Insolvency law before the pandemic
Colombian corporate insolvency law offers two reorganisation alternatives. Under the first one, which we might call private or pre-emptive reorganisation, directors of firms in the vicinity of insolvency can voluntarily approach creditors to restructure the debt. The Superintendence of Companies (SC), a specialized administrative agency with jurisdictional powers, ratifies the resulting agreement. While dissenters can object and request the opening of a judicial process, successful agreements allow the debtor to retain control of the business and enhance creditors’ monitoring powers.
The second option is judicial. Directors of financially distressed firms have a duty to file a request of reorganization in one of the SC’s regional branches (unless the business in no longer viable, in which case they directly file for liquidation). The SC conducts a substantive evaluation of the request and its supporting documents, including audited financial statements and cash-flow projections. The SC can—and often does—request further information before approving. If documents are complete and accurate, and the plan is feasible, the SC opens the reorganization procedure, freezing interest and other imminent payment obligations, notifies creditors, and decides whether to appoint a manager or to approve a debtor-in-possession request. Parties have up to six months to reach an agreement. If they fail to do so, the SC starts a judicial liquidation proceeding.
The SC is among Colombia’s most transparent and efficient institutions. Still, small firms seldom use legal reorganizations—whether private or judicial—to avoid the costs of producing the legal and financial documents that must accompany restructuring agreements. Instead, they tend to (i) reach (often unfavourable) deals with single creditors when approaching the vicinity of insolvency or (ii) resort to liquidation once insolvent, without even attempting to restructure the debt. In other words, small corporate debtors, who are the majority in the country, were not using the main legal instruments to escape liquidation before the covid-19 pandemic due to the SC’s strict requirements for approving reorganization agreements.
Insolvency reforms to confront the emergency
To prevent massive liquidations through the use of corporate reorganizations without overwhelming the SC, the government issued an emergency decree on 15 April 2020 (DL 560/2020). In line with international trends, it introduces amendments that are limited in both scope and time, including the suspension of duties to file for reorganization. Its measures to support small businesses are more unusual and offer five lessons.
1. Presumption of financial distress
The decree sensibly assumes that most firms are financially affected by the pandemic and will need their payment obligations to be frozen to survive. Hence, debtors that are already in reorganization are exempt from three months of payments, regardless of whether the agreement was voluntary or judicial. Approval of new filings is not subject to ex anteexamination: the SC will only ensure that the documents are complete and may request further documentation without delaying the start of the procedure. In the context of Colombia, it is an appropriate measure, as the rigorousness of the SC disproportionally excludes small businesses from the benefits of being in reorganization.
2. Restatement of available measures
The decree explicitly authorizes debt-restructuring strategies that were already common in large reorganizations but perhaps unknown for small firms, such as debt-equity swaps or judge-approved access to new finance. It correctly incentivizes less sophisticated debtors with collateralisable assets and appropriate ownership structures to use these mechanisms when negotiating with creditors.
3. Negotiation of tax debts
The decree gives the national tax authority, DIAN, discretion to negotiate and cancel debts during the emergency, a faculty that it is categorically denied by law. This is also a positive measure, as DIAN’s inability to waive payments tends to convert otherwise viable reorganization agreements into liquidation plans. In my view, the decree should have gone one step further and made it mandatory for DIAN to waive interest payments and to justify when it does not. Colombian public officials do not use discretionary powers when public funds are involved, to avoid investigations. Hence, unless accompanied by clear guidelines from DIAN, this measure risks having no impact in preventing liquidations.
4. Emergency reorganization
The decree’s ‘emergency reorganization’ is presented as a fast-track process: parties have to reach an agreement in three—rather than six—months. In this period, actions by creditors are halted and negotiations with groups of particularly vulnerable creditors are exceptionally allowed. The resulting agreement and dissenters’ claims are reviewed by the SC, which, in a single hearing, decides. The decision to restrict the SC’s intervention to the beginning and end of the process might limit creditors’ ability to influence changes in the agreement. However, as an alternative and temporally restricted process, it seems appropriate to encourage quick agreements during the pandemic.
5. Quasi-judicial procedure in chambers of commerce
The most innovative measure to ‘flatten the filing curve’ and extend the benefits of insolvency law to small businesses is a quasi-judicial reorganization process. During the emergency, debtors can choose to file for this reorganization in Chambers of Commerce, which are private associations entrusted with specific public functions, such as managing the companies register. Since all businesses already use the services of Chambers of Commerce more often than those of the SC, it might be useful for the two identified purposes. Yet, it might not contribute to reduce massive liquidations due to three regulatory choices.
- The first is that Chambers of Commerce, which have no prior experience in insolvency law, will conduct a substantive examination of legal and financial documents ex ante, a task that even the SC is no longer performing to accelerate stays during the emergency. Hence, sophisticated debtors will likely file in the SC and Chambers of Commerce will end up overwhelmed by the task of evaluating defective filings and justifying approvals. It would have been appropriate to extend the presumption of financial distress to debtors that choose this process.
- The second concerning aspect is the absence of a judge. Instead, Chambers of Commerce will appoint a mediator that can propose strategies to encourage agreements but cannot resolve disputes or issue orders. In other words, Chambers of Commerce now have authority to conduct substantial ex ante examinations (delaying admissions) but not jurisdictional powers to resolve disputes among creditors (prolonging negotiations). This simplified process might be useful to bring creditors into line (given that there is a stay) but its aptitude to produce quick agreements among heterogeneous participants is significantly constrained by the absence of a judge.
- Finally, the SC reserves the right to approve reorganization agreements and to start a judicial process upon unsuccessful negotiations. Although this gives parties an additional opportunity to prevent liquidation, one wonders the effect it will have on the SC’s workload.
Overall, while the specific rules that will govern these quasi-judicial procedures are yet to be issued by the national association of Chambers of Commerce and approved by the SC, it will most likely postpone—rather than prevent—massive liquidations of small businesses.
The Covid-19 pandemic was sudden, forcing governments to design and implement emergency measures against the clock. Colombia’s temporary reform to its insolvency law reflects such urgency. On the one hand, it accurately establishes a provisional presumption of financial distress, in light of which it suspends payment obligations for firms under reorganization and facilitates access to the judicial process. On the other hand, it creates alternative reorganization procedures to prevent massive liquidations without increasing the number of filings. The latter effort, more ambitious, is imperfect but might still help some businesses and already offers lessons for other jurisdictions.
Alvaro Pereira is a JSD Candidate at Berkeley Law and an Associate Editor at the Oxford Business Law Blog. During Michaelmas 2019 and Hillary 2020, he was a Junior Academic Visitor at the Commercial Law Centre at Harris Manchester College, University of Oxford.
I wish to thank Kristin Van Zwieten for the insightful comments and suggestions, and my colleague Tim Ancev for excellent editorial support. The usual disclaimer applies.
The blog post Flattening the Filing Curve for SMEs: Lessons from Colombia’s Insolvency Reform was originally published at the Oxford Business Law Blog.