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THE NATIONAL AND INTERNATIONAL INSOLVENCY REGIME IN COLOMBIA.
In Colombia there is an advanced law system around the insolvency, because it has
presented a constant legal development since the period of the colony, where the
bankruptcy procedure was adopted into the Spanish system in the Ordinances of
Bilbao, and later became embodied in the Colombian Constitution of 1821.
Subsequently, in 1940 was published the Act No.750, by which all creditors that
wanted to constitute the debtor in the status of bankrupt had to show off the quality of
trader, basing this requirement on the commercial character of this institution.
Then, by the Act 2264, 1969 - later incorporated into the Commercial Code –
introduced the legal concept of “preventive concordat” (in Spanish “concordato
preventivo”), in which established a model of prevention to debtor to be constituted
on bankruptcy.
Later, with the issuance of Law 222, 1995, the legal institution of the “bankruptcy”
was replaced for “compulsory settlement” (in Spanish “liquidación obligatoria”)
because into an insolvency process the priority was the liquidation of debtor’s assets.
In addition, Law 222 greatly advanced, as intended to unify the insolvency process,
to the case of debtors with a chance to recover or those to be subject to a liquidation
procedure (i), and set the subject of liquidation proceedings on the debtor, regardless
if their individual, social or economic activity (ii).
Four years later, Law 550, 1999 created the “corporate restructuring agreements”,
in which the subjects where all the legal entities engaged in commercial activities (i).
Also, developed the insolvency procedure to the economic situation of local
authorities (ii), and eliminated the ““preventive concordat”, leaving the current
procedure of “compulsory settlement” (iii).
Then, the Law 1116 of 2006 adopted the “Corporate Insolvency Regime”, which
determines a new insolvency system and defines news legal procedures for traders,
the reorganization process, the judicial liquidation, and international insolvency.
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Also, Law 1116 develops an extraterritorial insolvency system, based on the
UNCITRAL Model Insolvency Law.
After few years, Law 1380, 2010 introduced to the Colombian Law System the
institution of insolvency and it process for people that has not the status of trader.
In summary, in our legal system are two mechanisms for insolvency cases: the
economic insolvency procedure to people that has not the status of trader and the
specific procedure to traders – legal and natural persons -.
The direct antecedent of this proceeding was the sentence C – 699, 2007 of the
Colombian Constitutional Court, in which they urged to the Congress to establish an
insolvency proceeding for non- traders people.
Accordingly, it is established for people that are in default (in Spanish “cesación de
pagos”), caused when a debtor has defaulted on two or more creditors more than
ninety (90) days. Or, when there are one or more executory proceedings or
compulsory jurisdiction against the debtor demanding the payment of any of his
obligations.
Thus, the Law establishes a procedure which “provides safeguards for both subjects
in the process as the insolvent debtor allows organizing the performance of their duties,
without being stifled by a series of unsuccessful executory proceedings. While the
creditor is assured with an agreement that will be more fast, accurate and economical
than the independent judicial claim can be”2.
1 Colombian Constitutional Court. Sentence C – 699, 2007. Magistrate Rodrigo Escobar Gil. Free
Translation.
2 Colombian Magazine OBSERVATORIO LEGISLATIVO. Boletín No. 165. “La ley de insolvencia
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2.1. Scope of application.
Subject to this regime are the people who are not traders and be domiciled in
Colombia.
2.2. Competency.
For this insolvency proceeding has competence any Mediation Center of the
domicile of the debtor (i), including Notaries Public (ii).
Also in this situation, specified by law, has competence the Civil Municipal Court
(iii):
2.3. Proceeding.
If they do not
established an 6. Proper
agreement, it will be May not accept May accept
authority gives
declared failed another
opportunity to
If they established reach an
an agreement, it agreement
6. The 7. The debtor will make 8. Payment
will be a final a payment proposal. To Agreement. It will
account will
decision and which creditors may offer finished the
be a final
continue the counter to reach an proceeding
decision.
process as the agreement
creditors accept
from the begin
In the application to commence the process, the debtor may include a draft
debt negotiation where on exchange of their own assets as a means of partial or full
payment of his obligations.
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If the request for debt negotiation is successful, the Conciliator shall to
processing it, and the debtor must submit an updated list of his obligations, which
should include their debts in order of legal priority.
And, for the record, the Civil Municipal Court, requested by the Conciliator,
should state failed this negotiation if:
In this hearing the Conciliator or the proper authority shall inform the
creditors the detailed list of debtor’s liabilities and assets and inquire them if they
concur with it. So, if none one has objected, that agreement is taken as definitely into
the proceeding.
