The framework for insolvency procedures and the protection of creditor rights was extensively reformed in 1999, in order to accelerate the very protracted Concordato proceedings under the previous law. Law 550 on reorganization was introduced in an emergency context, and approved under pressure to protect distressed debtors' interests. It is excessively tilted against creditors and, more specifically, against financial creditors' rights, providing a potentially harmful effect on bank lending and on the financial deepening of the Colombian economy. The current project of reforms of all insolvency laws before Congress, and the widespread movement toward reform of laws on individual actions, provide a clear opportunity to incorporate international standards into Colombian law.

General Overview

The treatment of creditor's rights in Colombia follows the traditional approach found in most Latin civil jurisdictions. The basic norms are contained in the Civil Code and the Commercial Code, particularly with respect to the methods for taking security over assets and the ranking priority of credits. Concerning the rehabilitation of insolvent companies, the matter is governed by Law 550 of 1999, issued in December of 1999 to replace, for a term of 5 years, the regulations contained in Law 222 of 1951 applicable to Concordata (Rehabilitation) . Therefore, in accordance with Article 79, Law 550 is due to expire at the end of December of 2004. Insolvency of individuals remains subject to Concordata proceedings and are governed by Law 222. (World Bank Forum 2004)

Winding-up or liquidation applies to companies and is contained in Law 222 dated 1995. Corporate rescue, i.e. restructuring, is covered under Law 550 dated 1999. This law provides a regime that facilitates the reactivation of the business sector and reorganisation processes. It was last amended in 2002. Additionally, the Colombian Commercial Code (Código de Comercio de Colombia) provides information about the mandatory legal reserve. (Oxford Analytica 2005)

The framework for insolvency procedures and the protection of creditor rights was extensively reformed in 1999, in order to accelerate the very protracted Concordato proceedings under the previous law. Law 550 on reorganization was introduced in an emergency context, and approved under pressure to protect distressed debtors' interests. It is excessively tilted against creditors and, more specifically, against financial creditors' rights, providing a potentially harmful effect on bank lending and on the financial deepening of the Colombian economy. Improved economic conditions provide an opportunity to revise some aspects of the legal framework in order to reestablish a balanced approach to insolvency procedures. Individual actions for the collection of monies need to be reformed. The current project of reforms of all insolvency laws before Congress, and the widespread movement toward reform of laws on individual actions, provide a clear opportunity to incorporate international standards into Colombian law. (FSSA Update 2005)

The corporate insolvency regime introduced under emergency conditions during the 1999 crisis (Law 550) has not yet been replaced by new instruments more favorable to financial intermediation. Credit to the private sector would benefit from the revision of the legal framework for reorganization procedures as bank credit is impeded by the excessive protection of debtors against creditors in restructuring procedures, provided by Law 550. (FSSA Update 2005)

On December 30, 1999, the Colombian government passed Law 145, which provides the government with the power of "economic intervention" in the operation of all companies (public, private, local, or foreign) permanently located in Colombia. This law promotes solutions along the lines of U.S.-style "Chapter 11" bailouts for companies with financial problems which face possible liquidation or bankruptcy. Restructuring agreements impose strict regulations on companies (e.g., financial operations unrelated to the company's activity may not be performed without previous authorization from all the parties involved in the transactions). (CCG 2005)

The Colombian legal system provides sophisticated and varied protections of creditor rights in individual proceedings and advanced procedures for their registration but enforcement proceedings for both unsecured and mortgage creditors are inefficient and have caused a severe backlog of cases in saturated commercial courts. Land and movable registries should be centralized and automated. Individual proceedings are plagued by the lack of appropriate accelerated procedures toward the collection of funds for both secured and unsecured creditors. (FSSA Update 2005)

Two main sources of ineffectiveness of the insolvency system stand out. First is the laxity of prerequisites for restructuring agreements, which may eventually lead to the failure of the restructuring plan and to liquidation. The weakness of the restructuring procedure are to a large extent related to the following: (i) the shareholders' right to sit among the creditors with voting rights and (ii) to the violation of the priority rules of secured and unsecured creditors. Second, delays in insolvency procedures do not allow companies to rapidly reorganize or to be liquidated. Market practitioners have indicated that the resolution of the creditors claims may take up to two years, against the four months prescribed by the law. (FSSA Update 2005)

Confidence on the insolvency resolution procedures would increase were the role of Superintendent of Companies were be better adapted to its role of adjudicator of rights. Given his jurisdictional functions the Superintendent of Companies should be granted independence. If the Superintendent is to make final decisions in insolvency matters, he should be granted the same independence as members of the Judiciary. (FSSA Update 2005)

The Insolvency Project Law (as of September 2005) is currently under examination by the Congress of Colombia and intends to protect creditors through restructuring agreements and liquidation regulations, aims to protect commercial relations and organized economic activity information dissemination. Finally, the Insolvency Project targets the compliance of international standards in terms of cross-border insolvency by stating a specific regulatory framework. (Insolvency Project)