Capitalization of receivables

Through Official Letter No. 610-000113 of January 23, 2018, the Superintendence of Companies made an important pronouncement on how a capitalization of claims should be carried out in order to comply with the law. This Official Communication is particularly relevant as it clarifies the position of the entity with respect to four neuralgic points related to the capitalizations of claims in Colombian corporations, namely; the authorization of the meeting, the preferential right to subscribe shares by the other shareholders, the express authorization of the board of directors or shareholders' meeting for the administrators who intend to acquire shares, and the treatment of such capitalizations under the corporate reorganization regime.

Specifically, it was asked whether "(i) for purposes of capitalizing such credit, is the approval of the highest corporate body (meeting) necessary, (ii) must the preferential right of the other shareholders to subscribe shares be respected, (iii) must the administrators who -directly or indirectly acquire such shares- request the authorization referred to in Article 404 of the Code of Commerce, and (iv) do the above answers change anything if the company is in reorganization (Law 1116/2006)?

Regarding the first point, i.e., the approval of the capitalization of claims by the shareholders' meeting, the Superintendency -referring to its Official Notices 220-054887 of September 30, 2005 and 220-034905 of 2010- stated that, in effect, "one of the requirements for such figure to be approved by the shareholders' meeting is the approval of the capitalization of claims, one of the requirements for such legal figure to operate is to have the authorization of the assembly, not only because of the importance and transcendence of the capital operation being carried out, but also because with it the agreement between the debtor company and its creditors is perfected as a means to extinguish a pre-existing obligation. Likewise, and in response to the second question (obligation to respect the preferential right in the subscription of shares) the entity indicates that in the referred meeting the associates "must pronounce on the waiver of the preferential right which must be approved with the majorities provided in the corporate contract or in numeral 5 of article 420 of the Code of Commerce".

It indicates that, in order to maintain the political power of the existing shareholders in the corporation intact, only by statutory stipulation or by will of the meeting may it be decided that the shares be placed without subject to the preemptive right, a decision that must be adopted with a majority of no less than 70% of the shares represented at the meeting.

Regarding the third point (obligation of the administrators to request express authorization from the assembly or board of directors to acquire shares), the entity indicated -reiterating what was stated in Official Letter 220-047784 of 2007- that the acquisition of shares by any means (including the capitalization of credits) obliges the administrator to obtain prior authorization from these management and administrative bodies. Thus, this stipulation ceases to be a simple pro-corporate governance formalism and becomes an element of the transaction without which it would be null and void.

Finally, the Superintendency indicates that these requirements for the capitalization of debts to operate correctly apply both to companies that are in a normal financial situation and to those that are in a process of corporate reorganization. Naturally, in the case of companies in a reorganization process, the capitalization of claims and the payment in lieu of payment caused prior to the date of the opening of the bankruptcy proceeding "are subject to the results of the process (...) in such a way that no recognized or admitted credit is excluded, and will respect for payment purposes, the priority, privileges and preferences established by law. (...) Once the agreement has been executed under the terms provided by law, confirmed by the insolvency judge and registered in the chamber of commerce of the corporate domicile, it will be binding for the respective debtor or debtors and for all internal and external creditors. In this order of ideas, it corresponds to the highest corporate body to waive the right of preference for the respective capitalization to take place".

In conclusion, the rules related to the preemptive right in the subscription of shares and the authorization to acquire shares by the directors of the company are fully applicable in the processes of capitalization of claims, regardless of whether or not the company is in a bankruptcy proceeding. Ignorance of these provisions may result in the nullity of the acquisition of shares through the capitalization of claims.