We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
29 September 2000
The Restructuring Agreement
The Negotiation Process
Approval of the Agreement
Termination of the Agreement
Reversal of Acts and Contracts
The Superintendency of Corporations
Mandatory Liquidation Procedure
The insolvency legal regime in Colombia is essentially comprised of two laws. Law 550 of December 30 1999 introduced a new pro-debtor insolvency regime. Its objective is to promote agreements to restructure companies that are insolvent or at risk of becoming insolvent. Law 222 of 1995 regulates mandatory liquidations. (Law 222 also regulated the rehabilitation procedures, but this was repealed by Law 550.)
The main changes introduced by Law 550 relate to:
Law 550 shall remain in force for five years.
The law applies to all companies that permanently operate in Colombia, branches of foreign companies, and government entities. It does not apply to financial entities under the supervision of the Banking Superintendency, or to stock exchanges or intermediaries registered with stock exchanges.
Request and promotion
A company or its creditors may request a restructuring agreement, if the company has either defaulted on the payments of two or more commercial obligations for 90 days or more, or two or more judicial actions have been brought against the company for the debts. In either case, the debts must represent at least 5% of the company's total debts.
Promotion of the agreement shall be requested from the superintendency responsible for the oversight of the company (if any) or by the Superintendency of Corporations. For companies outside Bogotá or the jurisdiction of the regional offices of the Superintendence of Corporations, the local chambers of commerce are responsible. Special rules apply to government entities depending on whether they operate at the local, regional or national level.
The competent authority will appoint a promoter to help negotiate the agreement. The promoters main functions are:
Negotiations may take a maximum of eight months. Four months are granted to the promoter from the date of his appointment, to call a meeting in which credits and voting rights shall be defined. The remaining four months are for negotiation. In practice, if someone objects to the promoter's decision about credits and voting rights before the Superintendency of Corporations, the process could take up to 12 months.
During negotiations the company may not carry out operations beyond the scope of its ordinary business, without authorization. Specifically, it may not:
Effects on creditors
Any action (including legal action) taken against the company shall be suspended. No new actions may be started except actions to enforce payment of debts acquired after the initiation of negotiations. Attachments of the debtor's assets by court order will not be lifted during the negotiations.
If no restructuring agreement is reached or if the agreement is later breached, the creditor will be entitled to resume any suspended enforcement actions. If there are no actions then he will have the remainder of the term that would have been covered by restructuring negotiations to file a new action - unless the creditor has chosen to seek payment from a third-party guarantor.
Clauses in contracts providing for termination or acceleration of debts as a consequence of the initiation of a restructuring agreement are ineffective and the creditor may be sanctioned with the loss of priority for payment.
Securities granted by third parties will be treated differently depending on whether they were created before or after December 30 1999. If created before Law 550 was passed, the creditor may initiate enforcement actions and obtain seizure and attachment of collateral, but will only be paid through the sale of the collateral if a restructuring agreement is not approved within a term of eight months. Meanwhile, the creditor must become party to the restructuring negotiations. If an agreement is approved, the creditor will be bound by the terms of that agreement and will not be able to seek payment from the third-party guarantor, unless expressly authorized under the restructuring agreement.
If securities were created after December 30 1999, then the creditor must choose between seeking payment from the company being restructured or from a third-party guarantor. If the first option is chosen, all enforcement actions are suspended and the creditor must become a party to the negotiations. If there is no agreement within the specified term, the creditor will be able to enforce the third-party security. However, if he chooses to enforce only the third-party security, the creditor will forfeit the right to obtain payment from the debtor.
Voting rights are determined by the promoter on the basis of a list of creditors which are divided into internal and external creditors.
External creditors are entitled to a number of votes equal to the principal amount of their credit (ie, excluding interest and fines). This amount will be adjusted according to the consumer price index for the period between the maturity of the debt and the date of the document that determines credits and voting rights.
Internal creditors include shareholders, partners, associates or other persons who have invested in the company. They have a number of votes equal to the amount obtained from multiplying their percentage participation in capital by the result of adding the company's paid capital, share or capital placement premiums, reserves and revaluation of capital.
Labour creditors are entitled to a number of votes equal to their undisputed credits. Pensioners have as many votes as the amount of their accrued but unpaid pensions plus a value equal to 25% of the calculated actuarial amount.
National, regional or local tax authorities will be entitled to a number of votes equal to the principal amount of their credits plus default interest and fines.
Admissible credits and the number of votes to which each creditor is entitled are determined by the promoter. The Superintendency of Corporations shall resolve any objections that cannot be settled by the parties.
The agreement must be approved by more than one internal or external creditor and a majority of votes. Usually this majority must include votes cast by creditors of at least three of the following kinds:
However, if only three of these kinds of creditors are involved in the negotiation, the majority must include votes cast by two kinds.
