The enactment of Law 1676 of 2013 (Secured Interest Law) in the context of insolvency proceedings − reorganization and liquidation − has substantially restated the legal scope of creditors’ rights in at least three aspects: (i) the existence or not of a new creditor type; (ii) the compatibility of that possible new type of creditor and the current system of creditors hierarchy, and (iii) the specific rights of that new creditor, should there be one, in creditors arrangement proceedings.
(i) Is the secured creditor a new type of creditor?
The secured creditor is, indeed, a new type of creditor. In the context of insolvency proceedings, the secured creditor has rights and procedural prerogatives that other creditors don’t.
Secured creditor status is not set forth either in the Civil Code or in Law 1116 of 2006 (Corporate Insolvency Law), demonstrating that this type of creditor is different and that this difference should be acknowledged.
Law 1676 of 2013 defines the secured creditor as “the person, legal entity, trust fund or governmental entity, which is secured through a movable collateral that may be actually held or not by the creditor” (Article 8).
On the other hand, Articles 50, 51 and 52 of Law 1676 of 2013 provide, in short, that secured creditors, in the context of reorganization and liquidation procedures, have special privileges under which they can collect unpaid amounts in more favorable conditions than other creditors whose claims have not been dismissed, thereby reducing their risk almost to zero.
On the basis of the different applicable legal regimes and the terms of protections afforded vis-à-vis their type or class, the prerogatives established in favor of secured creditors makes them entirely different from the ranking of the Civil Code and allow us to distinguish them from other types of creditors. It would make no sense to argue that they are not a new type of creditor and that they must be treated as creditors belonging to the second class of creditors in case the collateral is movable property or to the third class of creditors in case the guarantee is real property. This position implies that everything changed in order to remain the same.
In fact, it’s worth mentioning that, for purposes of insolvency proceedings, not one but two types of secured creditors were created: (i) the secured creditor and (ii) the mortgagee who has the benefits of a secured creditor. Articles 50, 51 and 52 of the above-mentioned law states that the scope of the rights of the creditor includes real property guarantees. The creditor favored with this type of collateral, from a technical viewpoint, and on the basis of the legal definition, is not a secured creditor, but a new type of creditor entitled to rights that the usual mortgagee is not entitled to − as the mortgage holder (or mortgagee) belongs to the third category of creditors and must wait as per the order of priority payments set forth in the law and only if the property that has been mortgaged has subsisted until that point and has not been used to pay those creditors that belong to the first class (labor and tax). That was precisely the most evident disadvantage of the Colombian guarantees system: the lack of predictability.
Therefore, the mortgagee, as set forth in the rules we are now examining and which are only applicable in the context of insolvency proceedings, is not the usual mortgagee as per the terms of Article 2499 of the Civil Code of Colombia, just as the secured creditor is not a pledge. These types of creditors are different.
(ii) Are the notions of secured creditor and the hierarchy of creditors set forth in the Civil Code and Law 1116 of 2006 compatible?
They don’t have to be compatible, because the realm and scope of application are different. They are not mutually exclusive; in fact, they coexist. Because the principle by which all the creditors are subject to the insolvency proceeding whether they want it or not (collective debt collection mechanism) was not struck down but rather confirmed, the secured creditor must attend and has standing in the context of the insolvency proceeding and, in that sense, its claims must be recognized but not included or categorized in the hierarchy of creditors.
The ranking of creditors entails placing creditors into five specific classes: first, second, third, fourth and the fifth one, which is a sort of residual category. The system works by placing creditors’ claims in those categories throughout a period of time as per the specific priority order, set out in the law according with the nature of the debt and the type of creditor. This was formerly the model of creditors ranking:
The entry into force of Law 1676 of 2013 added another category to the set of creditors. Now, the model seems to be the following one:
- Secured creditors
2. Unsecured creditors
Secured creditors and their claims have to be recognized by the judge but not categorized within the Civil Code ranking, and voting rights have to be ascribed in their favor, as they always have the option to vote and join the corporate reorganization plan.
The Constitutional Court of Colombia, in rulings C-447 of 2015 and C-145 of 2018, set out some interpretation guidelines to acknowledge the amendments and changes resulting from the new type of creditor. As to the topic we are examining, the Constitutional Court stated that the category of creditors for purposes of payments was not stricken down, which means that the types of creditors set forth in the Civil Code in Articles 2495 et seq. continue to be in force.
(iii) Which are the rights of secured creditors under creditors arrangements?
In the context of reorganization proceedings (reorganization plan and pre-packed), a secured creditor whose claims have not been dismissed has three courses of action:
- Auction the collateral and collect the proceeds in those cases when the collateral is not required to operate the debtor’s business and when the security agreement has no provision in that regard or has no clause establishing otherwise.
- Invoke the payment of debts on a priority basis in cases when the collateral must continue to be held by the debtor, so that the debtor’s business operations will not be impaired.
- Join the reorganization agreement, even if this implies getting paid with fewer advantages than he would be entitled to as a secured creditor.
It’s worth noting that Decree 1835 of 2015 − which develops the Movable Guarantees Law − states that the payment, in addition to being subject to a priority, must be done immediately. The fact that the decree orders immediate payment − which is not established in the law − certainly impairs the debtor position, because the debtor must allocate all or part of his own cash flow to pay the debt that has been secured. To date, the insolvency judge has stated that the immediacy of priority payment is only feasible in cases where the cash flow is available or sufficient.
As to liquidation proceedings, the rights of the secured creditor are materialized upon obtaining an exclusion of the collateral from the estate and upon auctioning the corresponding property. This is an exclusion different from the typical exclusions of liquidation proceedings that deal with property owned by third parties held possessed by the debtor.
With respect to the issues we are examining, the property is owned by the debtor and is only useful to the extent that it is used to honor payment in favor of secured creditors and not used to honor the liabilities of unsecured creditors, except when the value of the property exceeds that of the guarantee; in this case, the surplus returns to the estate. Therefore, this is an exclusion that is not final, which is the case of the exclusion that favors third parties owning the property, under the terms of Articles 55 and 56 of Law 1116 of 2006.
In sum, Colombian insolvency rules have been restated. Actors involved in this type of proceeding will find new opportunities, difficulties and challenges. The existence of a secured creditor resulted from the specific needs of the market. More certainty about the fate of debt collection, even in the context of insolvency, offers a reduction of risks and, therefore, reduces costs.