Banking & Finance 2021 Comparisons

Recent Economic Cycles

The impact of recent economic cycles has caused a reduction in the activity in the Colombian loan market due to the uncertainty generated by the effects of the COVID-19 pandemic worldwide.

However, after the first two months of lockdown, the loan market saw a constant growth considering the need of several debtors to renegotiate and/or refinance their debt obtained from national and international financial institutions.

Colombian Government Measures

The Colombian government has been implementing different public policies that seek to reactivate the national economy, such as:

• laws to stimulate entrepreneurship;
• the granting of credit lines for specific sectors guaranteed by the Fondo Nacional de Garantías;
• the granting of financial stimuli to companies and natural persons; and
• the granting of financial reliefs to debtors.

Consequently, the need of several debtors to renegotiate and/or refinance their debt, together with the policies implemented by the Colombian government have marked a trend towards refinancing transactions and boosted the Colombian loan market.

The COVID-19 pandemic caused a significant reduction in the activity in the Colombian loan market due to the uncertainty generated by its worldwide effects.

However, between the second half of 2020 and throughout 2021 there has been a constant and growing movement in the loan market granted by banking institutions and by other kinds of financial institutions like debt funds and capital markets.

The consequences of the COVID-19 pandemic deriving in the need of several debtors to renegotiate and/or refinance their debt, together with the policies implemented by the Colombian government have marked a trend towards refinancing transactions and boosted the Colombian loan market.

Financing terms and structures in the context of the high yield market in Colombia have slightly changed due to companies ratings downgrades and said companies stakes in the Colombian credit market. Notwithstanding the latter, foreign creditors continue to take interest in Colombian companies and projects, as well as in the local bond market.

High-Yield Market in Colombia

Taking into account that Fitch Ratings and S&P Global Ratings downgraded Colombian ratings to BB+ from BBB- (outlook revised to stable), some Colombian public related companies ratings were also downgraded. Said downgrade was the result of a large fiscal deficit (arising from the governments impossibility to establish a satisfactory tax reform for diverse stakeholders) and an unproportioned public spending derived from pandemic afflictions.

Financing Terms and Structures

Although international investors remain interested and with their stakes in Colombia, in the domestic market there are interest rate modifications and refinancing negotiations. As the materialisation of the rollover risk takes over, loan agreements are amended to reflect Colombia's situation and in order to aid the debtors needs.

Colombia has seen a significant growth in alternative credit providers, due to new market trends (ie, use of technology in financial services, consumer protection, collateral packages alternatives, etc) and changes in regulation (ie, the introduction of a regulatory sandbox, the flexibility of payroll loans, the introduction of crowdfunding, etc).

Alternative Credit Providers

Commercial banks are not the only players in the loan market. In Colombia, there are various alternative creditors such as private companies lending with their own resources (whether they come from its shareholders or other creditors), and non-financial entities financing the acquisition of goods or services by its customers through the issuance of closed credit cards without the need of prior authorisation or supervision of the Colombian Financial Superintendency. Other alternative credit providers are private equity funds usually administered by trustees with an investment regime that includes the granting of loans to a specific niche of debtors.

Financing Terms and Structures

The participation of alternative credit providers in the market has caused commercial banks to facilitate the credit access and ease the know your client processes (to the extent permitted under applicable law). In light of the above, the financing terms and structures have changed to implement technology within processes for the loan granting and execution, and for loan providers to accept different assets as securities.

Banking and Finance Techniques

Banking and finance techniques in Colombia have been following the same trends that have been implemented in other countries that have more sophisticated and developed markets and practices.

As a consequence of the above, a more sophisticated loan market as evolved, involving more players that had zero of few involvement during the previous years. Thus, there has been a growth in the participation in the loan market of international debt funds, distressed finance funds, export credit agencies and family offices, among other type of entities.

New Participants

The participation of new players has brought the need to adjust our banking and finance techniques with their standards, through the implementation of more sophisticated structures and higher standards (especially in environmental and social requirements and reporting obligations).

Finally, in the same way that the banking and finance techniques have evolved with the involvement of new players, a more debtor tailor-made oriented industry is emerging, in which the needs of each such debtor is addressed in a manner that works for all the parties involved in the relevant transaction.   

The main regulatory developments related to the credit market in Colombia have been those related with Decree 1234 of 2020 and the additional regulation to be issued by the Colombian Financial Superintendency. Said decree introduces the regulatory sandbox in which non-financial entities may require the Colombian Financial Superintendency the issuance of a temporary operation permit to offer financial services. This means more competition in the credit market and more opportunities for consumers of these services.

Likewise, Decree 1692 of 2020 offers a new regulation regarding the low value payment system administrators (entidades administradoras de sistemas de pago de bajo valor) and their scope of work and duties. These entities coordinate the operations of receipt, transfer, compensation and settlement that satisfy a certain daily amount of orders of collection and transfer of funds, including those derived from the use of credit cards or debit cards for the participants of the system. This new regulation pretends to create new principles and objectives for said systems and entities (eg, introducing the obligation for the participants of the system to avoid restricting the entrance of new participants).

Tax

With the enactment of Laws 1943 of 2018 2020 of 2019, the thin-capitalisation rule for tax purposes was amended to:

• change the ratio from 3:1 to 2:1 of the net equity of the taxpayer reported in the previous year to calculate the maximum interest deductibility;
• exclude from this rule loan operations executed between unrelated parties; and
• exclude the application of this rule during pre-operative stages.

Additionally, the Colombian Council of State declared void an official ruling whereby the Tax Authority interpreted that interest deductibility of loans used to acquire shares were not allowed, including those structures whereby the target company was subsequently merged into the buyer.

