Insolvency of a non-trading natural person as an alternative to the insolvency of an individual

The Covid-19 pandemic, together with the measures adopted by the National Government to prevent its spread and mitigate its effects, has led to major changes in the development of the activities carried out by companies, traders, self-employed persons and, of course, non-trading individuals. For this reason and considering the possible negative effects that the current situation may generate on the latter group, it is necessary to recall the figure of insolvency of a non-trading natural person as a resource available to restructure liabilities and facilitate compliance with its obligations.

1. General considerations.

1.1.  To whom does it apply?

The insolvency regime for non-trading natural persons, regulated by Law 1564 of 2012 (General Code of Procedure - CGP) and Decree 2677 of 2012 (compiled in Decree 1069 of 2015), is applicable for those natural persons who:

(i) Do not professionally develop commercial activities, i.e., do not have the quality of traders according to the provisions of the Code of Commerce; and,

(ii) Do not hold the condition of controlling any company or are part of a business group.

1.2. What does this insolvency law allow me to do?

A non-trading natural person (hereinafter "PNNC") may: (i) negotiate its debts by entering into an agreement with its creditors; (ii) validate the private agreements it has entered into with its creditors; and (iii) liquidate its assets to effect payment of its obligations.

In all cases, for purposes of the payment of claims, the priority of credits must be considered in accordance with the provisions of the Civil Code, with priority being given to food obligations.

1.3.  Which entities are aware of this procedure?

The negotiation of debts and the validation of the agreement may be carried out before the conciliation centers expressly authorized by the Ministry of Justice and Law and the notary's offices of the debtor's domicile.

On the other hand, the liquidation of assets is under the restrictive competence of the municipal civil judge. Likewise, the judge will hear disputes arising in the process of debt negotiation or validation of the agreement. In both cases, to determine the competent judge, the domicile of the debtor or the domicile where the negotiation of debts or the validation of the agreement took place must be considered.

2. On debt negotiation.

2.1. Requirements:

PNNCs that: (i) have defaulted on the payment of two or more obligations in favor of two or more creditors for more than 90 calendar days; or (ii) have two or more executive or coercive jurisdiction proceedings against them may avail themselves of this procedure.

In any case, the percentage value of the obligations must represent not less than 50% of their liabilities.

It should be noted that the request for negotiation may be filed before the competent entity directly by the debtor or through a legal representative, attaching the documents required by article 539 of the CGP.

2.2. Duration of the process:

To ensure the expeditiousness of the procedure, the rule provides for a term of 60 days, extendable for another 30 days, counted from the acceptance of the request.

2.3. Effects:

The acceptance of the negotiation request has the effects contemplated in Article 545 of the CGP, of which the suspension of the executive proceedings, restitution of assets or coercive jurisdiction proceedings against the debtor and the interruption of the statute of limitations and expiration of the actions with respect to the credits that are due to the debtor should be highlighted.

Finally, it is necessary to indicate that the debtor who complies with the payment agreement may not request a new insolvency proceeding until 5 years have elapsed, counted from the date of total compliance with the agreement, considering the certification issued by the conciliator.

3. Validation of agreements.

3.1. Requirements:

Unlike debt negotiation, which allows the restructuring of the liabilities owed by the PNNC, this procedure allows the organization of obligations prior to default. In effect, this procedure may be carried out when: (i) circumstances arise that necessarily lead to a cessation of payment within the following 120 days, either due to the loss of employment, dissolution and liquidation of the marital partnership or similar events; and, (ii) a private agreement has been entered into with a plural number of creditors representing more than 60% of the capital of the obligations owed by the PNNC.

4. Liquidation of Assets.

4.1. Requirements:

The grounds for initiating this procedure are exhaustive, being: (i) failure of the negotiation of the payment agreement; (ii) declaration of nullity of the payment agreement or its amendment; and (iii) breach of the payment agreement that could not be cured.

Corollary, to proceed with the liquidation of assets, the debt negotiation process provided for in the CGP must be exhausted as a first step.

4.2. Effects:

First, it should be mentioned that this process consists of 3 stages: (i) the opening of the liquidation; (ii) the approval of the inventories and appraisals of the assets; and (iii) the adjudication of the assets that make up the debtor's assets.

In this sense, the declaration of the opening of the liquidation by the competent judge will produce, among others: (i) the prohibition to the debtor to make payments or agreements of any kind with its creditors on the obligations caused prior to the opening, as well as on its assets; (ii) the exclusive use of the debtor's assets to pay the obligations due prior to the commencement of the proceeding; and, (iii) the interruption of the statute of limitations and the inoperability of the expiration of the actions of the obligations perfected or due from before the commencement of the liquidation.

Notwithstanding the foregoing, within the process and prior to the adjudication hearing, the creditors may enter into a resolution agreement, if it is agreed by a number representing not less than 50% of the total amount of the obligations.

The consequence of the adjudication will be, among others, that those obligations that have not been settled will become natural and, therefore, will not be enforceable later by the creditors.

Finally, the debtor whose assets have been liquidated may only request an insolvency proceeding after 10 years have elapsed from the date of the adjudication of its assets.

5. Conclusions.

As can be seen, the insolvency regime of a non-trading natural person is made up of different figures that are applicable depending about the applicant, whether it is close to defaulting on its obligations, is in default of defaulting on them or does not have the mechanisms to comply with them without compromising its assets, in which case it will have to resort to the liquidation of its assets.

Consequently, and in view of the situation faced by the country due to Covid-19, it will be up to the interested party to carefully analyze its current situation in order to determine the most suitable mechanism to restructure its obligations, so that it may comply with each one of them and thus avoid long-term adverse effects such as negative reports in the credit bureaus, the difficulty to access new credits or, in the worst case scenario, the liquidation of its assets.