Special transitional measures in insolvency proceedings

By means of Legislative Decree 560 of April 15, 2020, the Government provided for the regulation of some special transitory measures in insolvency processes, which are aimed at companies that have been affected by the causes that motivated the declaration of the State of Economic, Social and Ecological Emergency referred to in Decree 417 of March 17, 2020. These special transitory measures will be in force for two (2) years as from April 15, 2020.

In general terms, the measures adopted may be summarized as follows: i) rescue; ii) pre-bankruptcy; iii) business recovery; iv) financial relief and business reactivation; and v) taxation.

1. Rescue. The salvage of companies in a state of imminent liquidation allows any of the creditors to contribute new capital to the assets of the insolvent company, for the purpose of avoiding its judicial liquidation, provided that its assets, as evidenced in the file, are negative.

The offer of the interested creditor must amount at least to the value resulting from the addition of the first-class credits, the labor indemnities for early termination without just cause, the normalization of pension liabilities, the reorganization administration expenses, the credits in favor of the secured creditors and the other credits with payment vocation, in accordance with the inventory of assets.

Once the deposit of the resources has been verified, the Judge will authorize the operation and will order the capitalization at nominal value of the claims paid and the corresponding issuance of shares in favor of the acquirer. This issuance of shares shall be made without prejudice to the right of first refusal.

2. Pre-contest. To carry out an emergency negotiation of reorganization agreements, the interested debtor must give notice to the Superintendence of Corporations of its intention to initiate such negotiation, for which it must be in any of the situations regulated in article 9 of Law 1116 of 2006: cessation of payments or imminent inability to pay.

Once the request is admitted by the Bankruptcy Judge, the negotiation between the debtor and its creditors will have a maximum duration of three (3) months. The agreement entered by the parties shall comply with the requirements set forth in Law 1116 of 2006 and shall be submitted to the Judge for confirmation, before the expiration of the term referred to above.

During the negotiation term: i) the restrictions of article 17[1] of Law 1116 of 2006 shall apply; ii) the execution, coercive collection, restitution of tenure and execution of guarantees against the debtor shall be suspended; and iii) the payments of administration expenses that the debtor deems necessary may be deferred, except for salaries, parafiscal and social security contributions.

3. Business recovery. These measures are adopted with the purpose that debtor and creditor may adopt extrajudicial mechanisms that allow renegotiating the terms of the obligations between the parties.

For the above, the Chambers of Commerce may advance business recovery procedures through the list of mediators established for such purpose, and their subsequent judicial validation. This measure may be used by debtors subject to the insolvency regime (Law 1116 of 2006) and by those excluded from said regime, in accordance with the provisions of article 3 of the law, provided they are not subject to a special regime.

The procedure will have a duration of three (3) months counted as from the communication of initiation and will have the effects of article 17 of Law 1116 of 2006, in addition to suspending the processes of execution, coercive collection, restitution of tenure and execution of guarantees against the debtor.

The agreement must be submitted for validation by the Bankruptcy Judge or the Civil Judge of the Circuit, as the case may be.

It should be noted that this procedure is subject to the regulation of the process by the Chambers of Commerce and to the regulation by the National Government regarding an expeditious process for the validation of the agreements.

4. Financial relief and business reactivation.

The decree established financial relief such as: 

  • Relaxation of the limitations for the payment of claims during the negotiation of reorganization agreements, so that the debtor may make the payment of small claims up to five percent (5%) of the total liabilities. For this purpose, the debtor may dispose, under market conditions, of fixed assets not necessary for the ordinary course of business.
  • Capitalization of liabilities by interested creditors.
  • Discharge of liabilities. When the debtor's liabilities exceed its valuation as a going concern, the agreement may provide for the discharge of liabilities more than that valuation.
  • Sustainable debt agreements with financial entities that contemplate debt restructuring or re-profiling.
  • Request for credits. The debtor may request credits for the ordinary development of its business, but if this is not possible, the Bankruptcy Judge may authorize: i) to back the credit with security over its assets, provided that they are not encumbered in favor of other creditors; ii) to grant a second degree lien over an asset; or, iii) to grant first degree security over previously encumbered assets, provided that the consent of the secured creditor is obtained.
  • The installments of the reorganization agreements in execution corresponding to the months of April, May and June 2020, will not be considered due until July of the same year.

5. Tax measures in insolvency proceedings. To provide liquidity solutions to companies admitted to a corporate reorganization process, or that have entered into a reorganization agreement and are executing it, the Decree establishes that the same:

  • They will not be subject to withholding or self-withholding at source as income and will be subject to withholding at source as sales tax (VAT) of fifty percent (50%). Such measures will be in force as from the issuance of Decree 560 of April 15, 2020, and until December 31 of the same year.
  • They will be exempted from liquidating and paying the advance payment of income (article 807 of the Tax Statute) for the taxable year 2020 and are not obliged to liquidate presumptive income for the same taxable year.
  • To preserve the company and employment, the National Tax and Customs Directorate - DIAN - and State entities may reduce penalties, interest, and capital.

Additionally, in order to provide agility to the reorganization mechanisms, the Decree has provided that the Bankruptcy Judge will not audit the content or accuracy of the documents provided by the debtor, nor the financial information, which will be the exclusive responsibility of the accountant or statutory auditor.

Finally, it should be noted that the Decree has suspended the effectiveness of some rules, among which are: the cause of dissolution due to losses and the cause of imminent inability to pay in order to initiate the corporate reorganization process.

[1] "EFFECTS OF THE FILING OF THE APPLICATION FOR ADMISSION TO THE REORGANIZATION PROCEEDING WITH RESPECT TO THE DEBTOR. As of the date of filing of the application, the administrators are prohibited from adopting amendments to the bylaws; the constitution and execution of guarantees or sureties over the debtor's own assets, including commercial trusts or fiduciary commissions for such purpose; making compensations, payments, settlements, waivers, settlements, unilateral or mutually agreed terminations of ongoing proceedings; or making disposals of assets or operations that do not correspond to the ordinary course of business of the debtor or that are carried out without being subject to the debtor's obligations; or disposing of assets or operations that do not correspond to the ordinary course of business of the debtor or that are carried out without being subject to the debtor's ordinary course of business; conciliations or transactions of any kind of obligations under its responsibility; nor any alienation of assets or operations that do not correspond to the ordinary course of business of the debtor or that are carried out without being subject to the applicable statutory limitations, including mercantile trusts and fiduciary assignments that have such purpose or entrust or empower the trustee in such sense; unless there is prior, express and precise authorization from the insolvency judge.

The authorization for the execution, execution, or modification of any of the indicated operations may be requested by the debtor by means of a reasoned document before the insolvency judge, as the case may be.

The execution of mercantile trusts or other types of contracts whose purpose or effect is the issuance of securities placed through the public securities market in Colombia must obtain authorization from the competent authority.

The issuance of securities placed through the public securities market in Colombia, through autonomous patrimonies or in any other manner, must additionally obtain the authorization of the competent authority. In the case of the execution of mercantile trusts whose autonomous patrimonies are constituted by the assets object of securitizations, placed through the public securities market, the authorization referred to in this article shall not be required. Neither shall it be required in the event that the operation in question corresponds to the execution of a mercantile trust in guarantee that is part of the structuring of an issue of securities placed through the public securities market."

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Medidas-transitorias-especiales-en-procesos-de-insolvencia_​ENG.pdf

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