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03 December 2004
There has been some relief for companies suffering under Colombia's largest financial crisis and on the verge of becoming insolvent since the mid-1990s - first under Law 222/1995 and then under Law 550/1999. In both cases creditors and debtors have had to deal with procedural and regulatory issues that obstruct settlement solutions, or impose time constraints on creditors, debtors, employees and shareholders reaching satisfactory restructuring agreements. In other words, legal requirements and procedural steps generally obstruct the parties from using the theoretical benefits implicit in the regulations. To avoid falling into an inconvenient insolvency proceeding, debtors and creditors may wish to follow an out-of-court settlement process that, should it be successful, would form an agreement binding on all parties executing it.
The test to find out whether a debtor company must undergo a restructuring proceeding varies. Under Law 222/1995, the debtor company must be in serious difficulties with regard to timely compliance with its obligations. No actual default is necessary to support the request to the authorities for insolvency protection.
However, under Law 550/1999, the debtor company is deemed insolvent where (i) it is in breach of payment for more than 90 days of two or more commercial obligations contracted in its course of business, or (ii) there are at least two collection suits demanding the payment of commercial obligations. In both cases the value of the unpaid or sued obligations should represent at least 5% of the debtor company's liabilities.
On the other hand, parties to commercial agreements may define contractually the instances in which creditors may demand acceleration of their obligations. Syndicated loans, other collective credit facilities or even long-term commercial agreements may provide for certain events of default more strictly than the law and the way to proceed if they occur, which may be more radical than in legal restructuring. In practice, the application of a contractual remedy would lead to the restructuring of the debtor company, as other creditors would try to defend their rights in accordance with the law.
Once a debtor company has determined a need to restructure its debts, it cannot take further action and must wait for an improvement in business or circumstances to force the opening of a formal reorganization process under Law 550/1999. It also has discretional alternatives (eg, wholly private restructuring and voluntary liquidation).
In general, private debt restructuring is viable where major creditors have the corporate and regulatory ability, as well as the financial capacity, to extend the payment terms of obligations in their favour. However, debtor companies often have to negotiate with the social security authorities, which are not allowed to settle the terms of obligations in their favour under their legal statute. This may delay the process, or make it cumbersome or impractical, unless the major creditors are willing to permit an exception. Nevertheless, the tax administration has been flexible in extending terms for payment of taxes in regulated or voluntary restructuring.
Employees may legally waive payment of accrued salaries or social benefits. However, in general the company under restructuring will not interrupt payment of salaries, although in certain cases employees have forgiven or postponed payment of non-legal social benefits. Suppliers, particularly those of strategic importance or small size, are also unlikely to be affected by the restructuring because they may create unbearable cost or make the debtor's operation impossible.
For a voluntary restructuring to be feasible, the debtor must be able to continue current operations so as to be in a position to recover from its negative financial condition after the payment delays or debt reductions have been granted.
In private restructurings it is essential that the debtor has good relations with its creditors, and the creditors are solvent and capable of restructuring the debt. In addition, the creditors must believe that whatever led to the debtor's insolvency will be solved, and have sufficient initiative and common interest to work its debts.
If the private restructuring must meet certain prior requirements or the parties foresee the need for prolonged negotiations, they may decide to negotiate a standstill or forbearance agreement, avoiding the collection of debts during the restructuring process. However, to do so the parties must ensure the debtor company does not meet the requirements to undergo a mandatory insolvency, otherwise the investment in the private restructuring would be moot.
Although private restructurings have their benefits, parties to them must ensure that their actions do not fall under fraudulent conveyance and the debtor company remains solvent until the statute of limitations on fraudulent conveyance runs out. This will prevent other creditors that have not participated in the private restructuring process but which may be affected by it from demanding that the agreement be terminated. Several provisions under Colombian legislation govern fraudulent conveyance (eg, Article 2491 of the Civil Code, Article 183 of Law 222/1995 and Article 39 of Law 550/1999). The following differences exist with regard to the provisions:
However, they all allow for the disputed agreements to be terminated, which could result in a waste of both debtor and creditor resources.
Therefore, although private restructurings are viable in Colombia, the situations of the debtor company and its creditors (whether participating in the private restructuring or not) must be carefully studied to determine whether the restructuring is worthwhile.
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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