Foreign Exchange

Traditionally non-resident individuals for foreign exchange purposes were not allowed to grant loans that qualified as a foreign indebtedness. However, due to recent modifications to the applicable law, non-resident individuals can grant loans to local companies and resident individuals.

ESG-Linked Recent Developments

The last couple of years have seen significant developments in relation to ESG linked lending in Colombia. As a consequence of the development of Colombia’s baking and finance techniques described in 1.5 Banking and Finance Techniques, the ESG linked lending in Colombia has been gaining more relevance.

Recent years have included the closing of the first ESG linked transactions, that include various sustainability goals or ESG ratings from companies and have no restrictions on usage of funds. That’s in contrast to green financing, where proceeds are restricted for environmental projects or investments.

In addition to the above, the implementation of the ESG standards in Colombia has a lot of regulatory advantages considering that the ESG matters are of the highest relevance for the country, which has committed to several national and international policies and commitments.

Colombian Government Policies

As an example, the 2018–22 Plan Nacional de Desarrollo introduces a series of policies and plans that provide guidance on the sustainable development of the country to comply with the referred national and international commitments and includes issues related to poverty, inequality, deforestation and clean energy. These issues are framed in initiatives such as the following:

• the National Energy Plan 2050;
• the National Action Plan for Human Rights and Business;
• the National Circular Economy Strategy; and
• the Green Growth Policy.

Banks and Non-banks Authorised to Provide Financing

In accordance with Colombian applicable law, a non-financial entity is not permitted to receive and manage deposits from the public nor make loans with such deposits collected from the public, and in that sense, undertake any activities related to collecting monies from the public. Such activities are exclusively permitted for financial institutions that, in accordance with the Organic Statute of the Financial System, require to be incorporated as sociedades anónimas. Nevertheless, Colombian applicable law permits a non-financial entity to lend monies to third parties only if such lending is made using its own resources (whether they come from its shareholders or other creditors), as opposed to using resources obtained from the public.

Additional Requirements

Additionally for non-banks, Chapter X of Circular 100-000005 of 22 November 2017 (as amended from time to time), sets forth that all corporations under the permanent surveillance of the Colombian Superintendency of Corporations with an operational revenue equal to or greater than 40,000 minimum monthly wages (a minimum monthly wage is approximately USD260) shall implement an Autocontrol and Management System for Money Laundering and Financing of Terrorism in order to continue granting loans.

Banks and/or financial institutions authorised to operate as such by the Colombian Financial Superintendency shall comply with credit risk policies whose general characteristics are deemed under instructions issued by said Financial Superintendency.

Foreign creditors have no restriction to grant loans, no foreign exchange controls are currently in effect in Colombia, and no foreign exchange control authorisations by any governmental authority in Colombia are currently required for the execution, delivery and performance of credit agreements.

However, please take into consideration the foreign exchange regulations described in 3.3 Restrictions and Controls on Foreign Currency Exchange.

There are no restrictions or impediments of a creditor to become a beneficiary of a security or guarantee. However, certain foreign exchange regulations arise in connection with the enforcement of a security or guarantee granted in favour of a foreign creditor. 

Securities

If a non-Colombian resident were to acquire rights arising under a trust or share capital issued by a Colombian resident (under any circumstance, including the enforcement of any security or guarantee), it would be required for such non-Colombian resident to register such ownership with the Colombian Central Bank and comply with applicable currency exchange regime formalities and registrations. Note that foreign direct investments in Colombia must be registered before the Colombian Central Bank by means of a foreign exchange declaration (declaración de cambio).

Guarantees

If a a non-Colombian resident were to enforce its rights granted under a guarantee, then it would be required to file the appropriate form with the Colombian Central Bank, directly or through an authorised intermediary of the foreign exchange market in Colombia, as applicable, as required by, and in accordance with, the applicable Colombian laws for the enforcement of the relevant guarantee and depending on its nature.

Determination of Domicile 

A foreign creditor will not be deemed resident, domiciled, carrying on business or subject to taxation in Colombia by reason only of the execution, delivery, performance or enforcement of a security document or a guarantee granted in its favour.

It is also not necessary under Colombian Law:

• to enable a foreign creditor to enforce its rights under a security document or a guarantee granted in its favour; or
• by reason of the execution, delivery or performance of a security document or a guarantee granted in its favour that such foreign creditor should be licensed, qualified or entitled to carry on business in Colombia.

Under Colombian foreign exchange regime, funds received by a Colombian resident from any non-Colombian resident as creditor, in foreign currency, must be reported before the Colombian Central Bank through an independent foreign exchange declaration of loans granted to Colombian residents, and payments need to be done through the foreign exchange market mechanisms.

No foreign exchange controls are currently in effect in Colombia, and no foreign exchange control authorisations by any governmental authority in Colombia are currently required for the execution, delivery and performance of a credit agreement, except for the report of the execution of the relevant credit agreement before the Colombian Central Bank and channelling the disbursements and payments of the loans through the foreign exchange market.

In Colombia there are no restrictions on the debtor's use of proceeds from loans or debt securities, unless said uses are illegal under Colombian law, or if there is a contractual agreement prohibiting certain uses.

Agency and Trust Agreements

Colombian regulation deems the agency via an agency agreement and one subtype of said agency agreement is the trust agreement.

The agency agreement is celebrated by the agent or party that will represent the principal and the principal; said agent will undertake certain activities or obligations on behalf of the principal's interest (whether by revealing or not that they act as an agent).

