This content is from: Local Insights

Colombia

As of December 28 1999 Colombia has a new tool to confront the economic crisis which has threatened the viability of some enterprises. By means of Law 550 of 1999, new regulations intended to help entrepreneurs and their creditors find a solution involving the redemption of the companies, were approved. Among others, Law 550 provides for the elimination of various legal obstacles which prevented profitable companies in difficult financial situation from achieving a recovery. Additionally, the law allows entrepreneurs and their creditors to reach an agreement in order to restructure the companies' financial obligations. The following is a brief description of the most important aspects of this law.

Negotiating the restructuring

The negotiation term for the entrepreneur-creditor agreements is due four months from initiation. During such negotiation period, all executive processes held against the company will be suspended, allowing it to settle administrative expenses of the company and permitting its continuity. Likewise, every financial operation involving the entrepreneur's assets and intended to guarantee any creditor's rights, must be have prior authorization from the corresponding supervisory authority.

The role of the promoter

In order to facilitate the negotiation of the agreement, an agreement promoter will be appointed by the corresponding authority. Such promoter, who will be subject to a severe strict legal regime in order to guarantee the proper performance of his/her activities, will be in charge of coordinating the agreement's negotiation. His/ her duties, among others, are the following: i) to determine the voting rights of each creditor, taking into account the financial statements of the company; ii) to act as a friendly mediator between the parties during the negotiation process; iii) to obtain from the parties an agreement concerning restructuring of the company's financial obligations which guarantees its viability; and iv) to participate in the committee supervising the agreement's performance.

Approving the agreement

Law 550 of 1999 provides for a reduction in the number of creditor votes required for the agreement's approval in order to facilitate reaching an agreement. In fact, while the previous regime demanded that votes representing 75% of the creditors rights should approve any agreement, as of now the number is reduced to 51% provided such percentage is obtained from at least two different classes of creditors. However, considering that the promoter has previously determined the voting rights of the different creditors, creditors can object to the reduction.

Effect of the agreement

Once an agreement has been reached, it becomes mandatory for the company and its creditors. Consequently, the order and payment procedure provided by the agreement will rule the legal obligations involving all parties. Likewise, any decision that may affect the asset composition of the company will be subject to the approval of the agreement supervision committee.

It is important to point out, however, that the legal obligations of the company with the National Direction of Tax and Customs (DIAN), as well as the labour obligations and acquired financial obligations will not be governed by the agreement's dispositions.

Nonetheless, if an agreement is not reached by the parties within the announced four months, the corresponding authorities will then start the liquidation or intervention process that would otherwise be applicable.

Other important aspects

Among other relevant aspects of Law 550 of 1999. are: i) the possibility of capitalizing the company's passive debts; ii) Governmental capitalization by Instituto de Fomento Industrial, (IFI), and Fondo Nacional de Garantías in order to grant small and medium enterprises' creditors special rediscount lines and special guarantees; and iii) the elimination of the "unity of enterprise" concept from Colombian labour laws.

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