New measures on insolvency proceedings: Decree No. 842 of 2020

Last June 13th, 2020, the National Government issued Decree No. 842 of 2020, adopting new measures applicable to insolvency proceedings. These measures are intended to complement and interpret some of the rules provided in Decree 560 of 2020.

Specifically, Decree No. 842 has the purpose of regulating some institutions and procedures that had been created in previous statutes. In this way, by means of this new Decree, insolvency proceedings conceived due to the Covid-19 crisis, shall operate in full.

The following are the most relevant aspects of this new regulation:

1. Measures applicable to business recovery procedures

a. Legal standing to apply for this kind of procedure

In the first place, the new Decree clarifies the type of persons that are allowed to apply to these kinds of proceedings, in accordance with article 9 of Decree 560 of 2020. In this regard, it is provided that the following persons have legal standing to apply to a business recovery procedure: merchant natural persons, legal entities (both excluded and not excluded from the corporate insolvency regime of Law 1116 of 2006), branches of foreign companies and trusts. Only those persons and entities that are subject to a special regime fall outside the scope of application of this rule.

b. Judicial validation of reorganization agreements

The business recovery procedure has a twofold nature: extrajudicial and judicial. On the one hand, the extrajudicial stage, carried out before a mediator endorsed by a chamber of commerce, is intended for negotiating and entering into the reorganization agreement; on the other, the judicial stage aims to obtain the validation of such an agreement by a judicial authority.

For this second stage, Decree 560 provided for two possibilities. In the first one, validation of the agreement will be carried out before an ordinary Court; in the second, such validation may be referred to arbitration. In any case, regulation for both proceedings was pending. The new Decree brings such a regulation.

This expedite procedure of validation commences with an application by the debtor in this sense. Once the authority examines that the docket and all the documentation is complete, a writ commencing the stage of validation is issued. If the Court deems that information is not complete, the debtor will be required to deliver the missing information. In case the debtor fails to do that, the application for validation shall be rejected.

Upon issuance of the writ admitting the application, the same consequences applicable to commencement of a reorganization process under Law 1116 are applied. We may find among these effects the following: registry of commencement of proceedings in the company’s commercial register, prohibition to execute any disposal of assets different to the ones undertaken in the ordinary turn of the businesses of the company, and adoption of publicity measures regarding commencement of proceedings.

Furthermore, the new Decree sets forth that commencement of the validation stage will have the effect of suspending collection proceedings against the debtor. Nevertheless, according to Decree 560, such effect had already taken place with commencement of the extrajudicial stage. For that reason, it is our opinion that this order has the sole effect of ratifying this situation.

Objections to the project of graduation and classification of credits and vote rights, as well as the observations to the reorganization agreement, are filed before the mediator in charge of the extrajudicial stage. This mediator shall endeavor for the parties to settle their differences. If there is no agreement between the parties, the Court will be informed about failure of the negotiation phase.

A hearing will be scheduled for the purpose of deciding the objections and observations filed by the creditors. In this hearing, objections to the project of graduation and classification of credits and vote rights shall be decided in the first place. Once this stage is exhausted, decision on the observations to the reorganization agreement, filed by the absent and dissident creditors, shall be rendered. The judgement that validates the agreement may be issued within this hearing, or by written in a later stage.

If the Court validates the agreement, it will have the same effects and legal consequences provided for the reorganization process of Law 1116. Likewise, this agreement shall be communicated to the Courts hearing of collection proceedings against the debtor, for the purpose of lifting interim measures and terminating such proceedings. This will not affect the right of the secured creditors to enforce their securities, in accordance with the mechanisms established in Law 1676 of 2013.

In case validation is not granted, the agreement will be enforceable before the debtor and the creditors that consented to it. For this purpose, it is necessary that the agreement contains an express clause in this sense.

c. Arbitration within business recovery procedure

Article 9 of Decree 560 provided that the objections and observations that may be raised within business recovery procedures may be referred to ADR mechanisms. Among this ADR mechanisms, the most relevant one is arbitration, which will be conducted in accordance with the same procedure established for judicial validation of the agreement. Responding to this mandate, Decree 842 sets the rules applicable to this arbitration.

On this matter, the first issue that shall be addressed is the one relative to the extension of the arbitration agreement. Decree 842 establishes that the arbitration agreement will only be enforceable before the creditors that have consented to it.

According to this, entering into the reorganization agreement and entering into the arbitration agreement for the resolution of the objections and observations to that agreement are two completely different things.

In practice, it means that for arbitration to be valid, the debtor has to obtain consent from all its creditors, or all the creditors belonging to one category if the agreement will be entered into in this way, including those creditors who abstained to vote or voted against the agreement. In other words, if only one creditor decides not to submit to the arbitration agreement, this mechanism will be frustrated.

Arbitration proceedings will be conducted by a sole arbitrator and will last no more than three months. An additional one-month term will be granted for the resolution of requests for clarification, amendment, or complementation of the award. This award is final and will have the same effects of a Court judgement.

2. Measures applicable to emergency negotiation of reorganization agreements

Emergency negotiation of reorganization agreements is an expeditious procedure commenced before the competent Court to know of insolvency proceedings, in accordance with the general rules provided in Law 1116 of 2006. On this matter, Decree 842 brings a series of rules that complement the provisions established in Decree 560.

In the first place, some rules are set regarding deferral of administrative expenses. New regulation establishes that such deferral does not cure default of obligations caused prior to commencement of insolvency proceedings, nor extends its effects to these kinds of obligations.

On the same topic, Decree 842 establishes that once the agreement is entered into or after termination of the proceedings for failure to negotiate an agreement, deferred administrative expenses shall paid in a preferential manner. Such payment will be carried out within a month after occurrence of one of the aforementioned events, unless agreed otherwise.

Likewise, it is provided that obligations that may arise out of one of the financing mechanisms established in article 5 of Decree 560, are not considered as administrative expenses. Therefore, they will be subject to the outcome of insolvency proceedings. Payment and other conditions will be ruled by the agreement of the parties.

3. Measures intended to apply to both mechanisms

Decree 842 provides for a couple of rules that are common to both emergency negotiation of reorganization agreements and business recovery procedures.

On the one hand, upon issuance of the writ commencing the proceedings, a series of legal consequences arise and the imposition of some duties in charge of the debtor are established. The effects and legal consequences set forth in article 19 of Law 1116 are applied. The debtor is ordered to adopt some measures intended to make commencement of proceedings public. If the debtor fails to do so, penalties and sanctions may be imposed.

On the other hand, the Decree states that if the proceedings are intended to apply only before one or some categories of creditors, suspension of collection proceedings and prohibition to commence new proceedings are only applicable to the creditors belonging to one of such categories. Likewise, in this scenario, for approval of the agreement, a simple majority of the votes will be required, excluding internal and related creditors.

4. Other measures

Finally, Decree 842 brings other rules intended to regulate or clarify other institutions established in Decree 560 of 2020. In the first place, for the purpose of discharge of debts, it is provided that any creditor may submit an expert opinion objecting the company’s valuation carried out by the debtor, in accordance with the rules and requirements set forth in the General Code of Procedure.

In the second place, a definition of the expression “acreedores con vocación de pago” is provided, stating that it includes all creditors whose debts are covered with the company’s valuation or with the assets owned by the debtor.

Lastly, it is provided that judicial liquidation will be applicable instead of liquidation proceedings by adjudication, which are suspended for order of Decree 560. Moreover, it establishes continuance of the liquidation proceedings by adjudication that commenced before entry into force of Decree 560.