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24 October 2003
On July 20 2003 the Colombian government submitted to Congress a bill amending the insolvency regime. While legislators have not yet begun to discuss the bill, it will be subject to approval over the coming months (for further details please see the Overview (May 2003))..
Colombia's existing insolvency regime is contained in several acts:
The government's proposal outlines a single regime for debt restructuring, bankruptcy and liquidation proceedings for companies and individuals. However, the bill excludes from its scope of application government bodies, financial institutions, domestic utilities and other types of legal entity.
The bill was submitted for public discussion for several months and the government has introduced a number of suggestions made by experts since May 2003. Public scrutiny has led the government to resolve some inconsistencies in its initial proposal.
The amended draft appears to be beneficial, as it retains the advantageous features of the existing regime under Law 550/99 and the previous sections of Law 222/95. Nevertheless, it has certain flaws, and several areas of concern are outlined below.
Financial viability test
The first issue refers to the procedure to determine whether a company is financially viable. The bill proposes that the administrator review the debtor's books and assets, and request the necessary information. The Superintendency of Companies or the judge (as the case may be) will have sufficient powers to force the debtor to provide the requested information. The administrator must then provide sufficient information to the creditors so as to enable them to decide whether the reorganization process should continue or the debtor should be liquidated.
However, the administrator is an independent individual paid by the debtor, which means that he should receive payment before the creditors, whose rights arose prior to the insolvency process. The administrator would have discretion as regards which information the creditors would have access to. This creates potential for the manipulation of this information by the administrator. This may prejudice the creditors' decision on the type of process to which the debtor should be subject. Thus, the Superintendency of Companies or judges should have a greater role in ensuring that information is produced and made available to creditors.
Qualifying for debt restructuring
There are also concerns about the requirements which a debtor company must meet in order to qualify for a debt-restructuring process. The bill lists a number of circumstances that would preclude debtors from accessing an insolvency proceeding. For instance, registered merchants:
In practice, insolvent companies seldom comply with all these requirements, simply because they demand resources that insolvent companies lack. The end result is that debtor companies that cannot comply with these requirements will not be able to access a restructuring process, thereby affecting the interests of all creditors. Generally, a debtor which requires an insolvency proceeding is not able to meet its pension, tax and registration obligations, but this should not be a reason to prevent debtors from undergoing the proceedings necessary for the reorganization of their business and compliance with their payment obligations. The bill does not provide for an alternative for debtors that cannot meet these requirements; thus, such debtors would be forced into liquidation.
Suspension of execution processes
Execution processes are only suspended, and not cancelled, as a result of the process. The consequences of this are unclear from the bill. Conceivably, if the debt-restructuring process is put in place, the outstanding obligations will be met through the reorganization programme. On the other hand, if the procedure fails, the debtor company will go into liquidation and the creditors will no longer be able to continue with the execution processes. The execution processes may not be restored after the execution of an agreement or the liquidation of the debtor - so what are the legal effects of this?
The protection afforded to creditors with collateral is much greater than that afforded under Law 550/99. The bill allows creditors to receive security interests over assets that have already been given as collateral. The rights of creditors judicially to enforce their collateral are suspended when the restructuring process starts. The debtor may use these assets as collateral for new creditors, which would have judicial means to enforce such collateral as long as the debtor does not default with the initial creditors. However, no judicial enforcement is possible if the debtor defaults with the original creditors. Accordingly, new creditors will actually be paid after the original guaranteed creditor. In addition, the original creditor may conflict with the new creditors sharing the collateral with respect to the use and maintenance of the asset.
The bill prescribes a two-month term for the creditors to approve any agreement after their voting rights have been determined. This term is excessively short in many cases. For example, within this term the Ministry of Labour must approve any agreements that may affect workers' rights. In the case of complicated restructurings (eg, those involving many creditors, many assets or complex business plans), creditors may be forced to approve a restructuring plan that may not be fully prepared. The bill should allow for the extension of this term in some cases.
Separation of powers
Depending on the type of debtor, either the Superintendency of Companies or a judge has jurisdiction to oversee the insolvency proceedings. The powers of both are almost unlimited and may not be appealed, opening the door to unfair treatment and corruption. Although the courts have acknowledged that the Superintendency of Companies (an administrative body) may have judicial powers in specific cases, it will have too many functions in insolvency cases - regulator, supervisor (of both the debtor company and the administrator) and judge - which may bias its decisions.
Another criticism concerns the fact that the debtor company is not a part of the debt-restructuring agreement. On the one hand, companies often have a negative liquidation value, the management must be replaced and, in real terms, the company belongs to the creditors. Thus, the company should be regarded as a collection of assets and liabilities, and it is up to the creditors to decide whether and how to reorganize the company. On the other hand, the success or failure of any debt restructuring will depend on how the company adjusts its operations to the agreement, meaning that its corporate participation may be crucial in some cases.
Finally, the bill introduces the cross-border insolvency proceeding. This section was drafted following the International Institute for the Unification of Private Law project that so far has been adopted only by a handful of countries (according to the Superintendency of Companies, it has been adopted by Mexico, Eritrea and South Africa), although it has been available for over five years. The Superintendency of Companies claims that it will resolve the problems that some companies undergoing debt restructuring in Colombia have encountered when they try to secure judicial effects abroad. It is unclear how the result suggested by the superintendency might be achieved, since it may provide only for the legal treatment in Colombia of foreign companies that undergo insolvency proceedings abroad, and not for Colombian companies appearing before foreign authorities when undergoing restructuring in Colombia.
The proposal allows the administrator to appear before foreign authorities to enforce the local procedure and to obtain some kind of automatic stay. However, in the final analysis, the success of the administrator in obtaining such results will depend entirely on the laws of the foreign jurisdiction, and particularly whether the automatic stay will be available in the jurisdiction based upon the fact that insolvency proceedings have been initiated in Colombia. Further, the practicalities of this specific proposal depend entirely on the world's adoption of Unidroit's rules, which have so far been adopted by few countries.
Although the bill includes many proposals that will be ultimately beneficial,
it raises a number of unanswered questions and contains inconsistencies that
must be resolved before it is finally approved.
For further information on this topic please contact Jorge Lara Urbaneja or Cristina Rueda Londoño at Baker & McKenzie - Raisbeck, Lara, Rodríguez & Rueda by telephone (+57 1 634 1500) or by fax (+57 1 376 2211) or by email (email@example.com or firstname.lastname@example.org).
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