Restructuring and insolvency law in Colombia

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The primary legislation governing business insolvency proceedings (restructuring and liquidation) in Colombia is Law 1116 of 2006 (“Law 1116”).  This primary regulation applies, generally, to:

  • individuals who are “merchants” under Colombian commercial law
  • companies and corporations
  • branches of foreign companies
  • commercial trusts (patrimonios autónomos) that carry out business transactions.

Additional regulation exists in connection with insolvency of other persons including:

  • individuals who are not “merchants”
  • entities of the healthcare, social security and pension sectors
  • stock exchange entities
  • companies subject to surveillance by the Superintendence of Finance  – financial institutions
  • state-owned companies – public/governmental entities
  • public utility companies

As a result of the COVID-19 pandemic, the Colombian Government issued Decrees 560, 772 and 842 of 2020 (together “COVID-19 Emergency Decrees”) which include temporary measures to face the pandemic-related crisis. 

2. How are insolvency proceedings or restructuring proceedings initiated?

There are two different types of insolvency proceedings in Colombia, restructuring/reorganisation processes and liquidation processes.

Restructuring/reorganisation processes

The purpose of restructuring/reorganisation processes referred to in Law 1116 is to:

  • enter into an agreement to preserve viable enterprises, normalise their commercial and credit relations, and to restructure their operations, management, assets and liabilities 
  • promote and protect good faith in commercial and asset-related relations in general 
  • impose sanctions regarding acts that were performed in violation of the insolvency regime.

Liquidation processes

On the other hand, the purpose of liquidation processes referred to in Law 1116 is the prompt and orderly liquidation of the debtor’s assets and liabilities. The processes seek 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.

Thus while restructuring/reorganisation processes seek to save the business of the debtor who, despite facing economic difficulties, has prospects of emerging out of the crisis, liquidation processes aim to realise the debtor’s assets in order to meet payment of its obligations.

Restructuring/reorganisation proceedings

Restructuring/reorganisation proceedings regulated by Law 1116 may be initiated as a result of a petition filed by the debtor, a petition filed by creditors, a request by the Superintendence that has supervision powers over the debtor or the debtor’s activity, 1 Law 1116 of 2006. Article 11. or ex officio by the Colombian Superintendence of Companies. 2 Law 1116 of 2006. Article 15. Additionally, restructuring/reorganisation proceedings can be initiated as a result of a petition filed by a foreign representative of a foreign (cross-border) insolvency proceeding. Requirements vary depending on how the proceeding is initiated.

Liquidation proceedings

Liquidation proceedings start by the filing of an admission petition. Such petition can be filed either by the debtor, one of its creditors, or ex officio by the Superintendence of Companies which acts as a judge and is entitled to admit or decline the submission. The Superintendence shall admit this petition if it complies with the requirements of Law 1116. If such requirements are not fully complied with, the petitioner has 10 days to correct the request.

Restructuring/reorganisation proceedings

The legal reasons to initiate restructuring/reorganisation proceedings are 3 Law 1116 of 2006. Article 9. :

Cessation of payments

It shall be understood that the debtor is in a “cessation of payments” situation when it fails to pay, for more than 90 days, two or more overdue obligations, to two or more creditors; or when two or more collection claims/suits have been filed against the debtor, by two or more creditors. 

Provided that in both scenarios outlined above, the accumulated value of the obligations in question represent 10% or more of debtor’s total liabilities.

Imminent inability to pay

It shall be understood that the debtor is in an “imminent inability to pay” situation when it proves that there are circumstances in the relevant market, or within its organisation or business structure, that seriously/materially affect, or could reasonably seriously/materially affect, the normal fulfilment of or compliance with its short-term obligations (those obligations with a maturity date equal to or less than 1 year). Imminent inability to pay, as grounds to start a restructuring/reorganisation proceeding, was suspended for 2 years by COVID-19 Emergency Decrees, in connection with regular restructuring/reorganisation proceedings. 4 Law Decree 560 of 2020. Article 15.

Liquidation proceedings

The legal reasons to initiate restructuring/reorganisation proceedings are 5 Law 1116 of 2006. Article 47 and 49. :

  • breach of the reorganisation agreement
  • cessation of payments
  • when the debtor directly requests it, or when it fails to deliver in time the documentation required as a result of a creditor’s request for an insolvency process
  • when the debtor has ceased to carry on its business
  • at the request of the authority supervising and controlling the respective business
  • as a result of a decision by the Superintendence of Companies, issued as a consequence of not updating the project for the recognition of credits in order to initiate the reorganisation process
  • as a result of a joint request from the debtor and a plural number of creditors holding less than 50% of the external liabilities
  • by express request related to the initiation of a judicial liquidation process by a foreign authority
  • due to overdue obligations related to pension allowances, tax authorities, discounts made to workers or contributions to the comprehensive social security system, without being remedied within the term indicated by the judge.