If a group of creditors belonging to the same group, or one creditor, is able to cast the majority of votes, then the agreement will require the majority to also have the additional votes of creditors representing 25% of admissible votes. The same majorities required for the adoption of the agreement are also necessary for any amendments.
Workers can veto clauses that violate rights that are unrenouncable under Colombian labour laws. Partners and/or shareholders of companies have the right to veto clauses that:
These rights may only be exercised if (i) these partners/shareholders represent more than 20% of admissible votes, and (ii) the decision was passed by less than the necessary majority.
The national tax authority shall have the right to veto clauses related to transfer of property over the company's assets if the remaining assets are insufficient to cover its credits.
Content and effect
Restructuring agreements must create an oversight committee in which internal and external creditors will be represented and which will supervise execution of the agreement. The agreement must contain the terms, conditions and order in which the different kinds of credits shall be paid (including any debts incurred during negotiations or after the agreement which must be paid first). This allows for the alteration by majority vote of the statutory order of preference. It must also include the terms and conditions under which credits will be capitalized by converting them into stock or risk bonds, if this capitalization is going to take place. Any kind of credit may be capitalized or converted into risk bonds, except for (i) the portion of pension rights that may not be renounced by workers, and (ii) up to half of the unpaid interest on tax obligations.
A restructuring agreement shall be binding on all creditors, including absent or dissident creditors.
The company's management must obtain the consent of the oversight committee for the alienation of the company's assets. All attachments and seizures shall be lifted, except those granted to the National Tax Authority, and all judicial proceedings for the enforcement of credits shall be terminated.
The enforceability of interest in property shall be suspended for the duration of the agreement.
Labour and tax credits shall retain the preference afforded to them by the law, except for any credits capitalized as stocks or risk bonds. The order of preference of the remaining orders (credits secured with pledges, credits secured with mortgages and unsecured credits) may be altered with 60% majority of votes.
The agreement shall be terminated in any of the following events:
If the agreement is terminated for reasons other than its fulfillment, liquidation will follow. This procedure will be initiated by the Superintendence of Corporations. In this case, enforceability of all securities shall resume, according to the law, and all suspended judicial proceedings may continue.
The law establishes actions that may be filed by creditors before the Superintendency of Corporations in order to obtain the reversal of any of the following acts or contracts executed by the debtor within the 18 months prior to the start of negotiations:
The need to prove bad faith on the part of the debtor is no longer recquired, nor is the need to show the debtor intended to avoid paying creditors by using any of these simulated or fraudulent contracts.
Capitalization of credit
Most of the company's debts may be capitalized if creditors choose to subscribe to stocks and risk bonds. If these are capitalized, they shall be counted as negotiable investments and must be sold during the term of the agreement.
Risk bonds shall be paid after external credits but before internal creditors.
Labour credits may be capitalized provided that they retain the preference for payment stipulated by law.
All restructuring agreements must include provisions on the treatment of pensions. Agreements without government approval shall be ineffective.
Agreements with workers in order to reduce their wages (but not below the minumum wage) may be included in the agreement. These agreements shall be subject to the approval of the Ministry of Labour.
The companies tax obligations are not negotiable. However, creditors of government entities may obtain payment by way of reduced tax obligations.
A final key characteristic of the law is that it vests greater judicial powers with the Superintendency of Corporations. The superintendency is now competent to issue final decisions on the following matters:
In exercising these judicial powers the superintendency is entitled to order the attachment and seizure of assets, subject to the Colombian Civil Procedure Code.
Initiation of proceedings
The superintendency may issue a writ initiating the liquidation proceedings, in which it will order:
If such action is taken, all debts are due and any judicial enforcement proceedings must be incorporated into the liquidation proceedings (though no new actions will be admissable). Creditors party to the failed restructuring negotiations shall not be required to present their credits again.
An advisory board to the liquidator will be appointed including representatives of the different kinds of creditors.
The liquidator will prepare an inventory of all assets and liabilities of the debtor, with the exceptions of assets not subject to attachment. This inventory shall be verified by the advisory board and approved by the Superintendency of Corporations.
After the inventory has been approved, the board will order the appraisal of the assets and, after this has been completed, their sale. The law establishes that, to the extent possible, assets should be sold as block or economic units so as to maximize their value.
Preference of payment
The legal order of preference for payment will apply, as follows:
Assets remaining after the payment of all obligations shall be returned to
the debtor. If the assets are not sufficient to pay all debts, creditors shall
be able to initiate judicial enforcement actions against the debtor to obtain
payment from any assets that the debtor acquires in the future.
For further information on this topic please contact Daniel Posse at Posse,
Herrera & Ruiz Abogados by telephone (+ 57 1 312 3157) or by fax (+57 1
313 0259 or by e-mail (firstname.lastname@example.org).
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.