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Merger (fusión impropia), reincorporation (reconstitución) and restoration (reactivación), as alternatives to liquidation of companies.

Commercial Law includes the following mechanisms for a corporation to continue developing its business and avoid liquidation: merger (fusión impropia), reincorporation (reconstitución) and restoration (reactivación). Even though all of them allow any corporation to avoid liquidation and reactivate, it is important to understand their differences, and their advantages and disadvantages to decide accordingly.

The merger to avoid liquidation, is regulated by article 180 of the Code of Commerce. This mechanism allows the incorporation of a new company to continue with the business of the dissolved one, as long as there are no changes regarding the course of business and the merger takes place within the six months after the decree of dissolution. All the merger rules provided by law are applicable to this instrument (such as procedure, quorum, deciding majority, and publicity requirements).

The reincorporation of a company is regulated in article 250 of the Code of Commerce. This instrument allows shareholders to unanimously agree on avoiding liquidation by incorporating a new company with all the assets and liabilities of the dissolved one. This mechanism must also comply with the merger procedural rules.

The restoration of a company is regulated in article 29 of Law 1429/10. Through this mechanism, shareholders may restore the dissolved company at any moment after the dissolution, as long as the company’s external liabilities do no exceed 70% of its assets, and the distribution of the remaining assets has not taken place. In a restoration, no new legal entity is formed, the majority needed to change the type of corporation must be observed, and creditors may exercise their right to object the transaction within 30 days, once they receive a communication announcing the restoration. Finally, the shareholders’ resolution approving the company’s restoration must be registered before the Chamber of Commerce within the next 15 working days.

Having reviewed all three mechanisms, it appears that the merger is the one that implies more difficulties and limitations to avoid the liquidation of a corporation. Its temporal limitations, the prohibition to change the course of the business, and the complicated merger procedure make this instrument a complex one.

By contrast, the restoration is useful for shareholders who intend not to create a new legal entity, as long as the company’s external liabilities do not exceed 70% of the assets. If this cap is exceeded, the reincorporation applies as long as all shareholders agree so. However, the downside of this option is that all the merger procedure must be observed.

In conclusion, restoration and reactivation are the most flexible mechanisms to avoid the liquidation of a corporation. Therefore, unlike the merger, these mechanisms do not have temporal or course-of-business limitations. Finally, the restoration’s procedure is simpler than the other two.

Authors

Juan Camilo Rodríguez
Juan Camilo Rodríguez, LL.M.
Managing Partner
Bogotá
Andrea Zúñiga
Andrea Zúñiga, LL.M.
Associate Director
Bogotá
Camilo-Caicedo-CMS-Colombia
Camilo Caicedo, LL.M.
Associate
Bogotá
Alejandro Restrepo
Alejandro Restrepo
Associate
Bogotá
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