In response to the economic, social and ecological emergency state brought on by the COVID-19 pandemic, the national government enacted legislative decrees 560 of 2020 ("Decree 560") and 772 of 2020 ("Decree 772"). These bills introduced temporary measures related to insolvency proceedings to address the crisis. Law 2277 of 2022 extended the validity of these decrees until December 31 of 2023. However, the Constitutional Court overturned this extension in Ruling C-390 of October 4, 2023, concluding a three-year duration of these measures.
However, Bill 106 of 2023 (the "Bill"), which seeks to incorporate as permanent legislation a large part of Decree 560 and Decree 772, was presented to the Senate on August 22 of 2023. On June 9 of 2024, the Bill was approved in its last debate by the House of Representatives, and it is expected to be sanctioned by the President of the Republic in the coming months, thus making into law many of the provisions of the expired legislative decrees.
Reinstated provisions of Decree 560 of 2020
Article 3 of the Bill restores the financial relief and business reactivation mechanisms provided for in Article 4 of Decree 560. These mechanisms consist of (i) the capitalisation of liabilities in reorganisation agreements; (ii) the discharge of liabilities when these are higher than the debtor's valuation as a business in operation; and (iii) sustainable debt covenants, under which the restructuring or reprofiling of obligations to financial institutions is envisaged as part of the reorganisation agreement, rather than a payment schedule or full extinguishment of obligations.
In addition, Article 4 of the bill re-establishes the incentives for debtor financing during the negotiation of a reorganisation agreement that were established in Article 4 of Decree 560. These incentives consist of the possibility of (i) securing new credits with debtor assets that are not encumbered in favour of other creditors, or with new assets acquired; (ii) granting a second-degree lien on previously securitized assets; and (iii) granting a first-degree lien on previously encumbered assets, with the consent of the debtor or the authorisation of the judge. Article 16 of the Bill establishes that debtors who obtain financing in this way must be in compliance with the terms of the credit by the time the reorganisation agreement is confirmed; otherwise, the insolvency judge will not be able to confirm it.
In addition, Article 5 of the Bill revives the procedure for the rescue of companies in a state of imminent liquidation permitted by Article 6 of Decree 560, in which a creditor may contribute new capital to the debtor once the order declaring the termination of the reorganisation process and ordering the commencement of the liquidation process has been issued. To do so, the creditor must make an economic offer that at the very least corresponds to the value owed to all first class credits, among other credits.
Article 6 of the Bill re-establishes the emergency negotiation procedure of reorganisation agreements introduced by Article 8 of Decree 560, although renaming it simply to 'negotiation of reorganisation agreements'. Under this procedure, after submitting a notice to the insolvency judge, the debtor may negotiate a reorganisation agreement with its creditors for a period of three months, after which it must submit it to the judge for confirmation. This procedure can be used to negotiate agreements with one or more categories of debtors. However, the Bill does not re-establish the possibility of deferring the payment of obligations related to administration costs during this procedure, which was permitted under numeral 3, paragraph 1 of Article 8 of Decree 560.
Additionally, Article 7 of the Bill re-establishes the business recovery procedure by and before chambers of commerce created by Article 9 of Decree 560, under which the debtor can negotiate an agreement with its creditors through a mediator appointed by the local chamber of commerce. As with the negotiation of reorganisation agreements procedure of article, a duration of three months is provided for this procedure, and the resulting agreement must also be judicially validated by the insolvency judge. Article 17 of the Bill also permits the use of the business recovery procedure by and before chambers of commerce to negotiate agreements with one or more categories of debtors. That said, Article 8 of the Bill prohibits debtors from simultaneously resorting to the procedures of Article 6 and Article 7.
Article 8 of the Bill also establishes the same consequences for both the failure of the negotiation of reorganisation agreements procedure and the failure of the business recovery procedure by and before chambers of commerce, consisting of an impediment to resort again to either of the two procedures within a one year term. However, it does not prohibit the debtor from being admitted to the insolvency proceedings of Law 1116 of 2006. In addition, the rules of said law apply subsidiarily as far as they are compatible with the procedures of Articles 6 and 7 of the Bill, by virtue of Article 9.
Reinstated provisions of Decree 772 of 2020
On the other hand, article 11 of the Bill provides for the use of technological tools and artificial intelligence in the insolvency proceedings of Law 1116 of 2006 and the Bill, which had been permitted by article 3 of Decree 772. Similarly, article 15 of the Bill allows auxiliaries of justice to act as promoters, liquidators and intervenors in up to six (6) insolvency proceedings at the same time, which was allowed under article 7 of Decree 772.
In addition, Article 12 of the Bill reintroduces the lifting of any injunctions on assets other than those subject to registration previously ordained in other proceedings with the commencement of the reorganisation process, which was first introduced by Article 4 of Decree 772. Likewise, Article 13 of the Bill re-establishes the possibility for debtors engaged in the construction and sale of real estate destined for housing to make mortgage loan payments without prior authorisation from the insolvency judge during business reorganisation processes, which was introduced by Article 5 of Decree 772.
Additionally, article 14 of the Bill enables liquidators to propose the establishment of one or several trusts for the total or partial transfer of the assets of the debtor for the consideration of creditors with payment vocation, with the resulting adjudication of trust rights to said creditors. This possibility for adjudication had been permitted under article 6 of Decree 772.
Articles 18 and 19 of the Bill re-establish the abbreviated reorganisation and simplified judicial liquidation processes for small insolvencies of Articles 11 and 12 of Decree 772, respectively. Debtors whose assets are less than or equal to 5,000 SMMLV (approximately USD$1.6 million) may only be admitted to said abbreviated processes, with the objective of being able to give them a quicker process. The rules of Law 1116 of 2006 apply subsidiarily as far as they are compatible with both abbreviated processes, by virtue of article 20 of the Bill.
Other provisions of the Bill
On the other hand, Article 21 of the Bill repeals Articles 37 and 38 of Law 1116 of 2006. The first of these articles regulates the process of liquidation by adjudication following the non-filing or non-confirmation of a reorganisation agreement. The second article establishes the effects of the non-filing or non-confirmation of the reorganisation agreement for the debtor: the dissolution of the legal entity, the removal of its administrators from their office and the immediate termination of certain contracts. These articles had been suspended by Article 15 of Decree 560 in order to alleviate the consequences of not reaching a reorganisation agreement for those debtors affected by the economic, social and ecological emergency state. With these derogations, the Bill eliminates the aforementioned consequences altogether.
Finally, it is worth mentioning that the Bill eliminates all mentions of the economic, social and ecological emergency state and its effect on debtors in the wording of the reinstated articles of Decree 560 and 772, thus making its provisions permanent. In any case, both article 1 and article 10 of the Bill reiterate that requests for access to all reorganisation mechanisms must be processed expeditiously by the competent authorities, which was contemplated by both legislative decrees in consideration of the past emergency. Thus, the Bill restores much of the insolvency regulatory landscape established during the COVID-19 pandemic, making it the status quo for the legal system going forward.