Conversely, the trust agreement's celebration means the constitution of a trust to be administered by a specialised financial institution designated as trustee in accordance with the instructions of the settlor and the restrictions agreed upon in the trust agreement. All actions undertaken by the trustee while administering the trust, will be in the benefit of the beneficiary (that can be a third party or the settlor). Usually said trusts are used to offer acceptable guarantees to creditors to isolate assets and rights from the debtor’s balance sheet and subsequently from the debtor’s state.

Alternatives to Trust Agreements

Instead of administering resources via a trust, investors may constitute a private equity fund also administered by a trustee or by a broker.

Loan Transfer Mechanisms

Colombian law provides the assignment of the contractual position as the mechanism through which a creditor (the assignor) may assign its rights and/or obligations under a credit agreement. Bear in mind that the assignment may or may not have a price, as it may or may not be total or partial (the parties could specify within the agreement the amount or total exposure to be transferred- funded or unfunded).

Security Package Associated Transfer and the Joinder Agreement

The assignee will become a lender under the relevant credit agreement through the execution of a joinder agreement by means of which the assignment conditions for the new lender are contractually agreed. Furthermore, the lender will become a beneficiary of the security package and documents associated with the loan transferred upon the execution of the joinder agreement. Finally, and depending on the case, the promissory notes will have to be endorsed in favour of the assignee, or new promissory notes may have to be issued (this should be defined in accordance with the loan agreement and the type of promissory note issued thereunder).

There is no secondary market for debt buy back in Colombia. Notwithstanding it is possible for the debtor to prepay its debt in accordance with the contractual provisions agreed upon and with the legal restriction (Law 1555 of 2012) for the creditor to charge a prepayment fee if the loan to be prepaid does not surpass an specific amount.

Nevertheless, any credit in Colombia can be novated (novado). The novación is one of the legal figures in Colombia that discharges obligations. The effect of the novación is the irrevocable the substitution of a previous obligation for a new one, or the substitution of a new party for a previous party in a contract so that the previous party is released.

The Colombian Civil Code deems some restrictions related with the latter, regarding the exceptions that can be contractually agreed upon. If the debtor is replaced and the obligation is novated, the parties cannot restrict the availability of the assets of the new debtor. There are no restrictions for a sponsor to be the new party of in the context of the novation, besides the administration of potential conflict of interest that should be studied case by case, see 5.3 Downstream, Upstream and Cross-Stream Guarantees.

Colombian law does not establish specific funding requirements to go through with a public acquisition offer. However, it is important to highlight that the consideration for the public acquisition (money, shares, bonds as established by the Colombian law) shall be secured by the offeror using any one of the following collaterals granted in favour of the Colombian Stock Exchange:

• banking deposit in Colombia;
• stand – by letters of credit;
• insurance policies;
• bonds issued by the Colombian government;
• assignment of rights in private funds; and
• foreign banking deposit (the currency used for such deposits shall be US dollars or euros).

The coverage of the collateral depends on the value/price of the public acquisition offer, as follows:

• up to 175.000 SMMLV – 25%;
• up to 525.000 SMMLV – 30%;
• up to 874.000 SMMLV – 35%;
• up to 1.224.000 SMMLV – 40%; and
• anything higher than the prior amounts – 50%.

In Colombia, payments of principal are not subject to withholding tax since they are considered a reimbursement no subject to income tax. Notwithstanding the foregoing, interest payments are subject to withholding tax in accordance with the following rules:

• 15% withholding tax if the term of the loan agreement exceeds one year, otherwise, a 20% withholding tax will apply;
• 0%, 5% or 10% withholding tax if the creditor is tax resident in a jurisdiction that has executed a tax treaty with Colombia; and
• 5% on interest payments from loans with an eight-year term or more obtained to finance infrastructure PPP projects under Law 1508 of 2012.

In general, no Colombian registration tax, stamp duty or any other similar tax or duty is required upon the execution of a loan agreement.

However, the registration of securities and guarantees triggers in Colombia the payment of the registration tax. Upon the enforcement and depending on the type of guarantee (eg, mortgages), registration tax, stamp tax and other notary fees may arise to the acquirer of the assets’ ownership at a rate of approximately 2.6% of the relevant asset value.

The usury rate is the maximum limit of interest that a creditor may charge in a loan agreement under Colombian law, which is certified by the Colombian Financial Superintendency on a monthly basis and depending on the loan type. Exceeding the usury rate established by the Colombian Financial Superintendency is considered a criminal offence under the Colombian Criminal Code. Likewise, any amounts received by a creditor from a debtor in consideration of the loan granted, irrespective of such amounts being labelled as fees, commissions or other similar concepts, will be considered as interests and as such, will be taken into account for purposes of the usury rate.

Typical Collateral Granted to Creditors in Colombia

The assets that are typically chosen by lenders as a suitable and acceptable collateral are:

• commercial establishments;
• project revenues;
• rights over existing and future assets (floating charge);
• patrimonial rights over intellectual property;
• cash deposits (through bank account control agreements);
• economic rights, trust rights, shares, real state, and others.

All the above, except for real state (pledged via a mortgage agreement or as part of a trust), can be pledged as a movable guaranty that once registered upon the applicable public registry (Registro Nacional de Garantías Mobiliarias) – if the asset is not subject to a special regime – grants a first priority lien in favour of the registered creditor. If the creditor does not register the collateral upon the applicable public registry (Registro Nacional de Garantías Mobiliarias) third parties could claim a better right in relation with the pledged collateral.

The registration of a movable guaranty is done online by the creditor or its agent and its done automatically for a low cost (approximately at USD10 with the current Colombian peso/dollar exchange rate plus VAT).

