In brief: liquidation and reorganisation processes in Colombia

Types of liquidation and reorganisation processes

What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

For a debtor to request the commencement of a voluntary judicial liquidation, it must be in a situation of ‘cessation of payments’, which takes place if the debtor is either in default of two or more obligations with two or more creditors for more than 90 days or has been sued in two or more collection actions. In both cases, such obligations must amount to more than 10 per cent of all debtor’s liabilities.

For the commencement of the liquidation proceeding the debtor must submit an explanatory report of the causes that led to the liquidation, financial statements for the last three fiscal years and financial statements and an inventory of all its assets and liabilities with a cut-off date of the month prior to the filing of liquidation.

The initiation of the judicial liquidation process has the following effects:

• a liquidator is appointed and the debtor shall cease operating in the ordinary course of business and may only carry out actions leading to its liquidation;
• the directors and management shall cease all operations and employment contracts shall be terminated;
• all agreements except for those necessary to preserve the debtor’s assets shall be terminated; and
• the debtor shall be declared dissolved.

What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?

For a debtor to request the commencement of a voluntary reorganisation, it must be in a situation of ‘cessation of payments’ or of ‘imminent inability to pay’. The cessation of payments situation takes place if the debtor is either in default of two or more obligations with two or more creditors for more than 90 days or has been sued in two or more collection actions. In both cases, such obligations must amount to more than 10 per cent of all debtor’s liabilities. The imminent inability to pay situation occurs if the debtor faces foreseeable and imminent bankruptcy either due to harsh market conditions or internal constraints that interfere with the normal functioning of the company and affect, or may affect, payment of obligations with a maturity equal to or less than one year.

To commence a reorganisation process, the debtor must submit to the bankruptcy court:

• financial statements for the last three fiscal years, and financial statements and an inventory of all its assets and liabilities with a cut-off date of the month prior to the filing of reorganisation;
• a report explaining the causes that led to the insolvency;
• cash flow to meet its obligations;
• a business plan for reorganisation considering not only the financial restructuring, but also operational restructuring; and
• a proposal of the priority qualification of all its claims and of the voting rights to be afforded to each creditor.

The debtor must also evidence that it maintains its accounting practices in accordance with legal requirements and, if applicable, that it is complying with all its pension-related liabilities.

Once a reorganisation process is filed, the debtor shall refrain from carrying out any actions outside its ordinary course of business without the express authorisation of the bankruptcy court. Among others, the debtor shall refrain from adopting amendments to its by-laws, disposing assets, granting or executing guarantees, terminating ongoing proceedings or making compensations, settlements, set-offs, waivers or similar arrangements.

Also, as from the date of the commencement of the reorganisation process no collection proceeding against debtor may be admitted or continued. Any ongoing or new collection proceedings must be incorporated within the reorganisation proceeding.

How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability and, if so, in what circumstances?

For the purposes of a reorganisation, creditors are divided into the following categories: employees governmental entities, financial institutions, internal creditors and all other creditors.

These categories differ from the claim priority classification established by law and are meant to provide a classification for calculating voting rights within the reorganisation.

The reorganisation agreement must be approved with the favourable votes of a plural number of creditors representing at least an absolute majority of all the votes, and in this majority there must be favourable votes from at least three of the mentioned creditors’ categories. In case the debtor only has three categories of creditors, there must be favourable votes from at least two categories of creditors, and if there are only two categories of creditors, there must be favourable votes from each category. However, if the reorganisation agreement is approved with the favourable vote of a plural number of creditors representing at least 75 per cent of all the votes, the requirement for favourable votes from specific categories of creditors shall not apply.

Law No. 2437 of 2024, emphasising creditor participation and procedural transparency, introduced additional mechanisms to facilitate electronic voting and remote participation in creditor’s meetings, reducing procedural challenges and delays.

As a general rule, a reorganisation plan may not release non-debtor parties from liabilities.

What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Creditors, by themselves, may not place the debtor into involuntary liquidation. Only creditors that represent more than 50 per cent of all of the debtor’s creditors may, along with debtor, request the commencement of an involuntary liquidation.

However, the bankruptcy court may order the commencement of an involuntary liquidation in the following cases:

• if the debtor has breached its obligations under a reorganisation agreement without remedying the breach in the terms set forth by law;
• if, while being in reorganisation, the debtor has outstanding obligations for more than three months related to pension payments, tax withholding or contributions to the social security system; or
• if the debtor abandons its business.

In these cases, creditors may request the bankruptcy court to assess the situation and order the commencement of the involuntary liquidation.

Once the proceeding is commenced by the bankruptcy court, there are no material differences to judicial liquidation proceedings initiated voluntarily.

What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Creditors may demand the commencement of an involuntary reorganisation of a debtor in the following scenarios: if the debtor is in a situation of cessation of payments, which means the debtor is either in default of two or more obligations with two or more creditors for more than 90 days or has been sued in two or more collection actions, and in both cases, such obligations amount to more than 10 per cent of all the debtor’s liabilities; or if the debtor is in an imminent inability to pay situation, which occurs if the debtor faces foreseeable and imminent bankruptcy either due to harsh market conditions or internal constraints that interfere with the normal functioning of the company and affect, or may affect, payment of obligations with a maturity equal to or less than one year.

If the debtor is in a cessation of payments situation, the reorganisation proceeding may be initiated by one or more creditors, and if the debtor is in an imminent inability to pay situation, the reorganisation proceeding may be initiated by a plural number of creditors who are not affiliated with the debtor or its shareholders.