After the acceptation by creditors, the Conciliator shall invite to the debtor to
make a payment proposal for the fulfillment of his obligations, which may receive
counter and alternative agreements from the creditors.
Nevertheless, if there are any objections to the detailed list given by the debtor,
the Conciliator shall invite to the parties to establish another settlement. But, if they
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continue with discrepancies, the Conciliator or proper authority shall consider as
failed the debt negotiation process.
So, from the acceptation of the debt negotiation to the celebration of this
payment agreement, the prescription term is interrupted and the expiration shall not
operate to proceedings against the debtor before the initiation of this process.
The debtor is entitled to apply for a new process of debt negotiation, just
six years (6) later, from the fulfillment date of the last agreement.
If the Conciliator verifies the breach of the agreement, shall invite to the
parties to review and study a possible modification of the original
agreement. If they concur and the breach continue, or the parties do not
establish a new modification, the Conciliator state the agreement as failed
and notice to the judges who knows the claims against the debtor to
continue with those proceedings immediately.
The insolvency proceeding ends, if the parties are complying the payment
agreement.
Law 1116 defines as its aim “the credit protection” (i) and “the recovery and
conservation of the enterprise as a unity of economic exploitation and generator of
employment, thought the reorganization proceedings and the judicial liquidation” 3(ii).
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Free Translation.
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“Finally, it should be noted that the figures of the
concordat, contests or liquidation processes are
oriented primarily to the credit protection, subject to
the provisions designed to make less burdensome the
debtor’s situation or draft of agreements.
(…)
In spite of what has just been said, the debtor has to be in the economic
situation of cessation of payment, or be impending inability to pay, as a required to
commence the insolvency proceeding:
Cessation of payment.
4 Colombian Constitutional Court. Sentence C – 699, 2007. Magistrate Rodrigo Escobar Gil. Free
Translation.
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Impending inability to pay.
The subjects of this regime are people who are traders (i), commercial companies
not excluded by law (ii), branches of foreign companies established in Colombia (iii)
and equity for commercial activities(iv).
3.2. Competency.
By law, the proper authorities are the Superintendence of Corporations and Civil
Circuit Court of the domicile of the debtor.
Superintendence of Corporations:
3.3. Proceeding.
This proceeding has been established to recover the company, preserve its
economic role and guarantee to creditors to get their payments.
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company and if it does not be possible, it extinction through an
allocation procedure, or in case of breach of the agreement, the
consequence is the commence of a judicial liquidation”5
1. 3. 4.
2. Commence of
Submission Reorganization Reorganization
the proceeding.
of the Draft. The debtor agreement.
Admission of the
application. makes a draft Between
application by
detailing creditors and
the proper
obligations and debtor.
authority
creditors.
5. Hearing of
5. Confirmation
the
Hearing.
Allocation
Agreement
6. Decision by the
proper authority. 6. Registering
7. Procedure their
8. Registering the state of If it would be
ends with the agreement in
the proper authority which denied, the
fulfillment of the the Chamber
ratifies the fulfillment of the procedure will
obligations of Commerce
agreement, in the Chamber continue as if the
established of the debtor’s
of Commerce of the debtor’s agreement has
inside the principal
principal domicile. never existed
agreement. domicile.
Now, if the economic situation of the debtor is an impending inability to pay, the
debtor or the creditors are only entitles to apply.
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Also, a legal institution is set: the “ancillary jurisdiction”, which means that shall
be no admission or following with executory proceedings or any other procedure
against the debtor because all debtor’s assets are part of this process, “in addition, if
all creditors are subject to the same procedure, it guarantees the principle of equality
because they are all derived from the same powers of a procedural nature”6.
Last, but not least, the debtor may not suffered the decreed to the unilateral
termination of any other contract, neither its expiration.
In this way, the objective of the reorganization draft is to recover and preserve the
company into the future, trough the identification of changes that have to do and
define the strategies that adopted.
About the usefulness of this draft, made by the debtor, the Colombian doctrine has
understood:
Presented the draft by the debtor, the judge proceed to hold the Reorganization
Agreement Hearing, in which debtor and creditors discussed about the draft and the
creditors decided about it (to protect their own interests)
This stage of the process has been defined precisely by the treatise Saúl Argeri:
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presents members, individually considered, who will unify and
fuse a common interest through the system of legal majority, in
exercise of the function assigned by the legislature, even when to
the contrary in the assessment of the circumstances that make the
acceptability or not of the draft proposed by the debtor.”8
After the acceptability of the draft from creditors, the judge has to declare its
legality, which means that the agreement is under the corporate reorganization
regime.