Special Registration Regime

There are assets that require additional registrations different from those made before the Registro Nacional de Garantías Mobiliarias, depending on the nature of the asset, which imply a special registry such as cars, shares, intellectual property, among others.

Colombian Law 1676 of 2013 defines the concept of “movable guaranty” (pledges) as any operation that has the effect of guaranteeing an obligation with the movable assets property of the relevant guarantor, and includes, among others, the following types of pledge agreements:

• possessory and non-possessory pledge agreements;
• commercial and civil pledge agreements;
• agricultural pledge;
• mining pledge;
• credit pledges; and
• pledge of trademarks, patents or other rights of a similar nature.

Types of Movable Guaranties

Additionally, Law 1676 of 2013 provides that a movable guaranty may be granted over the types of movable assets described in 5.1 Assets and Forms of Security, including floating pledges or other universal or similar security interest over all present and future assets of a company or a natural person.

Colombian entities in Colombia may grant downstream, upstream and cross-stream guarantees. However, the granting of such guarantees shall be:

• authorised in the corporate documents of the company granting the relevant guarantee;
• in case authorized in the corporate documents of the guarantor, authorised by the relevant corporate body, if applicable in accordance with the procedures provided for in the corporate documents (eg, board of directors and/or shareholders assembly approvals); and
• in case the parties determine that a conflict of interest deriving from the granting of the relevant guarantee exists, such conflict of interests shall be solved.

Conflicts of Interest

As per the Colombian Superintendency of Corporations’ case law, a conflict of interests will exist when a transaction entered among affiliates (eg, guarantees granted within the same group), would be deemed as a conflict of interest transaction.

Solving of Conflicts of Interests 

In case the existence of a conflict of interest is determined, it shall be subject to the procedure provided in the involved company’s by-laws or specific internal regulations on settlement of conflicts of interests as well as applicable Colombian law.

In addition to the corporate matters described in 5.3 Downstream, Upstream and Cross-Stream Guarantees, there are no restrictions for a target company to grant guarantees or financial assistances. However, note that it is not typical that the sellers of a target company to grant a guaranty over the shares being sold before the closing of the transaction due to the risks associated to the closing of the relevant transaction. Therefore, although the granting of guarantees by a target company is totally possible, this will depend on the commercial understanding between buyer and seller. 

Note that in Colombia no additional authorisation, approval, licence, consent, order, validation or notification of, or filing, recording or registration from or with any Colombian governmental authority or corporate body is required in connection with the granting, performance and enforceability by a guarantor, except for the following:

• the applicable corporate approvals and the resolution of conflicts of interest (as described in 5.3 Downstream, Upstream and Cross-Stream Guarantees);
• the applicable registration of a security document with the Registro Nacional de Garantías Mobiliarias pursuant to the provisions of Law 1676 of 2013 (approximately at USD10 plus VAT);
• in case of certain specific pledges such as share pledges, the annotation of a share pledge in the company’s stock ledger; and
• applicable foreign exchange filings to be made upon the enforceability (see 3.2 Restrictions on Foreign Lenders Granting Security).

The release of guaranty under Colombian law, depends on the pledged asset and its registration regime. If the guaranty is registered as a movable guaranty with the Registro Nacional de Garantías Mobiliarias, the cancellation is done by the secured creditor online after paying a low-cost fee. It is worth noting that if the pledged asset are shares, the release is done by a cancellation notation on the stock ledgers.

Rules Governing the Priority of Competing Interests in Colombia

See 7.3 The Order Creditors Are Paid on Insolvency.

Methods of Subordination and their Enforceability in Insolvency Proceedings

The contractual subordination agreements in Colombia are legal and valid. The parties may contractually subordinate securities and establish a priority inside a ranking of creditors described in 7.3 The Order Creditors Are Paid on Insolvency. Nevertheless, said subordination pacts cannot override the rules regarding the ranking of creditors described in 7.3 The Order Creditors Are Paid on Insolvency.

Under Colombian law, a secured creditor may enforce its security interest in accordance with the enforcement procedures agreed in the relevant security document and if not agreed, in accordance with Law 1676 of 2013, subject to the exceptions described below. The most typical kinds of guaranty granted in Colombia are movable guarantees.

Enforcement of Movable Guaranty Agreements 

Direct payment

To enforce a security interest via direct payment, Law 1676 of 2013 provides that the secured creditor may request the debtor directly the transfer of property under the collateral. In case the debtor refuses to directly transfer the property, the creditor may request the competent authority the transfer of such property. Bear in mind that this mechanism needs to be agreed under the relevant guaranty agreement.

Special enforcement proceeding

Law 1676 of 2013 also provides the alternative for the parties to agree on a special enforcement proceeding, by means of which the guaranty may be enforced before a public notary or a chamber of commerce. The special enforcement proceeding will be regulated in the relevant movable guaranty agreement and the referred entities will be responsible for enforcing the security and deciding whether the proceeding is valid. Under this proceeding, the debtor will be also entitled to oppose to the enforcement, and the public notary or chamber of commerce, as the case may be, shall decide whether to sale or adjudicate the movable assets.

Judicial proceeding

At any time, the secured creditor may also enforce the collateral granted in its favour before a Colombian judge.

Foreign Law as the Governing Law of the Contract

Article 869 of the Colombian Code of Commerce provides that any agreement executed abroad containing obligations to be performed by the parties thereof in Colombia must be governed by Colombian laws, regardless of whether such parties are Colombian residents.

