Colombian law provides for avoidance actions to revoke illegitimate acts before and during insolvency proceedings

'Avoidance action' is an umbrella term for any proceedings that seek to revoke illegitimate acts that diminish the debtor’s assets. These actions aim to protect creditors and maximise the value recovery from the debtor. Colombian law stipulates a variety of avoidance actions before and during insolvency proceedings, notwithstanding criminal liability for the revoked acts.

Before insolvency proceedings

Article 2491 of the Colombian Civil Code provides an avoidance action known as the 'Acción Pauliana', which allows for the rescission of acts executed before the start of insolvency proceedings in two scenarios.  The first corresponds to onerous contracts, mortgages, pledges, and antichresis that the debtor has granted to the detriment of their creditors if the debtor and their counterparty acted in bad faith.  The second scenario corresponds to all acts not included in the previous scenario, involving remissions and gratuitous release agreements if the debtor's bad faith and the creditors' detriment are proved.

Article 2491 provides a one-year term for exercising the Acción Pauliana counted from the date the act was carried out. This avoidance action, however, is intended to be exercised by the creditors before the commencement of an insolvency proceeding over the debtor.  Colombian insolvency law contemplates specific actions circumscribed to insolvency proceedings to annul acts performed before their commencement.

During insolvency proceedings, on acts executed before their commencement

As for avoidance actions circumscribed to insolvency proceedings, it should first be noted that Colombian law provides for two insolvency regimes: one for non-mercantile individuals, regulated in the General Code of Procedure (CGP) (i.e. "Individual Insolvency Regime"), and the other for legal entities regulated in Law 1116 of 2006 (i.e. "Business Insolvency Regime").

Under the Individual Insolvency Regime, article 572 of the CGP establishes an avoidance action to revoke any act that implies transfer, disposition, limitation, or dismemberment of the domain over assets representing more than 10% of the debtor’s total.  For this revocation to proceed, the act must have been carried out within 18 months before initiating proceedings. It must be proven that the said act caused damage to creditors and that the counterparty knew or should have known of the dire state of the debtor's finances.

Additionally, Article 572 allows for the revocation of the following:

• any gratuitous act executed to the detriment of the creditors; and
• acts between spouses or permanent partners and joint agreement separations of property that occurred within the 24 months prior to acceptance of the request for debt negotiation proceedings.

Article 572’s avoidance action may be promoted by any creditor whose credit precedes the commencement of proceedings and only during these proceedings.  If successful, the creditor is entitled to a 10% reward over the value recovered in the proceedings.

Under the Business Insolvency Regime, Article 74 also provides an avoidance action intended to revoke certain acts or transactions carried out by the debtor when these have harmed any of the creditors or affected credit priority.  Thus, it allows for the revocation of onerous acts within 18 months prior to the beginning of proceedings (provided the counterparty has not acted in good faith) and any gratuitous act carried out within 24 months.

Additionally, it allows for the revocation of any bylaw reforms made six months prior that reduce the debtor's equity to the detriment of the creditors or modify associate liability limitation. Article 74’s avoidance action may be exercised by any creditor, promoter, or liquidator of the proceedings within six months following the date credit priority and voting rights are established. Like article 572 of the CGP, Article 75 of Law 1116 grants a reward to the creditor that promotes the avoidance action of Article 74, equivalent to 40% of the commercial value of the recovered asset.

During insolvency proceedings, on acts executed after their commencement

As for acts performed after the commencement of insolvency proceedings, both regimes establish certain prohibitions.  Thus, under the Business Insolvency Regime, Article 17 prohibits the debtor’s administrators from carrying out certain acts from the filing of the petition for reorganisation proceedings onward.  Carrying out these acts gives rise to the removal of the said administrators who will be jointly and severally liable for the damages caused to the debtor, its partners, and creditors. Likewise, the judge may impose successive fines on the debtor and its administrators until the respective operation is reversed, and on any creditor who benefited from it. A creditor in this situation may also be sanctioned with the postponement of their claims payment.

Additionally, Article 50 of the Business Insolvency Regime prohibits associates and administrators, from the date of the opening of judicial liquidation proceedings onward, from disposing of any assets of the debtor or making payments or settlements on obligations entered prior to the beginning of the judicial liquidation process.  Likewise, under the Individual Insolvency Regime, Article 565 of the CGP prohibits the debtor from the commencement of liquidation proceedings onward from making payments, compensation, granting of assets in lieu of payment, settlements, waivers, unilateral or mutually agreed terminations of ongoing proceedings, conciliations or transactions on obligations incurred before the commencement of the liquidation, or on assets possessed at that moment.  All three articles establish that prohibited acts do not have legal effect.

For more information on avoidance actions and insolvency law in Colombia, contact your client partner or these CMS experts.