On February 21, 2014, a new law on security interests over movable assets (Law 1676 of 2013,1 “Law 1676”) came into effect in Colombia. Law  1676 replaced the regulations on creation, perfection and enforceability (oponibilidad) of security  interests over movable assets set forth in the Code of Commerce of Colombia of 1971 (the “Code of  Commerce”). The purpose of Law 1676 is to increase access to the financial products of medium and  small-sized companies (“PYMES”).2 It accomplishes this by reducing the time, procedures and cost  needed to perfect and enforce security interests and by expanding the types of assets that can be  subject to a security interest.3 Despite this limited purpose, the application of Law 1676 promises  to be far reaching and will impact not only security interests created by PYMES, but also the way all security interests over movable assets are perfected, monitored and enforced in Colombia.

Among the most significant changes in the new law are: (i) an expansion of the types of assets that  may be subject to a security interest; (ii) the creation of a new centralized system where filing  and searches of security interests may be conducted; (iii) new methods to enforce security  interests against third parties; and (iv) new methods to enforce security interests against  debtors/guarantors.

Assets that May Be Subject To Security Interests

Law 1676 expands the types of assets that may be subject to a security interest by establishing that the proceeds or the products that result from the transformation, sale or substitution of  collateral may be subject to a security interest. This new feature is a significant departure from  the traditional concept of security interest under Colombian law (and civil law generally), which  only covers the specific asset named in the security agreement, and follows the pattern of more dynamic laws, including the Uniform Commercial Code and the guidelines promoted by the UNCITRAL. The new system also eliminates the  burden imposed on creditors and debtors on having to create, perfect and register a security  interest each time an asset is sold, transformed or substituted.

Law 1676 also introduces the concept of a purchase money security interest (garantía mobiliaria  prioritaria de adquisición) (“PMSI”). Pursuant to Law 1676, a PMSI is a security interest in goods  that secures the repayment of the debt owed in connection with the purchase price of such goods.  Under the new law, once filed, a PMSI is awarded a super-priority treatment vis-à-vis other  security interests created over the goods sold. This feature will likely foster lending and selling  on credit, as it will help mitigate the credit risks of customers that have financed their  purchases of such goods by allowing the creditor/seller to regain possession of the goods sold should the customer default in the payment of the goods.

Innovative Filing and Monitoring Process

Prior to Law 1676, a security interest over movable assets was enforceable against third parties  once the relevant security agreement was registered with the Chamber of Commerce (Cámara de  Comercio) where the collateral was located. This fragmented registration system was cumbersome, as  it required creditors to constantly monitor the location of assets and forced debtors to carry on  deregistration and registration procedures each time an asset was moved to another jurisdiction.

Law 1676 simplifies the process of enforceability (oponibilidad) of a security interest against  third parties by creating a national movable assets public registry administered by the National  Association of Chambers of Commerce (Confederación Colombiana de Cámaras de Comercio—Confecámaras).  Pursuant to the new law, all security interest filings may be made, modified, extended, cancelled,  transferred and searched in the new national centralized system. Law 1676 also allows for the  filing of electronic registration statements (formularios de registro); this simplifies the filing  steps and reduces the length of the review process that needed to be completed for filings under  the prior system.

Another important feature of Law 1676 is that it allows any person to access online the centralized  registry to search for assets that are subject to a security interest, determine the value of the  secured obligation and confirm the status of the underlying assets. It also allows any person to  request physical copies of any given registration statement.

Law 1676 provides a variety of safeguard mechanisms for both debtors and creditors to monitor the  assets that are subject to a security interest. For example, Law 1676 provides that creditors need  to be authorized by debtors in order to file, modify or extend a security interest and that creditors may authorize a third party to conduct such filing or modification on their behalf. Law 1676 also establishes that a  registration statement is only valid for the period set forth in the registration statement, which  may be extended for periods of three years. If the registration statement is silent as to the  period during which it will be valid, the law specifies that the registration statement is valid  for five years.

Enforceability of a Security Interest Against Third Parties (Oponibilidad)

Law 1676 provides three new methods to enforce a security interest over movable assets against  third parties: (i) enforceability through the filing of a registration statement, (ii)  enforceability through possession (tenencia) and (iii) enforceability through control.

As a general rule, a security interest over a movable asset is enforceable against third parties  once a registration statement is filed with the national public registry.4 In some cases, a  security interest may be enforceable against third parties through possession (tenencia) of the  collateral by the creditor, even if a registration statement is not filed.5 A security interest over deposits in bank accounts is enforceable against third  parties if the creditor (or an entity acting on behalf of the creditor) exercises control6 over the  deposits subject to the guarantee.

The new law also provides rules on priorities of security interests. Pursuant to Law 1676, the  priority of a security interest over an asset subject to two or more security interests depends on  the method used for the enforceability of a security interest against third parties. A security  interest filed with the national public registry has priority over a security interest that was not  so filed (except in cases when a security interest can be enforced through possession or control,  in which case the priority would depend on the time the security interest became enforceable  against third parties). If no security interest was filed (and the security interest is not a  security interest that can be enforced against third parties through possession or control), priority will be determined based on the execution date of the underlying security agreement.

Expedited Process to Enforce a Security Interest Against Debtors

Another salient feature of Law 1676 relates to the various mechanisms established to enforce a  security interest against debtors. Depending on what was agreed by the parties in the security  agreement, a creditor may seek to enforce a security interest against the debtor through a civil court proceeding (as set forth under the Colombian Procedural Code), or through two new mechanisms introduced by the law: extrajudicial  enforceability and direct payment.

Law 1676 allows a creditor and a debtor to agree on the extrajudicial process that a creditor needs  to follow in order to enforce a security interest. If the parties have not agreed on that process, the debtor and the creditor need to follow the process set forth under Law 1676 that requires the  creditor to file an enforceability statement before the national public registry and to instruct a  Chamber of Commerce or a notary public to notify the debtor of such filing. The notification of the  enforceability statement limits the debtor’s ability to sell or transform the asset subject to the  security interest. The debtor will be responsible for any damages caused to the creditor if the  assets are transformed or sold after the date the enforceability statement was filed.

A creditor may also enforce a security interest against a debtor through the so-called “direct  payment” method, if agreed by the parties in the security agreement or if the creditor is in  possession (tenencia) of the collateral. Under this mechanism, a creditor may directly sell the  collateral for the appraised value of such collateral set by the Superintendence of Companies  (Superintendencia de Sociedades). No judicial process needs to be followed. Nonetheless, if a debtor is in possession (tenencia) of the collateral and fails to relinquish the collateral to the creditor, the creditor  may initiate a summary proceeding against the debtor to force the debtor/guarantor to relinquish the collateral.

Moving Forward

Law 1676 provides the basic tools to facilitate  the creation, perfection, enforceability,  termination and monitoring of security interests over movable assets. However, the Colombian  government (including the Superintendence of Companies and the Superintendence of Finance  (Superintendencia Financiera)) needs to rapidly issue regulations that guarantee that the new mechanisms are properly applied by, for example, implementing tools that guarantee the  transparency, monitoring and accessibility of the new national registry (which are key to the success of this new law) and promoting the new system with banks and other lending  institutions so that PYMES and other entities can be informed of the benefits of the new law.