However, pursuant to the provisions of Law 1563 of 2012, any agreement to be performed in Colombia and subject to the compliance of certain international requirements defined therein, could be governed by the laws of a country or state other than Colombia, provided that the parties thereto agree to submit the disputes arising thereunder to the forum of international arbitration. Furthermore, pursuant to Law 33 of 1992, payment of obligations under credit transactions are deemed to be performed in the place of payment.

Submission to a Foreign Jurisdiction

Provisions in a certain contract establishing exclusive jurisdiction of courts other than Colombian courts with respect to disputes involving Colombian persons may not be recognised by Colombian courts, who may decide to assume jurisdiction over such disputes.

Proceedings filed before the courts of Colombia shall be subject to Colombian procedural rules. Procedural rules are deemed by Colombian laws as public order laws and cannot be validly waived or otherwise agreed.

However, pursuant to the provisions of Law 1563 of 2012, any agreement to be performed in Colombia complying with certain international requirements defined therein, could be governed by the laws of a country or state other than Colombia, provided the parties thereto submit any disputes under such agreement to the forum of international arbitration. Additionally, Article 869 of the Colombian Code of Commerce provides that any agreement executed abroad containing obligations to be performed by the parties thereof in Colombia must be governed by Colombian laws, regardless of whether or not such parties are Colombian residents.

Waiver of Immunity

Any immunity from proceedings that might in the future be granted to the parties of a contract cannot be validly waived in advance. Pursuant to the Colombian General Procedural Code, Colombian civil procedure rules are considered public order laws and therefore cannot be modified or waived by contractual arrangements.

To the extent that the parties to a contract commence enforcement actions before Colombian courts instead of commencing them at foreign courts (which final rulings may subsequently be enforced in Colombia through exequatur proceedings as described above), any waivers made by the parties of a contract in respect of Colombia’s rules of civil procedure may be rendered unenforceable.

Colombian courts will give effect to a judgment obtained in a foreign country without a retrial of the merits of the case, provided:

• that there exists a treaty or convention relating to recognition and enforcement of foreign judgments between Colombia and the country of origin of the judgment or, in the absence of such treaty, that proper evidence is provided to the effect that the courts of the relevant country would recognise and enforce Colombian judgments; and
• that the subject judgment fulfils certain requirements.

In order for a foreign judgment to become enforceable, it must first be the subject of exequatur proceedings before the Supreme Court of Colombia, which will verify, in addition to the issue concerning the existence of a treaty or of reciprocity between Colombia and the country of origin of the judgment, whether the following requirements have been observed:

• the foreign judgment presented in Colombia for enforcement does not refer to in rem rights on assets located within Colombian territory at the commencement of the proceedings in the foreign court that issued the judgment;
• the foreign judgment presented in Colombia for enforcement does not conflict with Colombian public order laws;
• the foreign judgment, in accordance with the laws of the country in which it was obtained, is final, and a duly certified, legalised copy with the corresponding apostille seal together with an official translation into Spanish has been presented to the court in Colombia;
• the matter of judgment is not subject to the exclusive jurisdiction of the courts of Colombia;
• no proceedings are pending in Colombia with respect to the same causes of action, and no final judgment (other than the foreign judgment referred to above) has been awarded in any proceeding on the same subject matter and between the same parties; and
• in the proceedings commenced in the foreign country that issues the judgment, the defendant was served in accordance with the laws of such jurisdiction and in a manner reasonably intended to afford an opportunity to the defendant to defend the action.

Under Colombian laws, the enforceability of creditors rights under a credit or security agreement may be limited by applicable bankruptcy, restructuring, insolvency, liquidation, fraudulent conveyance, reorganisation, moratorium or similar laws now or hereafter in effect, which affect creditor rights generally, including without limitation Colombian Laws 1116 of 2006 and 1676 of 2013 as they may be amended or supplemented from time to time.

Insolvency Laws

Under Article 74(1) of Colombian Law 1116 of 2006, transactions involving the transfer, disposition, constitution or cancellation of liens, limitation or dismemberment of right of property of the debtor entered into by the insolvent party within the claw-back period of 18 months immediately prior to the declaration of such party insolvency may be revoked by the applicable insolvency court; provided that:

• there are not enough assets to cover the outstanding indebtedness on the insolvency estate; and
• the transaction was entered with the intention to defraud the creditors of the insolvent debtor.

Additionally, in accordance with Article 16 of Law 1116 of 2006, any provision whose purpose or effect is to avoid and obstruct directly or indirectly the initiation of a reorganisation proceeding, whether by means of termination of agreements, acceleration of obligations, imposition of any restrictions and, in general, through any kind of prohibitions, authorisations or imposition of negative effects to the debtor admitted under the reorganisation proceeding, will be ineffective, without a judicial decision in such regard.

Good Faith

Under Colombian law, the enforcement of the creditor’s rights under shall be made in good faith. Furthermore, pursuant to the Code of Commerce, a party may be held liable for damages arising out of the undue exercise of its rights.

According with Law 1116 of 2006, there are two types of main insolvency proceedings: reorganisation and judicial liquidation, not to mention special procedures for MSMEs (micro, small and medium size enterprises), but usually, participants in the corporate restructuring market prefer the out-of-court treatment of the insolvency, because it is more efficient in terms of associated costs.

Conversely, there is an intermediate tool in Colombia that starts from a private negotiation between the debtor and his creditors, but can extend its effects to all creditors, even if they have not participated in the negotiation, if obtained an approval by the insolvency judge (cram-down).

In the context of out-of-court restructuring procedures, informal and consensual frameworks such as the INSOL Principles are not expressly referred by Colombian law, but in practice, their principles are observed, especially when the out-of-court workout involve institutional creditors, as financial entities and large suppliers. 

