Corporate insolvency law in Colombia

Corporate Insolvency Regime in Colombia

Just as individuals can experience periods of economic instability, companies are also vulnerable to these periods, especially those operating in volatile markets such as oil. If a company finds itself in a situation of debt it cannot manage, it can initiate a corporate insolvency process in Colombia. While this law has been in effect for many years and has saved numerous companies, there is still considerable lack of awareness regarding its benefits.

Previously, we discussed insolvency of a non-trading individual in Colombia; this time, we want to discuss everything related to the Economic Corporate Insolvency in Colombia: what it is, the governing law, who can access it, and its benefits.

What is the Corporate Insolvency Regime in Colombia?

The corporate insolvency regime is a procedure that allows companies, and also merchant natural persons, to pay accumulated debts to their creditors and, at the same time, protect their establishment as a source of income and employment. This mechanism is stipulated in Law 1116 of 2006.

Reorganization and Judicial Liquidation Processes

According to Article 1 of Law 1116 of 2006, companies and merchant natural persons who access this mechanism can organize their debts through a reorganization or judicial liquidation process:

• Reorganization Process: Aims, through an agreement, to preserve viable companies and normalize their commercial and credit relationships through operational, administrative, asset, or liability restructuring.
• Judicial Liquidation Process: Seeks prompt and orderly liquidation, aiming to make the most of the debtor's assets. For more information on liquidations, consult our article on Official Liquidations in Tax Matters in Colombia or How to liquidate a company in Colombia?.

Requirements to Access the Corporate Insolvency Regime

For a company to access the corporate insolvency regime, it must meet one of these two conditions:

• Cessation of Payments: When the company defaults on payments for more than 90 days to 2 or more creditors or has 2 or more lawsuits filed against it by creditors for debt payment. To better understand this process, you can read about Legal Portfolio Collection in Colombia. In either case, the accumulated value of the obligations must represent no less than 10% of the total debt.
• Imminent Inability to Pay: This situation occurs when the company is unable to pay due to market circumstances or internal organizational and structural issues that severely affect the fulfillment of its obligations.

Merchant natural persons can only access the corporate insolvency regime through the condition of cessation of payments, and for the purposes of this condition, alimony obligations and related processes are not taken into account.

Which Companies Can Access the Corporate Insolvency Regime?

According to Article 2 of Law 1116 of 2006, the following can access this mechanism: merchant natural persons and companies not excluded by this law.

These companies and natural persons must conduct business permanently within the national territory of Colombia, whether of a mixed or private nature. Also, foreign companies considering establishing operations in Colombia can explore the requirements for Setting up a company in Colombia as a foreigner. Branches of foreign companies and autonomous patrimonies carrying out business activities can also access this mechanism.

Who Cannot Access the Corporate Insolvency Regime?

In the previous section, we mentioned that companies can access this mechanism, but certain types of companies are excluded from this law.

These excluded companies are described in Article 3 of the same law and are as follows:

1. Health Promoting Entities, Administrators of the Subsidized Regime of the General System of Social Security in Health, and Health Service Providers.
2. Stock and Agricultural Exchanges.
3. Entities supervised by the Superintendencia Financiera de Colombia. This does not include securities issuers, subject only to the control of the aforementioned entity.
4. Entities supervised by the Superintendencia de Economía Solidaria that carry out financial, savings, and credit activities.
5. Publicly held companies, and national and territorial industrial and commercial state-owned enterprises.
6. Public law entities, territorial and decentralized entities.
7. Domestic public utility companies.
8. Non-merchant natural persons.
9. Other legal entities subject to a special regime for business recovery, liquidation, or administrative intervention for administration or liquidation.

Benefits of the Corporate Insolvency Regime

Since its implementation, this law has been a lifeline for many companies, and there have been many successful cases of companies that managed to reorganize their debts and overcome their economic crises.

In Colombia, there are very few cases where companies have had to resort to liquidation as the only alternative to settle all or most of their debts.

We know that markets can change, but not everything has to be lost. When a company detects the crisis in time and avails itself of this law, the chances of saving its debt and avoiding liquidation are very high. The process can last approximately 18 months from the time the request is made until an agreement is reached with the creditors.

Similar to insolvency for non-natural persons, the corporate insolvency regime is designed for companies and individuals who, while lacking the capacity to pay their debts, demonstrate an interest in resolving their credit history. If you need legal advice on corporate matters, contact our Corporate Lawyers in Colombia. For more information, contact Servicio Legal.