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

Restructuring/reorganisation processes

There are several restructuring/reorganisation mechanisms in Colombia.

Firstly, private and voluntary restructuring proceedings are allowed between debtors and their creditors, who are free to agree the terms of a 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 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 previously mentioned, this statute was partially amended temporarily for 2 years by the COVID-19 Emergency Decrees.
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.

The COVID-19 Emergency Decrees create two additional transitory restructuring/reorganisation mechanisms: 

  • emergency negotiation of reorganisation agreements
  • business recovery procedure in the chambers of commerce (insolvency mediation mechanism).    

These two processes are more agile and shorter than conventional processes and allow debtors to enter into agreements with one or some categories of creditors.

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 to:

  • enter into an agreement to preserve viable enterprises, normalise their commercial and credit relations, and to restructure their operations, management, assets and liabilities
  • promote and protect good faith in commercial and asset-related relations in general
  • impose sanctions regarding acts that were performed in violation of the insolvency regime.

The reorganisation process is a judicial process carried out before civil judges/courts or before the Superintendence of Companies, depending on who the debtor is, and is intended for the debtor to reach a payment agreement with its creditors. 

This process has the following stages: 

  • application
  • admission
  • start of the process
  • qualification and graduation of credits, and voting rights and inventory of assets
  • restructuring agreement.

If an agreement is entered into by the parties, the reorganisation process terminates. But if an agreement is not reached, liquidation by adjudication proceeds. 6 Given the pandemic’s transitional measures adopted by the COVID-19 Emergency Decrees, liquidation by adjudication is suspended, and if an agreement is not reached, the debtor goes to judicial liquidation.

Liquidation processes

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.

Judicial liquidation process

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. 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:

  • failure to comply with the restructuring/reorganisation agreement
  • as a result of a request for a restructuring/reorganisation proceeding, the insolvency court/judge finds “elements of judgement” according to which liquidation is required
  • the debtor does not update the project of “qualification” and “graduation” of credits and voting rights required by the insolvency court/judge
  • 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 3 months.   

5. Are there several types of creditors and what is the effect of a difference?

According to Colombian law there are five classes of creditors.

The first class includes:

  • wages and all benefits arising from an employment contract
  • court costs incurred in the general interest of creditors
  • tax and parafiscal credits
  • contributions to the Social Security system
  • child support obligations.

The second class includes:

  • pledgees (secured creditors with a pledge) up to the sale value of the pledged assets
  • fees paid by the intended buyers of real estate destined for housing in the insolvency processes of people who are engaged in construction and disposal of assets for that purpose
  • beneficiaries of guarantee/security trusts over movable assets, up to the sale value of the assets.

The third class includes:

  • mortgagees until the value of the property subject to mortgage
  • beneficiaries of guarantee/security trusts over real estate property, up to the sale value of the assets.

The fourth class includes all the credits of the suppliers of raw materials or supplies necessary for the production or transformation of goods or the provision of services.

The fifth class includes the other creditors that do not have any preference.

These classes define the order in which credits must be paid in a reorganisation process. Therefore, no class can be paid until the prior classes have been paid in full first.  However, special rules apply regarding securities over movable assets (garatías mobiliarias) which rank higher than any other class up to the value of the assets, except regarding first class child support obligations and employment contract wages and benefits.

Also, it is important to note that Law 1116 divides creditors for the purposes of voting categories as follows: 

  •  company employees
  • governmental entities
  • financial institutions
  • internal creditors of the company i.e. partners and shareholders
  • other external creditors that do not fall into any of the above categories.

The above categories apply both to restructuring/reorganisation processes and liquidation processes.

6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

According to Article 1938 of the Colombian Commercial Code, merchants shall file a declaration before the competent judge/court that there has been a “cessation of the normal/current payment of its mercantile obligations”. However, such obligation was suspended for 2 years by the COVID-19 Emergency Decrees, when the cause of the cessation of payments is a direct consequence of the causes that motivated the declaration of the State of Economic, Social and Ecological COVID-19 Emergency.

Therefore there is no obligation for debtors or creditors to initiate restructuring/reorganisation processes and/or liquidation processes. Nevertheless, as noted above, the Superintendence of Companies can initiate insolvency processes ex officio.

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

In general

According to Section 1938 of the Colombian Commercial Code, merchants shall file a declaration before the competent judge/court that there has been a “cessation of the normal/current payment of its mercantile obligations”. However, such obligation was suspended for 2 years by the COVID-19 Emergency Decrees, when the cause of the cessation of payments is a direct consequence of the causes that motivated the declaration of the State of Economic, Social and Ecological COVID-19 Emergency.