In Colombia, one of the consequences of initiating an insolvency procedure is that no enforcement of guarantees or any other debt collection process against the debtor may be carried out or continued. Therefore, enforcement proceedings that are in progress should be incorporated into the insolvency process (automatic stay).

For business reorganisation proceedings, since the enactment of Law 1676 of 2013, the secured creditor, once recognised, may request authorisation to enforce its security, to the extent the assets are considered not necessary for the continuity of the company. If the assets are necessary for the operation of the company, the creditors right will be granted as the possibility of receiving a preferential payment before any other recognised creditor.

Conversely, in a judicial liquidation proceeding, since the enactment of Law 1676 of 2013, assets secured by the debtor's property may be excluded from the liquidation estate for the benefit of secured creditors or beneficiaries of the securities provided, only if the guaranty was duly registered in the Registro de Garantías Mobiliarias, or in the appropriate registry depending on the nature of the asset.

Creditors under the insolvency proceeding of a company will be paid in accordance with the ranking of creditors provided in the Colombian Civil Code. These creditors are grouped into different classes hierarchically organised, as follows:

• the first are labour credits and those derived from taxes;
• the second are creditors with guaranties over personal property;
• the third are creditors with real estate guaranties;
• the fourth class covers the debtor's strategic suppliers; and
• the fifth class includes all other unsecured creditors, or common creditors.

However, Law 1676 of 2013 changed the priority of the classes as described below.

Ranking Before Law 1676 of 2013

This ranking system works by placing creditors’ claims in those categories throughout a period as per the specific priority order, set out in the law according with the nature of the debt and the type of creditor, in accordance with the five classes described above.

Ranking After Law 1676 of 2013

After the implementation of Law 1676 of 2013, the ranking of credits allows differentiating between creditors with real guarantees, under the terms of Law 1676 of 2013, who have precise and broad privileges and bankruptcy rights, versus unsecured creditors, who are at the same time distinguished into classes of creditors according to the nature of their debts as follows:

• for secured creditors:
1. personal property; and
2. real property; and
• for unsecured creditors:
1. first class;
2. second class;
3. third class;
4. fourth class; and
5. fifth class.

The insolvency rules in Colombia foresee a similar concept, known as “debt postponement”, which is a sanction against certain creditors whose behaviours may compromise the proper development of the reorganisation process, as described in 6.4 A Foreign Lenders's Ability to Enforce Its Rights.

In addition to the matters described in 6.4 A Foreign Lender's Ability to Enforce Its Rights, 7.2 Impact of Insolvency Processes and 7.3 The Order Creditors Are Paid on Insolvency, if the debtor enters to a formal insolvency proceeding, the creditor shall enforce its guaranty, whether on real estate or movable assets, only in the context of the insolvency process. It is mandatory for secured creditors to attend the process to be recognised to demand their broad privileges in the framework of the insolvency process. During the process, secured creditors may even ask the judge to take further steps to protect the encumbered assets.

Enforcement of the Guaranty

The enforcement of guaranty rights may be carried out depending on the type of guaranty involved and the time at which it is intended to be enforced and as described in 7.2 Impact of Insolvency Processes.

Before the start of an insolvency proceeding

In Colombia, each type of guaranty has a different treatment, as in the case of a mortgage, for example, where for its execution a judicial process must be initiated, while for movable guaranties, Law 1676 of 2013 provides another type of treatment, where the intervention of a judge is not mandatory for the execution of the security, being possible for the creditor to take possession of the assets by his own hand.

After the initiation of insolvency proceedings

One of the consequences of the commencement of an insolvency proceeding is that no lawsuit for enforcement or any other debt collection process against the debtor or the enforcement of guarantees on movable or real state property necessary for the development of the debtor's economic activity, may be carried out or continued. Therefore, enforcement proceedings that are in progress should be incorporated into the insolvency process.

Project finance is a widely used financing mechanism in Colombia. Due to its benefits and the industry development, since the early 2000’s this type of financing has been used increasingly throughout the years. Recently, with the creation of the Financiera de Desarrollo Nacional and the Colombian government’s plans for the development of infrastructure projects, project finance are one of the most used financing type in our loan market.

Legal Framework

Colombian law does not provide a legal framework for project finance transactions. However, any project finance transaction in Colombia shall comply with the tax, foreign exchange and regulatory provisions described in 1.6 Legal, Tax, Regulatory or Other Developments, 2.1 Authorisation to Provide Financing to a Company, 3. Structuring and Documentation Considerations and 4. Tax, as applicable. 

Relevant Legislation, Legal Restrictions and Other Obstacles

Public private partnerships (PPPs) were introduced into the Colombian public contracting scheme by Law 1508 of 2012 (“Law 1508”), which allows for increased participation by private parties in the execution of concession agreements regarding infrastructure projects allowing the use of the project finance model, mainly in the transportation sector. Said law regulates the general conditions applicable to public private partnerships, including procurement, modification, interpretation and termination of contracts, the termination payment, risk allocation, hand back clauses and others.

Important to note is Law 1682 of 2013 (“Law 1682”), which regulates the transportation infrastructure sector. Law 1682 regulates important aspects of project development for PPPs, such as land acquisition, interaction with utility networks and environmental management dispositions.

Other legislation which directly impacts the PPP sector is Law 1882 of 2018, which establishes certain dispositions to strengthen public procurement in Colombia. Regarding PPPs, Law 1882 includes changes to the procurement process and the structure of PPPs.

