Insolvency law and rules in Colombia

There are several restructuring/reorganisation mechanisms.

Firstly, private and voluntary restructuring proceedings are allowed between debtors and their creditors, who are free to agree on the terms of the restructuring/reorganisation.

There are also multiple special restructuring/reorganisation regimes applicable to, among others, public/governmental entities, financial institutions, and individuals who are not “merchants”.

Finally, Law 1116 of 20016 provides a comprehensive insolvency regime that applies, except otherwise excluded, to “merchants”, legal entities, branches of foreign companies and commercial trusts (patrimonios autónomos) that carry out business transactions.

As a reaction to the Coronavirus pandemic crisis, the above mentioned statute was partially amended temporarily until 15 April 2022, through Decree 560 of 2020 (“Law 1116”).

Law 1116 and additional special regulations to that effect (Regulatory Decree 1074 of 2015) also provide the possibility to, at any time and without having to comply with regular admissibility requirements, enter into an out-of-court restructuring/reorganisation agreement. Such an agreement may be filed with the insolvency court/judge for validation and approval, upon request of any of the parties to the agreement.  Once approved, the out-of-court agreement shall have the same effect as a judicial restructuring/reorganisation agreement.

All in all, despite the fact that there are multiple “restructuring/reorganisation mechanisms” in Colombia, this document focuses only on the judicial restructuring/reorganisation regime of Law 1116, as it is the most important and relevant one for this publication.

The purpose of the restructuring/reorganisation process referred to in Law 1116 is as follows: (i) to enter into an agreement to preserve viable enterprises and normalise their commercial and credit relations, and to restructure their operations, management, assets and liabilities; (ii) to promote and protect good faith in commercial and asset-related relations in general; and (iii) to impose sanctions regarding acts that were performed in violation of the insolvency regime.

There are several liquidation mechanisms.

Under the first classification, a distinction must be made between voluntary and mandatory settlements.

The former are private or extrajudicial since no judge is needed to carry them out, and are fundamentally ruled by the Colombian Commercial Code.

The mandatory ones, on the other hand, are judicial proceedings ruled by Law 1116.

There are also multiple special liquidation regimes that include public entities and financial institutions.

Although there are multiple “liquidation schemes” in Colombia, this document focuses on the judicial liquidation regime provided by Law 1116, as it is the most important and relevant for this publication.

The purpose of the judicial liquidation process referred to in Law 1116 is the prompt and orderly liquidation of the debtor’s assets and liabilities as the debtor seeks to take advantage of its assets.  The process seeks to promote and protect good faith in commercial and asset-related relations in general, and impose sanctions on acts that were performed in violation of the insolvency regime.

The judicial liquidation process starts mainly in the following events:

1. Failure to comply with the restructuring/reorganisation agreement;
2. As a result of a request for a restructuring/reorganisation proceeding, the insolvency court/judge finds “elements of judgment” according to which liquidation is required;
3. The debtor does not update the project of “qualification” and “graduation” of credits and voting rights required by the insolvency court/judge;
4. The debtor has overdue obligations (i.e. it has fallen into arrears for the payment due) regarding pension allowances, mandatory withholdings in favour of tax authorities, discounts made to workers, or contributions to the Social Security System, and payment has not been made within the term indicated by the insolvency court/judge, which in no case shall exceed three (3) months.

Effects of the commencement of the restructuring process

The admission to the restructuring/reorganisation process has the following effects:

1. No enforcement demands or any other collection process may be admitted or continued against the debtor;
2. No contract with the debtor may be unilaterally terminated;
3. No administrative expiry (caducidad) may be decreed, unless the process of declaring such expiration had been initiated prior to the commencement of the restructuring/reorganisation proceeding;
4. The debtor may seek renegotiation, by mutual agreement, of contracts of continuing performance to which it is a party.  When renegotiation by mutual agreement is not possible, the debtor may request authorisation from the insolvency court/judge to terminate the contract.
   The authorisation may be granted when the debtor proves (a) that the contract is still being executed/performed, and (b) that the obligations to be complied with by the debtor are excessive, taking into consideration the price of the equivalent or replacement transactions that the debtor could obtain in the market at the time of termination.
   If the insolvency court/judge authorises termination of the contract, the counterparty may request compensation for damages through summary proceedings within the insolvency process, and the amount of damages will be included in the restructuring/reorganisation agreement,
5. Proceedings for the restitution of movable goods and immovable property, with which the debtor carries out its corporate purpose/business, may not be initiated or continued when the pleaded cause to request the restitution is the delay by the debtor in the payment of royalties, prices, rents, or any other consideration corresponding to the relevant leasing or rental contract.
6. The period within which the measures leading to the reestablishment of the corporate assets may be taken or ordered shall be suspended to increase the cause for dissolution due to losses.