In addition to the foregoing, the bankruptcy court may also request the initiation of a reorganisation proceeding in cases where the debtor is in a cessation of payments situation.

Law No. 2437 of 2024 streamlined admissions of petitions, imposed greater responsibility on debtors to certify the accuracy of their financial information and allowed for electronic filing to expedite proceedings.

Once the proceeding is commenced by the creditors or the bankruptcy court, there are no material differences to reorganisation proceedings initiated voluntarily.

Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?

Yes. Colombian law, as reinforced by Law No. 2437 of 2024, provides for both expedited reorganisations procedures and prepackaged reorganisations.

Debtors whose assets are equal to or less than 5,000 legal monthly minimum wages may only access abbreviated reorganisation or simplified liquidation processes. These expedited proceedings aim to reduce the duration of the reorganisation proceeding.

Law No. 2437 of 2024 made permanent the negotiation process for reorganisation, which allows a debtor to directly negotiate with its creditors for up to three months, during which collection proceedings are suspended, payment of regular commercial debts may be suspended, and partial agreements can be negotiated with specific classes of creditors, without affecting the rights of other stakeholders. If the legal requirements are met, the insolvency judge will confirm the agreement. If no agreement is reached or the judge does not confirm it, the case will proceed under the traditional reorganisation regime.

In addition (an add-on to existing insolvency rules), settlement centres within local chambers of commerce may provide conflict settlement mechanisms, including the appointment of insolvency experts to act as mediators in the negotiation of reorganisations. Such settlements may then be validated by insolvency judges.

Colombian law also provides for prepacked reorganisations. In these cases, the debtor and all or some of its creditors reach an out-of-court reorganisation agreement, which is then submitted to the bankruptcy court for validation. Once validated, the agreement is granted all the benefits and protections of an in-court reorganisation proceeding, provided it meets all legal requirements applicable to in-court reorganisation agreements, including approval by the majority of creditors as established by law. Once the prepackaged agreement has been signed, any of the parties thereto may request the bankruptcy court to confirm that the agreement complies with all requirements applicable to in-court reorganisation agreements, and once the out-of-court agreement is validated it will have the same effects that the law confers to an in-court reorganisation agreement.

How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

A reorganisation is considered defeated if a reorganisation agreement is not approved by the majority of creditors as required by law and confirmed by the bankruptcy court within four months after the court has formally recognised all of debtor’s liabilities (or within the shorter term applicable to abbreviated reorganisation processes).

Under Law No. 2437 of 2024, the debtor has a maximum of three months from admission into the negotiation process to present an agreement for confirmation. This period is strict and can only be extended by the judge in exceptional and duly justified circumstances. If no agreement is reached and presented within that term, the negotiation is declared failed, the process is terminated, and the debtor may not initiate a new negotiation process for at least one year. The debtor may request admission to regular insolvency proceedings under Law No. 1116, in which case the insolvency judge will generally order the commencement of judicial liquidation proceedings (or simplified judicial liquidation for small debtors with assets less than or equal to 5,000 legal monthly minimum wages).

The same outcome applies if the debtor fails to comply with its obligations under an approved reorganisation plan and does not remedy the breach within the legally established terms. In those cases, the judge may declare default, revoke the reorganisation plan and order the debtor’s liquidation.

Law No. 2437 also preserves mechanisms to protect going-concern value even after failure of the reorganisation process: article 5 allows creditors or third parties to propose a capital contribution to rescue the company in a state of imminent liquidation, provided that priority claims are satisfied and the plan is approved by the judge. This mechanism offers creditors a last opportunity to avoid liquidation and preserve enterprise value.

The same will happen if the debtor fails to comply with its obligations under the reorganisation agreement without remedying them within the statutory term or without submitting a remediation plan that is approved by the creditors.

Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

Yes. There are corporate procedures in place for the dissolution of a corporation, which are carried out privately by the shareholders without the involvement of the bankruptcy court. Such process begins with a resolution of the shareholders’ assembly ordering the dissolution of the company and the appointment of a liquidator. The liquidator will then make an inventory of all the assets and liabilities of the corporation and will distribute them in accordance with claim priority regulations. If, after paying all creditors, there are remaining assets, these will be distributed between the shareholders.

The main difference between the corporate procedure and the bankruptcy procedure is that the bankruptcy court is not involved in the corporate procedure. Also, in corporate procedures, once the liquidation proceeding begins, the board and managers are not necessarily terminated and they may continue as advisers of the liquidation. In bankruptcy proceedings, upon the initiation of judicial liquidations, the board and managers should be removed. Other relevant differences are that creditors are much more involved in a bankruptcy proceeding and that the terms in bankruptcy proceedings are set forth by law, while in a corporate dissolution timing depends on the debtor, its shareholders and the liquidator.

How are liquidation and reorganisation cases formally concluded?

A successful reorganisation is concluded once all the obligations in the reorganisation agreement have been complied with and the bankruptcy court officially confirms that the reorganisation plan has been completed. A reorganisation agreement will also be concluded if the debtor breaches its obligations under the reorganisation agreement without remedying or submitting a remediation plan in the terms set forth by law.

A liquidation proceeding is concluded with the ruling of the bankruptcy court that establishes that the adjudication of all the debtor’s assets is final and non-appealable and once all such assets are distributed to the creditors in accordance with such adjudication terms.