Furthermore, the PPP sector is regulated by Decree 1082 of 2015 (“Decree 1082”), which establishes the rules by which PPP projects must be structured, including the main aspects regulating unsolicited PPP and public sector-led PPP projects, as well as the rules concerning service levels and quality standards, budgeting, risk allocation (although risk policy is regulated by another type of instrument) and financing considerations.

Decree 1082 was modified by Decree 438 of 2021, to include new specific rules regarding PPPs, such as new approval rules of unsolicited projects and changes in financing (new ways of structuring projects) and transparency considerations introduced partly by Law 1882. As Law 1508 allows further governmental regulation regarding public private partnerships in different industries, Decree 1082 has also been modified to include specific regulation of non-transportation sectors, such as water and sanitation and information technologies.

The Main Legal Obstacles for Project Transactions Identified

• Restrictions regarding participation of private equity funds in Decree 1082, as Article 2.2.2.1.1.3 only allows for persons or corporations to participate in bidding processes for PPPs. Private equity funds may submit their financing capacity and/or investment experience through an irrevocable investment commitment letter, referring to such matters. Also, private equity funds which participate in this manner must have pension funds within their investors. Additionally, foreign private equity funds must comply with the admissibility requisites established by the Colombian Financial Superintendency for pension funds to participate.
• Enhanced scrutiny in the structuring of unsolicited PPPs introduced by Decree 483 of 2021, most importantly the fact of having to identify leading sponsors (which carry restrictions when trying to leave the project) from a very early stage of structuring, which can limit the number of parties which are able to start a structuring process.
• Contractual restriction (in 4G and 5G contracts) which does not allow Leaders (parties which have acted as such or demonstrated financial capacity/investment experience during the bidding process) cannot “leave” a project, having to maintain at least a 25% stakeholding until the first year of the O&M phase is finalized, unless they obtain an authorization form the granting authority, which gives less flexibility.

Overview of Public-Private Partnership Transactions in Colombia

Currently, Colombia is launching the first wave of the fifth generation of concessions, which includes 14 projects in the toll-road, waterway, airport and rain sectors, worth approximately COP18.5 billion, or approximately USD4.8 billion.

In addition to the matters described in 3.1 Restrictions on Foreign Lenders Granting Loans, 3.3 Restrictions and Controls on Foreign Currency Exchange, 4.1 Withholding Tax and 4.2 Other Taxes, Duties, Charges or Tax Considerations, and subject to the particularities of each project finance transaction, there is no need to obtain the consent of any government approval or pay any taxes, fees or other charges and the transaction documents do not need to be registered or filed with any governmental authority.

Registration of the Creditors under 4G Toll Road Concession Financings

Notwithstanding the above, note that in certain types of project finance, such as the financings granted to concessions part of the 4G toll road concession program of the Colombian government, the creditors of the relevant project shall be registered before the grantor (in this case, the National Infrastructure Agency or ANI), so that the creditors may exercise the step-in rights granted to them under the concession agreement.

Project Financings Applicable Laws

Please take into consideration that the most usual governing laws for project finance transactions in Colombia are the following:

• New York law;
• Colombian law; and
• English law (very few cases).

Additionally, such project finance transactions that have used a mix of the above referred governing laws, usually consist on a credit agreement governed by foreign law and the security documents governed by Colombian law.

Government Bodies

In connection with the oil and gas sector, the responsible governmental bodies are the following.

• The Ministry of Mines and Energy (MME). This is the governmental entity in charge of issuing the public policy for the mines and energy administrative sector, especially those related to the exploration, exploitation, transportation, refining and, distribution of hydrocarbons.
• The National Hydrocarbons Agency (ANH). This is the administrator of the Colombian hydrocarbon resources and the agency that issues the rules for allocating blocks for the exploration and exploitation of hydrocarbons.
• The Mining and Energy Planning Unit (UPME). One of its roles is to plan the development and use of mining and energy resources with the agents of this sector and is responsible for disseminating the necessary information for public policy decision-making.

In connection with the power sector, the responsible governmental bodies are the following.

• The MME.
• The Superintendency of Public Utilities (SSPD). It oversees the exercise control, inspection, and surveillance of compliance with the provisions for the proper provision of public utilities.
• The Energy and Gas Regulatory Commission (CREG). CREG is an eminently technical entity seeking to ensure that electric power, natural gas, liquefied petroleum gas and liquid fuel services are provided to the largest possible number of people, at the lowest possible cost for users, and with adequate remuneration for companies.
• The UPME.
• XM Compañía Expertos en Mercados (XM). XM operates and manages the Colombian electricity market, and is mainly in charge of running the Colombian National Interconnected System and managing the wholesale energy market.

In connection with the mining sector, the responsible government bodies are the following.

• MME.
• National Mining Agency (ANM). It oversees, among others, the execution of the national mining policy and the processes of granting and managing mining concessions and mining titles.
• UPME.

Regulations

In connection with the oil and gas sector, the primary laws and regulations are the following.

• Decree 1073 of 2015 - compilatory decree on the energy and mining sector.
• Law 1530 of 2012 – regulates the organisation and functioning of the general system of royalties.
• Decree 1082 of 2015 – compilatory decree on national planning, title 4 regulates the general system of royalties.
• Decree 2041 of 2014 – regulates title VIII of Law 99 of 1993 in connection with environmental licenses.
• Decree 1076 of 2015 – compilatory decree on environment and sustainable development.
• Resolutions from the ANH Nos 40048 and 49396 of 2015, 41251, 164 165 and 167 of 2016.
• Arrangements from the ANH Nos 4 of 2012, 3 of 2014, 2 of 2015 and 3 of 2015.

In connection with the power sector, the primary laws and regulations are the following.

