial condition1. Although the pre-agreed sale of productive units that constitute pre-pack proceedings is not a common insolvency practice in Colombia, this jurisdiction currently includes multiple rules that would make such a sale possible with the subsequent validation by a judge. Furthermore, insolvency rules as amended by COVID-19 pandemic regulation could promote pre-pack agreements in the country.
Restructuring Agreements and their out-of-court agreements in Colombia
Reorganisation proceedings are a type of judicial insolvency proceeding carried out before civil judges or the Superintendence of Companies, depending on who the debtor is. The purpose of these proceedings is, among others, for debtors to enter into an agreement with their creditors to preserve viable enterprises, normalise their commercial and credit relations, and restructure their operations, management, assets and liabilities. Restructuring agreements are binding on all creditors, including those who did not vote or who voted against it.2
Restructuring agreements in Colombia may provide the sale of one3 or more productive units of the debtor through a corporate spin-off4. Under ordinary circumstances (as opposed to insolvency scenarios), a spin-off allows creditors of the company to demand collateral to secure payment of their claims5 and enables the company's shareholders to exercise a withdrawal right entitling them to a refund of the value of their shares6.
However, said rights are not available when the spin-off occurs as part of a restructuring agreement7. Colombian insolvency laws also provide the possibility to, at any time and without having to comply with regular admissibility requirements, enter into an out-of-court restructuring agreement8. Such an agreement may be filed with the insolvency judge for validation and approval, upon request of any of the parties to the agreement. Validation will be granted provided the following requirements are met: (i) the agreement was the result of a public and open negotiation of the parties; (ii) was accessible to all creditors; (iii) provided equal rights to all creditors belonging to same creditor classes; and (iv) does not include illegal or abusive clauses.
Once approved by the judge, the out-of-court agreement will have the same effect as a judicial restructuring agreement. All in all, under applicable law, it is possible for the debtor to reach an enforceable out-of-court agreement with its creditors before starting a judicial insolvency proceeding, and the purpose of said agreement can be the sale of one or more productive units. Therefore, pre-pack proceedings are already legally possible in Colombia.
Innovations brought on by COVID-19
As a result of the COVID-19 pandemic, the Colombian Government issued emergency decrees9, including temporary measures related to insolvency proceedings to address the crisis. Originally set to expire by December 31st, 202210 ,these measures were granted a one-year extension until
December 31st, 202311. However, a recent Constitutional Court decision overturned this extension on October 412, concluding a three-year duration of these measures. It remains to be seen whether this precedent will influence future insolvency law reforms.
Mediation driven process
Under the aforementioned decrees, it was possible to negotiate a restructuring agreement through mediation by and before a local Chamber of Commerce13. Said agreements needed to be expeditiously validated by the insolvency judge14.
Under the rules that applied to this type of proceedings, the relevant Chamber of Commerce assigned a mediator who among others examined the debtor's accounting and financial information, verified the suggested classification and ranking of creditors' claims and determined the creditors’ voting rights. The mediator played a key role in this type of proceeding, by promoting an amicable resolution of objections raised by creditors who did not participate in the negotiation or voted against the resulting agreement.
Also, initiation of this procedure entailed a stay of preventative and enforcement actions by all creditors regarding debtors and their assets (just as in judicial insolvency proceedings).
Rescue of companies in a state of imminent liquidation
With the purpose of rescuing the company and preserving the productive unit of a debtor in an imminent state of liquidation, any creditor could express its interest in contributing new capital, provided that certain requirements are met, including that the debtor's equity is negative. The offer made by the creditor had to correspond, at a minimum, to the value required to pay in full: (i) all first-class credits (notably employees, pensioners and tax authorities); (ii) employees' compensation for early termination "without just cause"; (iii) secured creditors; and (iv) administration expenses of the reorganisation process. Together with their offer, bidding creditors had to deposit in escrow a sum of money equal to no less than the value of the abovementioned liabilities.
The judge authorised the operation, by written order or in a hearing, after verifying that all legal requirements had been met. Once the operation was approved, payments were made against the escrow deposit money in favour of all creditors15 and the judge will ordered: (i) termination of the liquidation process; (ii) capitalisation at nominal value of the paid debts; and (iii) issuance of new shares in favour of the buyer and cancellation of the shares of the previous shareholders.16
For more information on insolvency and pre-pack procedures in Colombia, contact your CMS client partner or local CMS experts.
1 This, in turn, allows creditors to have a more valuable and liquid insolvency estate than an ordinary insolvency proceeding would provide.
2 Ibid., Article 40.
3 Under current insolvency regulations, when the company is sold as a single productive unit as part of the restructuring agreement, said unit must be valued by a "specialised firm" chosen from a list of firms kept by the Superintendence of Companies (Law 116 of 2006, Article 81). The restructuring agreement will determine the conditions for valuation, as well as the valuator's fees (Decree 1730 of 2009, Article 19).
4 Law 222 of 1995, Article 3.
5 Ibid., Article 6.
6 |bid., Articles 12 and 16.
7 Law 1116 of 2006, Article 44.
8 Ibid., Article 84.
9 Said emergency decrees were Decree 560 of 2020 and Decree 772 of 2020.
10 Decree 1793 of 2021, Article 139.
11 Law 2277 of 2022, Article 96.
12 Ruling C-390 of 2023.
13 Decree 560 of 2020, Article 9.
14 Decree 842 of 2020, Article 11.
15 Except for employees’ compensation for early termination regarding employees who
remained in the company.
16 Decree 560 of 2020, Article 6.