Effects of commencement of the liquidation process

Commencement of the liquidation process produces the following effects:

1. Dissolution of the legal entity;
2. Separation of all managers (officers and directors) as well as termination of functions of corporate bodies and of those corporate bodies that control the legal entity;
3. Termination of employment contracts (damages for unfair dismissal/wrongful termination shall apply);
4. Termination of existing contracts that are not necessary for the preservation of debtor´s assets;
5. Interruption of the terms of the statute of limitations and of terms to file actions against the debtor;
6. All the debtor's “term obligations” become enforceable (i.e. the maturity date will be accelerated);
7. Prohibition of debtors from making payments or disposing of assets outside the liquidation process;
8. The referral to the insolvency court/judge of all enforcement proceedings against the debtor;
9. Preference of the rules of the judicial liquidation process over any others that are contrary to it.

Asset management within the restructuring/reorganisation proceeding

In addition to the effects generally described above, from the date of submission of the application for admission until the restructuring/reorganisation process is actually “admitted”, the administrators are prohibited from:

1. Adopting statutory reforms (i.e. reforms to articles of incorporation and bylaws);
2. Creating and enforcing securities or guarantees over the debtor’s assets;
3. Making compensation (i.e. set-offs), payments, settlements, withdrawals, unilateral or mutually agreed terminations of processes in progress;
4. Conciliations or transactions (i.e. settlements) of any of its obligations;
5. Disposal of assets or transactions that do not correspond with the ordinary course of business of the debtor.

Any act performed in contravention of the abovementioned prohibitions will result in the removal of the manager (officer or director), who will be jointly and severally liable for the damages caused to the company, the partners and creditors.

Likewise, fines of up to approximately USD 50,000 will be imposed on the creditor, the debtor and its managers (officers and directors) until the operation is reversed.  Also, credit rights of the sanctioned creditor shall be postponed.

Asset management within the liquidation proceeding

Since one of the effects of the commencement of the judicial liquidation process is the cessation of functions of corporate bodies and the separation of all managers (i.e. officers and directors), these functions are transferred to the liquidator, who assumes responsibility for the administration of the company and the assets until they are sold (liquidated) in a diligent manner and the liquidator then distributes the product in strict order of legal priority.

Debtor’s assets are the central focus of the proceeding, and precautionary measures are decreed/ordered as protective measures in connection with these assets so that they are not disposed of (transferred) by anyone. Therefore, the insolvency court/judge will order the assets to be handed over to the liquidator (as a “court-appointed receiver”) who will have the obligation to provide verified accounts/statements and reports through his management.

Also, the receiver must deposit in a “judicial deposit account”, any income/return obtained from the administration of the assets.

The liquidator must verify the assets he receives, their quantity, condition and other information required for him to perform all necessary acts to preserve the assets within the framework of the insolvency proceeding.

Also, if (i) the assets received by the liquidator – to be liquidated – are part of a productive unit, and (ii) during the time of custody the liquidator believes that he can maintain the said productive unit and that it can be used as a generating source of employment, the liquidator must strive to ensure that the promotion and sale are carried out in this way. By doing so, the liquidator will accomplish two main goals of insolvency: protection of credit and the conservation of companies.

Votes

Generally speaking, voting rights shall be calculated under a basic rule: “one vote per each Colombian peso owed”, whether or not yet enforceable, without including interest, fines, penalties or other concepts apart from the capital.

Restructuring/reorganisation process and structure

1. Commencement of the process;
2. Presentation/filling of credits;
3. Presentation/filling of the project of qualification and graduation of credits, voting rights and asset inventory;
4. Presentation/filling, conciliation, and decision of objections to item iii above;
5. Presentation/filling of the restructuring/reorganisation agreement;
6. Restructuring/reorganisation agreement confirmation hearing;
7. If the restructuring/reorganisation agreement fails, confirmation of the “asset award agreement”;
8. Lifting/termination of the existing precautionary measures, in the judicial order that confirms the restructuring/reorganisation or the “asset award agreement”;
9. Termination of the process.