Restructuring/reorganisation processes

  • The insolvency court/judge appoints a promoter whose main functions are the negotiation, analysis, diagnosis and preparation of the reorganisation agreements, as well as the issuance or dissemination of financial, administrative, accounting or legal information of the entity in the reorganisation process. The intervention of the promoter in the hearings of the reorganisation process cannot be delegated
  • The debtor’s internal bodies continue to operate but their functions are limited by the general rule contemplated in Law 1116. Therefore, as of the date of filing of the application for admission to the reorganisation process, administrators are prohibited from making disposals of assets or operations that do not correspond to the ordinary course of the debtor’s business, unless the insolvency court/judge authorises them to do so. 7 Law 1116 of 2006. Article 17.

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:

  • adopting statutory reforms (i.e. reforms to articles of incorporation and by-laws)
  • creating and enforcing securities or guarantees over the debtor’s assets
  • making compensation (i.e. set-offs), payments, settlements, withdrawals, unilateral or mutually agreed terminations of processes in progress
  • conciliations or transactions (i.e. settlements) of any of its obligations
  • 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 above-mentioned 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.

Liquidation processes

A company in a liquidation process cannot initiate new operations in the development of its social purpose, and its legal capacity is strictly limited to the necessary acts of its immediate liquidation. 

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.  Therefore, the entity being liquidated is represented by the liquidator.

The board of directors’ body of a company in a liquidation process may be maintained as a consultant or advisory body to the liquidator, if the shareholders’ meeting decides so. Thus, it is not mandatory for the board of directors’ body to continue holding periodical meetings, as required by the company’s by-laws, unless the shareholders (in a shareholders’ meeting) decide so.

The 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 regarding his/her 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/she receives, their quantity, condition and other information required for him/her to perform all necessary acts to preserve the assets within the framework of the insolvency proceeding.

Also, if:

  • the assets received by the liquidator – to be liquidated – are part of a productive unit, and
  • during the time of custody, the liquidator believes that he/she can maintain the 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.

(See point 7 above)

Restructuring/reorganisation processes

  • At the beginning of the reorganisation process, the insolvency court/judge appoints a promoter whose main functions are the negotiation, analysis, diagnosis and preparation of the reorganisation agreements, as well as the issuance or dissemination of financial, administrative, accounting or legal information of the entity in the reorganisation process.  The intervention of the promoter in the hearings of the reorganisation process cannot be delegated.
  • The debtor’s internal bodies continue to operate but their functions are limited by the general rule contemplated in Law 1116. Therefore, as of the date of filing of the application for admission to the reorganisation process, administrators are prohibited from making disposals of assets or operations that do not correspond to the ordinary course of the debtor’s business, unless the insolvency court/judge authorises them to do so. 8 Law 1116 of 2006. Article 17.

Liquidation processes

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. Therefore, the entity being liquidated is represented by the liquidator.

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

Restructuring/reorganisation processes

The debtor’s internal bodies continue to operate but their functions are limited. Thus, the insolvency court/judge appoints a promoter in charge of the negotiation, analysis, diagnosis and preparation of the reorganisation agreements, as well as the issuance or dissemination of financial, administrative, accounting or legal information of the entity in the reorganisation process.

Shareholders will meet (hold shareholders’ meetings) as provided by the by-laws or by law, in order to vote on the fiscal year’s financial statements and review a detailed report on the status and development of the process.

Liquidation processes

As mentioned above, corporate bodies as well as managers, officers and directors are deprived of their powers and functions upon commencement of a liquidation process and their functions are transferred to the liquidator.
Shareholders will meet (hold shareholders’ meetings) as provided by the by-laws or by law, in order to vote on the fiscal year’s financial statements and review a detailed report on the status and development of the liquidation process.

According to Law 1116, when the assets are insufficient to pay the debtor’s liabilities, the liquidator must require all shareholders to pay the full value of any unpaid equity or shares, and of any additional liability provided the by-laws, to be paid by shareholders or equity holders. 9 Law 1116 of 2006, article 60.  To that end, if necessary, the liquidator shall start collection proceedings against shareholders and equity holders before the liquidation court/judge. In these processes, the collection document (título ejecutivo) shall include a copy of the inventories, appraisals and a certificate from the public accountant or tax inspector of the company, if any, certifying the insufficiency of the assets and the amount of the benefit payable by the corresponding shareholder or equity holder.