• Law 142 of 1994 – regulates the provision of public services.
• Law 143 of 1994 – regulates the power sector, including main principles, planning, expansion, generation, and selling.
• Decree 1073 of 2015 - compilatory decree on the energy and mining sector.
• Resolution CREG 119 of 2007 – establishes the tariffs formula for the commercialisation of energy in the regulated electricity market.
• Resolution CREG 097 of 2008 – regulates the charges for use of regional transmission and local distribution systems.
• Resolution CREG 070 of 1998 – establishes the legal framework for the distribution of electrical energy.

In connection with the mining sector, the principal laws and regulations are the following.

• Law 685 of 2001 – establishes the Colombian Mining Code.
• Law 141 of 1994 – creates the National Royalties Fund, the National Royalties Commission and regulates the government's right to receive royalties for the exploitation of non-renewable natural resources.
• Decree 1073 of 2015 - compilatory decree on the energy and mining sector.
• Law 1530 of 2012 – regulates the organisation and functioning of the general system of royalties.

The following are the main issues that need to be considered when structuring a deal:

Tax Matters

The parties of a transaction need to be careful with the tax structure that will be implemented and trying to create efficiencies under such structure, which include, among others, the tax matters described in 4.1 Withholding Tax shall also be taken into consideration.

Project Companies

The project company developing a project is usually a special purpose vehicle which only purpose is to operate and develop the relevant project. Usually, project companies are incorporated in Colombia as sociedades por acciones simplificadas, which provide in accordance with Colombian law, do not require a very complex corporate structure and can have a sole shareholder. Bear in mind that such sociedades por acciones simplificadas can be established with less than USD300.

Under Colombian law, most relevant laws to project companies are tax, employment, environmental and AML laws as well as the relevant laws applicable to the type of project being developed (eg, energy, renewables, toll-roads, railway, ports, healthcare laws).

See 3.1 Restrictions on Foreign Lenders Granting Loans, 3.2 Restrictions on Foreign Lenders Granting Security and 3.3 Restrictions and Controls on Foreign Currency Exchange.

The following are the typical financing sources and structures for project financings in Colombia, which have been implemented with single or double currency structures.

Financing Sources

• Bank financing;
• multilateral financing;
• debt funds financing;
• capital markets financing; and
• export credit agency financings.

Typical Structures Used

• Bridge loans;
• miniperms;
• international and local bond issuances; and
• a combination of the foregoing.

Below are the main issues and considerations associated with the acquisition and export of natural resources in Colombia.

Hydrocarbons

The acquisition and export of hydrocarbons in Colombia is an activity that involves the participation of the authorities described in 8.4 The Responsible Government Body. As a rule, companies are required to enter:

• an exploration and production contract; or
• an association contract to explore and exploit hydrocarbons in Colombia.

Export of Hydrocarbons

Note that the same rules described below for the export of power energy will apply for the export of hydrocarbons. In addition to such rules, the exporter shall file a report of volumes effectively exported.

Mining

The mining activities in Colombia are regulated by the authorities described in 8.4 The Responsible Government Body. Note that a governmental authorisation is needed to undertake mining projects in Colombia, which under the Mining Code is known as an Exploration and Production Mining Concession Agreement.

A Mining Concession is executed between the ANM and the private party seeking to acquire mining rights. A mining concession grants to the holder the exclusive right to:

• explore a limited area of up to 10,000 hectares to establish if there are minerals in quantities and qualities to exploit, in which case the holder pays a surface fee to the Colombian government during the exploration and construction phases; and
• exploit and own the minerals that are mined, in exchange for royalty payments during the production phase.

Export of Minerals

The requirements for the export of minerals are the following:

• the registration in the RUCOM, which is a system where mineral traders shall be registered to have access to the purchase and/or sale of minerals; and
• the certificate of origin of the minerals being traded. 

Power Generation

The power generation activities in Colombia are regulated by the authorities described in 8.4 The Responsible Government Body. The generation phase of electric power is governed by the free market as the generating facility can be installed in the place that suits better with the interests of the project owner, but in any case, the companies generating electricity must be registered with the competent authorities (eg, XM, SSPD and CREG).

On the distribution and commercialisation front, no concession from the government is required. However, the companies carrying out distribution and commercialisation electricity must be registered with the competent authorities (eg, XM, SSPD and CREG) and comply with the regulations regarding tariffs, technical requirements, and the report of information surrounding its business and activities.

At the transmission level, the construction and operation of transmission assets can only be obtained through the award of project developments by public tenders made by the UPME.

Export of energy

Colombian law provides that a prior authorisation of the Colombian tax authority (DIAN) is required for the export of energy. For such authorisation, the exporter shall, among others be a legal person and demonstrate that has the necessary physical infrastructure is available for the export, the equipment and measurement, control, and security procedures are available for the development of this exportation, among others.

Finally, the exporter must electronically submit to the DIAN the request for shipment authorisation and export declaration, corresponding to each of the registered cut-off dates.

Environmental Regulation

Notwithstanding the fact that special environmental regulation varies depending on the type of project, there is a common regulation for environmental infractions and sanctions, that is deemed under Law 1333 of 2009.

Regulatory Bodies

In general terms, the regulatory bodies overseeing these regulations on a national level are the National Environmental License Authority that supervises the compliance of projects, works and licensed activities with the environmental regulations and Colombian National Parks, that supervises and administers the national parks system.       

The regional autonomous corporations (CAR) are public entities that administer in their specific region the natural resources.

In any case, the Ministry of Environment and Sustainable Development is the regulatory body in charge of the public policies and regulation towards the conservation and protection of the environment.