“A business can be salvaged through an ordinary reorganization process or by a prepacked arrangement”

The pandemic has hit the economy of every single country. Many companies are in dire straits, and some may even be declared bankrupt. However, before reaching the point of no return, there are steps that can be taken to save a business. Nicolás Polanía Tello and Camilo Martínez Beltrán take us through how the insolvency system works in Colombia in 2020.

Posté le Wednesday, September 23rd 2020
“A business can be salvaged through an ordinary reorganization process or by a prepacked arrangement”

Nicolás Polanía and Camilo Martínez

Leaders League: How would you describe the regular insolvency regime in Colombia? What are the alternatives to insolvency?

Nicolás Polonia / Camilo Martínez: The insolvency regime in Colombia provides two main sets of rules of judicial procedure, one to reorganize a viable business, and the other to liquidate non-viable businesses in an efficient way.

A business can be salvaged through an ordinary reorganization process or by a prepacked arrangement. In the first instance, the debtor enjoys the protection of the automatic stay while they negotiate the terms of the restructuring plan to be voted on by creditors. The whole process normally last about 14 to 18 months. In the prepacked case, there is no protection against individual creditors taking immediate action, and the only judicial intervention is to confirm the reorganization agreement previously agreed creditors. In both cases, the creditors status must be clearly spelled out, i.e are they secured creditors, unsecured creditors, and subordinate creditors.

On the other hand, the judicial liquidation process aims to effectively sell off the debtor’s assets, as a going concern - the preferred option - or piece-meal, in order to pay any and all recognized claims, applying the same creditor hierarchy (secured, unsecured and subordinated). In any case, if the business is still viable once the procedure starts, the reorganization process will always be an available option to come back to, in order to provide the firm with a new equity arrangement. This procedure is meant to last between 12 to 18 months and requires the appointment of an independent liquidator from a list drawn up by the Insolvency Court.

It seems that Colombia has made its insolvency regime more flexible in light of the pandemic. Can you detail the changes that have been made? What are the advantages?

Indeed, decrees 560 and 772 of 2020 provide a set of rules aimed at rescuing and recovering any companies affected by the economic crisis linked to the Covid-19 pandemic.

The former establishes two new out-of-court procedures for reaching business reorganization agreements: The Emergency Negotiation of Reorganization Agreement, and the Business Recovery Procedure Before Chambers of Commerce. The latter provides special rules in order to reorganize or liquidate micro and small businesses through expeditious proceedings, within the three to four month period after commencement.

As a firm, we had the privilege of carrying the first Emergency Negotiation of an Reorganization Agreement, and it was a huge success, because in less than three months we reached an agreement to reorganize a $20 million debt, including DIP financing.

Besides these four new procedures, there are some special rules that are worth highlighting, (i) first, the aforementioned DIP financing, which can improve the chances of a firm staying in business by facilitating access to fresh money. The new rules assign ‘super-priority’ to debt originating in the DIP Financing and forbid the judicial confirmation of the reorganization agreement if there are unpaid fees to serve the cash provider. In addition, the debtor may ask permission to temporarily hold asset as guarantee for the financing, even is these assets had already been given in guarantee to a third party, as long as the debtor is capable of providing  adequate protection to the affected creditor.

Another interesting reform is (ii) “debt discharge” of the firm undergoing reorganization. In this case, the debtor can get rid of a debt that exceeds the present value of the firm as a going concern. In this case, if the reorganization plan is approved, via 60% of the assigned votes, debt discharge will take place. However, it must be noted that the firm would emerge from the process with a new equity structure through debt capitalization in favor of the creditors that consented to it, displacing the former shareholders who would, in effect, lose their investment. The discharge cannot affect labor, pension and secured creditors.

Third, (iii) taking over to avoid liquidation is another innovative measure adopted by the extraordinary legislator. Through this option, once the company fails to obtain the necessary votes to approve the reorganization plan, one or various creditors can express their intentions to make an offer to acquire the firm in order to avoid liquidation. Should this happen, an appropriate appraisal is required to determine the minimum bid, with a judge choosing the most convenient proposal for the creditors within the competitors.

Finally, (iv) the new regulation provides various mechanisms to purchase assets from distressed companies, whether through discharge or by taking over prior liquidation, and during the reorganization process without the permission of the insolvency judge, if the proceeds of the sale are destinated to pay minor creditors in order to exclude them from the liabilities of the firm. The other opportunity in which asset purchase is available is during the liquidation, in both models, as piece-meal or as going concern.

What is the role of the Superintendencia de Sociedades?

The Superintendence of Companies is an administrative authority which depends on the President of the Republic, and perform both administrative and judicial functions. On the one hand, the Superintendence oversees all companies in the country, except those which have special regulator, as finance or public services ones; on the other hand, as a judicial authority, it embodies the highest insolvency, and the most specialized corporate dispute courts. The Superintendence has more than half a century of experience in the insolvency field, resolving distressed situations and helping companies to reach restructuration agreements with  creditors. The Colombian insolvency system and institutions have been recognized among the 35 best for the last few years in the World Bank’s Doing Business Report.

Do you have any recommendations for entrepreneurs currently facing a potential insolvency situation?

We consider that the main function of the contemporary insolvency systems is to reduce the direct and indirect cost of the crisis situation for the debtor. As a general rule, in our practice, we prefer the direct resolution of the distress situation between the debtor and its creditors, via private arrangement. But this is not always possible, particularly when the debt is not concentrated, so we analyze all scenarios and consider all the pros and cons of each, in order to give the best advice.

In this context, we encourage the entrepreneurs to formalize their business through a corporate vehicle, in order to isolate the estate risked, gather regular, transparent financial information, communicate any struggle they may have with the current payment of their liabilities, and finally, abandon any bias they may have on the business situation in order to make the best possible decision.

We are certain that insolvency is a financial rather than legal problem, and this approach allows us to present the most realistic prognosis to our clients. With former insolvency judges and skillful practitioners in financial and legal fields, our practice is highly sophisticated and experienced, and that is why we are recognized throughout the legal market, both in Colombia and abroad.