Finally, if the debtor’s assets or payment capacity are diminished due to fraudulent, wrongful or culpable acts or omissions of partners, shareholders, administrators (i.e. officers and directors), internal auditors or employees, said persons shall be liable for unpaid external liabilities unless they did not have knowledge of the actions or omissions or voted against such actions or omissions

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

(See points 7, 8 and 9 above)

Restructuring/reorganisation processes

Even though the debtor’s internal bodies continue to operate, their functions are substantially limited and the promoter is in charge of the negotiation, analysis, diagnosis and preparation of the reorganisation agreements.
As to shareholders, they will meet (hold shareholders’ meetings) as provided by the by-laws or by law, in order to vote on the fiscal year’s financial statements and review a detailed report on the status and development of the process.

Shareholders are under no direct obligation to comply with the duty to request a reorganisation proceeding. However, they may controvert/dispute the decisions taken by the representative bodies whenever such decisions do not comply with the law or the by-laws.

In addition, shareholders of a company in a reorganisation process may freely transfer their shares, since there is no legal rule that prohibits the exercise of their right to negotiate them. Said rule applies unless there is a “right of preference” in connection with negotiation of shares provided by law/regulation or by the by-laws. Any additional stipulation that restricts the freedom of negotiation of the shares will be void.

Liquidation processes

Corporate bodies as well as managers, officers and directors are deprived of their powers and functions upon commencement of a liquidation process and their functions are transferred to the liquidator. However, shareholders will meet (hold shareholders’ meetings) as provided by the by-laws or by law, in order to vote on the fiscal year’s financial statements and review a detailed report on the status and development of the liquidation process.

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

According to article 218 of the Colombian Commercial Code, one of the causes/grounds for dissolution of a commercial company is the decision of the associates (i.e. shareholders and equity holders), adopted in accordance with the law and the company’s by-laws. The dissolution of a commercial company observes the rules of a statutory reform, and according to the article 158 of the Commercial Code, must be adopted by public deed which must be registered in the Chamber of Commerce (or it will not produce any effect against third parties).

Likewise provides that after the dissolution of the company, its liquidation will be immediate.  Therefore, it may not initiate new operations in pursuit of its object and shall retain its legal capacity only for the necessary acts for immediate liquidation. Any operation or act unrelated to this purpose, except those expressly authorised by law, shall make the liquidator and auditor jointly and severally liable to the company, its members and third parties if they do not oppose it. 11 Decree 410 of 1971, article 222.

Thus, the liquidator must proceed to continue and conclude the corporate operations pending at the time of dissolution, taking into account that such operations do not suspend the liquidation process, since it continues with regard to the sale of assets and the payment of the obligations of the debtor company, which must be concluded before the documents are registered in the Chamber of Commerce.

Under article 226 of the Commercial Code, one of the liquidator’s duties is, among others, the presentation at the ordinary shareholders’ meetings of a detailed inventory, which must be provided to partners/shareholders. The inventory must include, in addition to a detailed list of the company’s assets, all the obligations payable by the company, specifying the priority or legal order of payment established in the Civil Code, including those that may affect the company’s patrimony, such as conditional, litigious, bonds, guarantees, etc.

Said inventory may be controverted by creditors on grounds of falsehood, inaccuracy or gross error.  Once the objections have been resolved and the corrections made, or once the period in which they can be proposed has expired, the inventory will be submitted for approval by shareholders (at a shareholders’ meeting).

Once the liquidation process has been completed, the liquidator will proceed to cancel third parties’ accounts/credits/debts, based on the inventory, taking into account the legal priority of payments.  

Note, shareholders shall not be entitled to request reimbursement (total or partial) of their shares, quotas or equity interest before all external liabilities have been cancelled. Only then, reimbursement shall be made in proportion to the nominal value of each shareholder’s equity interest unless the company’s by-laws stipulate otherwise. 11 Decree 40 of 1971, art. 144.

However, it should be noted that the Superintendence of Companies has the power to request the dissolution, and later liquidation, of a company when the conditions set out in the law or the by-laws are met. 12 Law 222 of 1995, article 84.

Colombia does not yet have a legal framework for preventive restructuring. All restructuring measures outside of insolvency proceedings must have the approval of the debtor, a plural number of creditors (equivalent to the majority required by Law 1116 for this purpose) and the subsequent opening of a process of validation of the out-of-court reorganisation agreement, in order to verify that it complies with all legal requirements.

If, as a result of the validation process, the insolvency court/judge authorises the agreement, it will have the same effect as those conferred by Law 1116 to a reorganisation agreement.

13. What is the average success rate after completed restructuring / insolvency proceedings?

There is no accurate information to assess what the success rates is.

Daniel Rodríguez
Daniel Rodríguez, LL.M.
Partner
Bogotá
Carolina Arenas
Carolina Arenas
Partner
Bogotá