Corporate insolvency law for MSMEs

Colombia is no exception. Confecámaras' Business Creation Dynamics Report[2], which analyzes the behavior of the incorporation of companies and registration of natural persons, according to statistics reported in the Single Business and Social Registry (RUES), indicates that 310,731 productive units will be created in 2022, 1% more than in 2021. Of the total number of units registered during 2022, 73.8% correspond to individuals and 26.2% to companies.

Continuing with the referred report, according to the size of the company measured by the value of its assets, it is evident that the new productive units are made up of micro companies (99.6%), followed by small companies (0.4%).

Under the above scenario, it is important to consider the role played by corporate insolvency rules for MSMEs. In this regard, Professors Aurelio Gurrea Martínez and Adolfo Rouillon point out that, "[i]nsolvency law or insolvency law is an area of the legal system that can have a significant impact on the access and cost of credit and on the levels of entrepreneurship, growth and competitiveness of a country" (p. 23)[3].

Accordingly, the capacities of MSMEs and large companies to face situations of corporate insolvency differ. For example, while large companies have greater financing facilities, since they have more capital and customers, and can meet the costs of insolvency proceedings, MSMEs may not have sufficient assets to finance the aforementioned procedural expenses, which discourages the use of legal frameworks for corporate insolvency.

Although financial capacity is not the only reason for differentiating between the insolvency of MSMEs and large companies, various proposals have been made at the international level to improve legal frameworks in this area. The United Nations Commission on International Trade Law at its 46th session in 2013, with regard to the insolvency of MSMEs, requested Working Group V to conduct a preliminary review of the relevant issues at its session to be held in the first half of 2014, in particular to determine whether the UNCITRAL Legislative Guide on Insolvency Law provides sufficient and appropriate solutions for such companies.

Not being financial capacity the only reason to differentiate the corporate insolvency of MSMEs and large companies, different proposals have been made from the international arena to improve the legal frameworks on the matter. The United Nations Commission on International Trade Law at its 46th session in 2013, with regard to the insolvency of MSMEs, requested Working Group V to conduct a preliminary review of the relevant issues at its session to be held in the first half of 2014, in particular to determine whether the UNCITRAL Legislative Guide on Insolvency Law provides sufficient and appropriate solutions for such companies.

By the fifty-ninth session of the Commission in 2021, the Working Group completed its work on a legislative guide on an insolvency law for micro and small enterprises by submitting the respective draft[4].

Taking into account the above, in Colombia until before the COVID-19 pandemic, both MSMEs and large companies were subject to the same corporate insolvency regime, with distortions such as the one mentioned above.

This extraordinary health emergency, unprecedented in our history, demanded the issuance of abundant legal, economic and financial measures. From the point of view of Bankruptcy Law, Law 1116 of 2006 was complemented with new exceptional and transitory instruments to face this crisis, extraordinary and unprecedented in our history.

Thus, our country created a special regime for small insolvencies through Legislative Decree 772 of 2020 (June 3), regulated by Decree 1332 of the same year (October 6), which has been extended twice. It is currently in force until December 31, 2023, in accordance with the provisions of Article 96 of Law 2277 of 2022 (December 13).

In consideration number 38 of the aforementioned legislative decree it is noted that, "it is necessary to adopt measures to expedite the access and processing of insolvency proceedings in order to facilitate the protection of debtors in difficulties, or the liquidation of the assets of the debtor who does not have the capacity to continue developing its corporate purpose, since reorganization proceedings have an average duration of twenty (20) months and liquidation proceedings last twenty-two (22) months, which hinders the rescue of companies and the efficient and timely mobilization of assets in the economy".

Consequently, this legal regime contemplates two new bankruptcy processes: the abbreviated reorganization process (Article 11) and the simplified judicial liquidation process (Article 12). Both processes are aimed at debtors with assets less than or equal to 5,000 legal minimum monthly salaries in force, and are therefore unique and exclusive mechanisms.

Without claiming to be exhaustive or simplified, it is worth mentioning that the abbreviated reorganization process that proceeds in the event of cessation of payments, in very simple terms and once the debtor is admitted, is processed in two stages: conciliation meeting and hearing for the resolution of objections and confirmation of the reorganization agreement. In the first stage, which is self-compositive, the purpose is to resolve the objections to the draft credits and votes formulated by the creditors, for which the insolvency judge acts as conciliator. In the second stage, which is heterocompositive, the insolvency judge acts as such, resolving the non-conciliated objections and will decide on the confirmation of the reorganization agreement submitted for his consideration. Its predominant characteristics are a shorter duration and the total commitment to the resolution of conflicts through conciliation.

In the simplified judicial liquidation process, the assets of the estate will be considered at their net liquidation value. Consequently, no appraisals are made; notwithstanding the fact that creditors may object to the said value by submitting binding purchase offers or appraisals. The judge directly adjudicates the assets, which is why no voting rights are assigned. The stages are shorter, which means that the assets return more quickly to the economic stream in an orderly manner.

Now, in order to verify the practical application of the legal regime in question, let us review what happened, for example, with the abbreviated reorganization process. Indeed, taking into account the date of issuance of Legislative Decree 772 of 2020 (June 6), when examining the figures reported by the Superintendency of Corporations in its Report Atlas of Insolvency in Colombia, Facts and Figures[5], the Cali Regional Superintendency, an agency that exercises jurisdictional functions in matters of corporate insolvency, had 12 processes as of December 2020 and 12 processes as of December 2021, 1 for 2020 and 11 for 2021; In other words, by the end of the year 2021 it had already attended 11 of the 12 processes with which it ended the year 2020. By the end of September 2022 (last published report), it had 9 processes, all from that year; in other words, it had already attended all the processes for the year 2021.

In the same exercise, the Bucaramanga Regional Superintendency as of December 2020 had 45 abbreviated reorganization processes and as of December 2021 had 24 processes, 4 from 2020 and 20 from 2021; in other words, by the end of 2021 it had already attended to 41 of the 45 processes with which it ended 2020. By the end of September 2022 (last published report), it had 27 processes, all from that year, i.e., it had already attended all the processes for the year 2021.

These statistics show how the structure of the process in question, as mentioned above, which includes not only the concentration of procedural stages but also the reduction of their terms, meets the international recommendations on the matter, through fast, simple and flexible insolvency processes, which necessarily reduces the associated costs, promoting economic growth and improving the collective welfare.

To conclude these very brief lines, without prejudice to the criticisms, as well as the improvements that may be made to the insolvency regime for small insolvencies, a substantial progress in the matter is noticed, where Colombia begins to give adequate answers, being necessary that this legislation becomes permanent.

[*] Lawyer from Universidad Libre, Pereira. Master in Business Law from Pontificia Universidad Javeriana, Cali; and Doctoral Candidate in Law at Universidad Externado de Colombia, Bogotá, D.C. Legal Manager at Mazars Colombia.

[1] https://www.un.org/es/observances/micro-small-medium-businesses-day

[2] https://confecamaras.org.co/noticias/865-mas-de-310-mil-en-empresas-se-crearon-en-colombia-en-2022

[3] Gurrea Martínez, A. and Rouillon, A. (Dir.). (2022). Insolvency law: A comparative and functional approach. Bosch.

[4] https://uncitral.un.org/es/working_groups/5/insolvency_law

[5] https://www.supersociedades.gov.co/web/procedimientos-de-insolvencia/informes