Liquidation process

1. Commencement of the process;
2. Presentation/filling of credits;
3. Presentation/filling of the project of qualification and graduation of credits, voting rights and asset inventory;
4. Disposal of assets;
5. Payment of debts through an “award of assets”;
6. Presentation/issuance of the final report by the liquidator;
7. Termination of the process.

Law 1116 of 2006, in line with UNCITRAL Model Law, provides a possible cross-border insolvency scenario for a process taking place outside of Colombia where recognition is sought in Colombia by the representative of the foreign insolvency process.

Application for recognition of the foreign process by the foreign representative

In this case, the foreign legal representative may apply to the competent Colombian authorities for the recognition of the foreign proceeding.

Effects from the recognition request until its resolution

Beginning the day when an application is submitted for the recognition of a foreign insolvency proceeding until the day such request is resolved, the competent Colombian authority may, (i) at the request of the foreign representative of the insolvency process and (ii) if the measures are urgent and necessary to protect the assets of the debtor or the interests of the creditors, grant the following provisional measures:

1. Order the suspension of any execution/collection process against the debtor’s assets;
2. Entrust the foreign legal representative, or another person appointed by a competent Colombian authority, with the administration of the debtor’s assets located in Colombian territory, to the extent permitted by law.  The purpose of such a measure is to protect and preserve the value of assets, which, by their nature, are perishable, susceptible to devaluation, or are threatened by any other cause;
3. Entrust the foreign representative, or another person appointed by a competent Colombian authority, with the task to award all or part of the debtor's assets located in Colombian territory, provided that the competent Colombian authority ensures that the interests of creditors in Colombia are sufficiently protected;
4. Grant the foreign representative any other measure that, in accordance with Colombian insolvency regulations, relate to the performance of the duties of the promoter or liquidator.

Recognition

A foreign process shall be recognised, provided that:

1. It is a “Foreign Proceeding” (i.e. a collective proceeding), whether judicial or administrative, including an interim proceeding, conducted by a foreign State under an insolvency law, under which the assets and transactions of the debtor are subject to the control or supervision of a foreign court for the purpose of restructuring/reorganisation or liquidation;
2. The “Foreign Representative”, whether a person or a “body”, including one appointed on an interim basis, has been empowered in a foreign proceeding to manage the restructuring/reorganisation or liquidation of the debtor's assets or business or to act as a representative of the foreign proceeding;
3. The recognition application meets the application requirements for recognition of a foreign proceeding under Law 1116; and
4. The application has been filed with the “Competent Colombian Authority” (i.e. the Colombian Superintendence of Companies, “civil judges of the circuit”, or “municipal judges”) of the main domicile of the debtor.

Primary and non-primary foreign process

The foreign process will be recognised:

1. As a foreign primary proceeding, if it is conducted in the State where the debtor has the center of its main interests; or
2. As a foreign non-primary proceeding, if the debtor has, in the territory of the State where the foreign insolvency proceeding is taking place, an “Establishment” (i.e. any place of operations where the debtor carries out an economic activity on a permanent basis).

If proven that any or all reasons/motives that gave rise to the recognition are partially or totally absent or no longer exist, the recognition may be amended or revoked.

Effects from the recognition of a foreign primary process

As of the date of recognition of a foreign process, that is also a primary process:

1. No enforcement/collection proceedings may be commenced against the debtor, and those already in progress shall be suspended.  The foreign representative and the debtor shall be legally entitled to apply, individually or jointly, for a suspension of the proceedings and to plead for the voidance of the proceedings or of the procedural steps following recognition of a foreign main proceeding;
2. Any right to transfer debtor´s assets, or to otherwise dispose of its assets, shall be suspended, except for acts or transactions that are performed in the ordinary course of business.

Commencement of the insolvency process in Colombia

None of the provisions on foreign insolvency processes shall affect any otherwise available right to request commencement of or admittance to an insolvency proceeding under Colombian law or any otherwise available right to file a claim regarding credit rights in a process in Colombia.

Effects of the recognition of a foreign insolvency proceeding for the owner of a foreign branch in Colombia

The recognition of a foreign insolvency process for the foreign owner of a branch established in Colombia will result in the opening of the insolvency process of the branch in accordance with Colombian insolvency regulations.