We provide an analysis of Law 1116 on corporate insolvency, popularly known as the “bankruptcy law,” from a legal and juridical standpoint.
For centuries, all business activity has involved taking risks. Starting a venture, investing in, or running a company always entails the possibility of earning significant profits, but also of facing losses.
That is why both business owners and States have created legal and financial mechanisms that make it possible to manage these difficult situations in an orderly manner, protecting business stability and facilitating recovery.
Originally, this process was known as the Bankruptcy Law. In its early days, the term was literal: when a merchant could not continue operating because expenses exceeded income, they had to “break the bench,” a symbolic gesture that marked the end of their operation in the market.
Over time, the evolution of trade, the economy, and the law made this process far more complex. Today, in Colombia, there is a differentiated regime: one for companies or legal entities (Law 1116 of 2006) and another for natural persons (Law 1564 of 2012), which regulate how to face an economic crisis in a legal and orderly manner.
Insolvency law for legal entities
In this article, we want to take a closer look at Law 1116 of 2006, since most business activities in Colombia are carried out through legal entities or companies.
This law establishes a set of conditions under which a company may resort to one of two legal paths when it faces economic difficulties: business reorganization or judicial liquidation.
These scenarios are set out in Article 9 of Law 1116 of 2006, which details the circumstances under which an organization may initiate either of these proceedings.
Bankruptcy law and suspension of payments
- To be in cessation of payments:
“Defaults on the payment for more than ninety (90) days of two (2) or more obligations in favor of two (2) or more creditors, contracted in the development of its activity, or has at least two (2) demands for execution filed by two (2) or more creditors for the payment of obligations. In any case, the accumulated value of the obligations in question must represent not less than ten percent (10%) of the total liabilities in charge of the debtor as of the date of the financial statements of the application, in accordance with what is established for the effect in the present law.” - Being in a scenario of imminent inability to pay:
“The debtor will be in a situation of imminent inability to pay when it proves the existence of circumstances in the relevant market or within its organization or structure that affect, or could reasonably affect in a serious manner, the normal fulfillment of its obligations, with a maturity of one year or less.”
In addition, the law provides for other technical requirements that must be analyzed on a case-by-case basis, such as the expiration of the period to remedy the grounds for dissolution, compliance with commercial obligations, or the existence of pension liabilities, among other aspects.
As for its purpose, the rule primarily seeks to preserve viable companies, protect the jobs they generate, and, in general, give a second chance to those organizations that are going through financial difficulties but still have the potential to recover.
The State’s objective with this regime is to maintain economic activity and allow companies to restructure before reaching a definitive liquidation.
We consider this purpose to be entirely praiseworthy and necessary, and we believe that in many cases material results have been obtained that meet these objectives.
Pros and cons of the Bankruptcy Law
In recent years, there has been evidence of an inappropriate use of Law 1116, a situation that concerns both the legal and business sectors, as it can generate serious consequences in the market and constitute an abuse of rights.
In some cases, it has been observed that certain companies, when they are close to being unable to pay, make large purchases of supplies or inventory on credit just before requesting admission to the reorganization process. In this way, they obtain products or raw materials, but then subject payment to the broad timeframes and benefits of the process, such as the absence of interest or the suspension of collection efforts.
This behavior represents an improper and premeditated use of a legal mechanism that was created to rescue viable companies, not to obtain disproportionate advantages or evade financial responsibilities.
These types of practices can have serious consequences for:
- Creditors, whose cash flows are affected by non-payment and by the need to wait for years to recover their money.
- In addition, the impact may extend to the macroeconomic sphere, since these behaviors could be considered a form of unfair competition.
In practice, a company gains undue advantages by harming its competitors or other actors in its commercial chain, in order to gain market share at the expense of others’ stability.
For all these reasons, although Law 1116 remains a valuable and necessary tool for addressing insolvency situations, it is essential to monitor its proper application.
Companies that resort to this mechanism must do so with transparency and good faith, ensuring that their actions are consistent with the spirit of the rule and with market balance. Otherwise, it creates a climate of legal uncertainty that affects not only business owners, but also the country’s economic confidence and prosperity.
Author: Santiago Pinzón Sosa
Reviewed by: Pedro Henao and Néstor Bedoya