If the creditors do not accept the agreement or the judge do not confirm it, the
judge shall hold an allocation agreement hearing.
In this hearing, as well as the name implies, “the debtor’s assets are allocated as a
partial or total payment of obligations recognized by the judge, because creditors
agreed when the reorganization agreement negotiation has failed”9.
Colombian law establishes that the allocation of goods has to be under the judicial
liquidation’s rules: the goods have to be allocated as the creditors have agreed, but if
they don’t, the judge has to allocate the goods as the law determines for payment and
allocation.
The process ends when the reorganization agreement is fulfillment (i), the judge
ratified it through a pronouncement (ii), and the state is registered in the Chamber of
Commerce of the debtor’s principal domicile.
The term to conclude the reorganization agreement shall be four (4) months,
renewable for two (2) months, because it is intended to be flexible and ready to
achieve the objectives in pursuing.
8 ARGERI, Saúl. Manual de Concursos. Citado por ISAZA U, Álvaro y LONDOÑO R, Álvaro. Comentarios al
Régimen de Insolvencia Empresarial. Editorial Legis. Tercera Edición. Page 193. Free Translation.
9
Ibidem 6. Page 327 Free Translation.
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If the creditors or the debtor denounced the breach of the obligations
established into the reorganization agreement, the judge has to verify it and hold to a
breach hearing.
In this hearing, the judge invite to parties to found a new alternative of solution.
So, if parties do it this is the final agreement, but if they do not establish a new
agreement, the judge has to order to commence of the judicial liquidation.
In this proceeding the company is extincted, which means finish with its
commercial activities.
7. Procedure ends.The
allocation is like creditors
concord
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- The authority responsible for monitoring or controlling the
corporation, submitted the application.
- The Superintendence of Corporations decided it through a
reasoned decision.
- Application by the debtor and a plural number of creditors.
- Application of a foreign authority.
- If the debtor has pension obligations, labor or tax due, without
having been paid within the period specified by the judge.
3.3.2.2. Proceeding.
Once the liquidation procedure began, the judge order the valuation of the
debtor’s goods and them selling.
Then, from the proceeds of sale have to pay to each creditor. And if it is not
possible because there was no sale, the judge hold to an allocation agreement between
creditors, and goods have to be allocated as they have agreed, but if they don’t the
judge have to allocate all goods as the law determines for payment and allocation.
This process ends with the allocation is doing by the creditor’s agreement or the
judge’s state(i), or if during the process debtor and creditors hold a reorganization
agreement (ii).
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4. THE CROSS – BORDER INSOLVENCY PROCEEDING.
Law 1116, 2006 provides the cross-border insolvency for processes involving
natural and legal persons. In this sense, the law develops its principles fully inspired
by the UNCITRAL Model Insolvency Law10.
Thus, with the incorporation of the UNCITRAL Model Insolvency Law “there is an
introduction of rules stimulating international cooperation, recognition of insolvency
proceedings, and access to officials and foreign creditors to procedures, and the access of
domestically officials and creditors to foreign proceedings outside”12.
Therefore, Colombian law provides in which cases shall be applicable the cross-
border insolvency procedure:
10 Colombian Constitutional Court. Sentence C – 699, 2007. Magistrate Rodrigo Escobar Gil.
11 Ibidem 5. Page 10.
12 Ibidem 6. Page 496.
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Creditors or other interest parties who are located abroad and are
interest to participate in the Colombian proceeding or in a submission
of application.
In this matter, Law 1116 implies an advance because introduce the insolvency
cross-border and considered the guidelines establish by UNCITRAL Model Insolvency
Law, as:
4.2. Competency:
4.3. Proceeding.
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In that sense, by requested of the foreign representative, the judge may take
necessary and urgent measures to protect the creditor’s interests or the debtor’s
assets, that’s why is enabled to:
But, in this case, the request from a foreign representative or authority do not
involved the submission of debtor’s assets and business overseas.
Thus, when the foreign process is recognized, it shall be notice to the creditors
who resident in Colombia, and to the creditors that has not any domicile or residence
in Colombia and knows their address, shall be notice through any suitable media.
In this way, in our country the recognition of a foreign proceeding as main has
certainly effects:
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The foreign representative and the debtor are entitled to apply,
individually or collective, the suspension or the invalidity of every
kind of proceedings open against the debtor after the recognition of
the foreign process.
5. FINAL CONSIDERATIONS.
In that sense, this is a proceeding which does not imply to parties several
charges, as judicial costs, causation of higher interest to the debtor, the risk to
creditors to not get soon them payment, traders can be stayed their activity by a long
time; and other circumstances which lead a drastic process where the opportunity to
enter into payment agreements is not given.
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