Project Finance 2019 Second Edition

Last Updated November 04, 2019

Colombia

Law and Practice

Authors



Brigard Urrutia is recognised as a leading law firm in Colombia and one of the most prestigious in Latin America, with presence in Barranquilla, Cali and Medellín. The firm’s size gives it the ability to offer an unparalleled range of first-class legal services and bespoke solutions to its global client base which includes leading domestic and foreign financial institutions, multinational corporations, private equity/venture capital funds, state-owned enterprises, governments and multilateral agencies. Their banking and financial services practice has the experience and knowledge required to advise entities on any type of regulatory matter before the Colombian authorities and financing transactions, including: syndicated loans, structured financing, project finance, asset-backed financing and implementation of collateral models. The practice is highly specialised and regarded as one of the leading departments in the market and advises important clients such as JP Morgan, HSBC, BNP Paribas, Credit Suisse, Goldman Sachs, SMBC, Citibank and BTMU.

During the last eight to ten years, Colombia has been experiencing an infrastructure and project finance boom. The fourth generation of toll road projects – the 4G Programme – which comprises 42 projects aimed at building roads totalling approximately 7,000 km in length and requires an investment of around USD20 billion, is currently under financing and in development.

Given the strategic importance of the 4G Programme, the Colombian government has implemented several actions to provide support and enhance the risk profile of investments in the 4G Programme. A decisive action was the enactment of Law 1508 of 2012 governing the legal framework for public-private partnerships (PPPs) in Colombia, and Law 1682 of 2013, which aims to offer quick solutions to the most common bottlenecks in road construction related to land acquisitions, environmental licences and relocation of public utility networks.

More recently, in January 2018, Law 1882 of 2018 was enacted. This law amends certain provisions of the infrastructure regime regarding public procurement contracts, such as:

  • the structure of public tenders;
  • the responsibility of advisors, auditors and consultants;
  • the implementation of mandatory standard documents in public procurement proceedings;
  • inter-administrative agreements;
  • transport infrastructure projects; and
  • the settlement of PPP contracts in case of annulments.

The 4G Programme has faced several challenges and complexities, but the national government has taken action and issued regulations to provide a solid legal framework for this ambitious plan to move forward. For instance, in 2019 several rulings have had an impact in the financing industry and consequently lenders have strengthened their requirements. One example is the ruling of 6 August 2019 where an arbitration panel ruled in relation to the Project Ruta al Sol 2, declaring the agreement executed between the then Instituto Nacional de Concesiones (INCO) – today Agencia Nacional de Infraestructura (ANI) – and the concessionaire Ruta del Sol S.A.S. null, as they found evidence of illicit object, illicit cause and deviation of power. This ruling was controversial in relation to the liquidation and termination payment of the agreement and has had an impact in the perception of the legal security of Colombia for the lenders, which is therefore expected to have an effect on the 4G Programme.

The National Infrastructure Agency (ANI), which is the government entity in charge of structuring, tendering and supervising the performance of projects under the 4G Programme, is seeking to attract foreign lenders (including capital markets financing), infrastructure funds and first-level domestic and international contractors with sufficient experience, financial strength and technical standards.

In addition to the 4G Programme, Colombia has a healthy stream of infrastructure projects in diverse sectors. The most important public procurement projects include:

  • the first line of the Bogotá metro project (23.96 km), which entails investments in the region of approximately USD6 billion;
  • the financing of the bid (licitación) of the buses comprising phases 1 and 2 of Transmilenio S.A. for the provision of public passenger transport services in Bogotá D.C.;
  • the construction, operation and maintenance of the 4G Project Autopistas al Mar 2, a toll road that goes through Cañasgordas-Uramita-Dabeiba-Mutatá-el Tigre-Necoclí; and
  • the construction and operation of a liquefaction, regasification and storage unit for the processing of natural gas which will be located on the Colombian Pacific coast.

In addition, Law 1715 of 2014, “through which the integration of non-conventional renewable energy to the National Energy System is regulated”, aims to promote research, development and investment in the generation and use of non-conventional renewable power, which translates into business opportunities in the renewable energy market.

In this regard, with the enactment of Law 1955 of 2019 (Plan Nacional de Desarrollo) the government has specifically stated as part of the development plan of Colombia incentives and measures to achieve a more innovative, competitive, clean and equitable energy sector; already, a minimum of 10% of the total energy purchased by the commercialisation companies must be renewable energy. This regulatory framework has been complemented by resolutions issued by the Commission for the Regulation of Energy and Gas (Comisión de Regulación de Energía y Gas) that establish, among others:

  • the rules on supply contracts for agricultural-origin fuel for a reliability charge;
  • the methodology to determine the firm energy of geothermal plants;
  • the methodology to determine the firm energy of wind farms; and
  • the methodology to determine the firm energy of photovoltaic solar plants.

Furthermore, the government is currently drafting a decree which will regulate the offering of non-conventional renewable energy to the National Interconnected System. The purpose of this initiative is to facilitate the access of non-conventional renewable generators into the electric market.

Finally, Colombian foreign exchange regulations recently reformed to allow foreign entities to grant loans to Colombian residents in Colombian pesos (COP). This development grants local borrowers’ access to new resources without assuming any foreign exchange risk. For foreign lenders and investors, it will open the loan secondary market, allowing for a more efficient and profitable use of resources. In order to perform these operations, foreign entities are required to complete all transfers through bank accounts held in local foreign exchange intermediaries.

Infrastructure projects in Colombia have been funded by both local and international banks, as well as local and international funds. Currently export credit agencies, multilaterals and development finance institutions play a pivotal role providing funding resources and expertise to the deals and the market, especially in energy and infrastructure projects where, without their support, the projects would not be able to reach financial closure due to political, reputational and geographical risks.

An example of the aforementioned is La Financiera de Desarrollo Nacional (FDN), a development bank specialised in financing and structuring of infrastructure projects in Colombia. The bank started in 2013 with the aim of developing the national infrastructure sector to become an asset that directly impacts and improves the competitiveness of local industry and the well-being of all Colombians. Linked to the Ministry of Finance and with the IFC, Sumitomo Mitsui Banking Corporation, CAF and the national government as shareholders, this bank has access to diverse funding resources and below-market funding resources, which allows it to offer subsidised loans.

FDN provides loans either directly or indirectly through a network of accredited financial intermediaries, including national and international banks, funds and multilaterals. Nevertheless, other local banks including Banco Davivienda S.A., Bancolombia S.A., Banco de Bogotá S.A., Banco Itaú Corpbanca S.A., export credit agencies and institutional investors are also active in Colombia’s project finance market.

Sponsors of infrastructure projects in Colombia have been diverse – domestic construction companies, foreign international infrastructure companies, service and equipment providers and private equity funds. This is because project finance imposes a low-risk exposure for the shareholders or sponsors of the project, as (i) it will be primarily funded with resources provided by financial institutions and lenders, not with the sponsors’ own resources, and (ii) it is structured by means of a special purpose vehicle (SPV) that will commit to the government contract and have the responsibility of developing and operating the project. Therefore, the risks of the project are borne by a specific legal entity separated from the sponsor or shareholders.

Law 1508 of 2012 governs the legal framework for PPPs in Colombia, establishing the organic norms of budget and other issued dispositions, and aiming to create a mechanism to achieve the competitiveness required by the country.

Formerly, PPPs were also regulated by Resolution 3656 of 2012, which stipulated the parameters for the evaluation of the PPP mechanisms as a modality of project execution, and in Regulatory Decree 1082 of 2015 (which compiles decrees 1467 of 2012, 2043 of 2012, 1610 of 2013, 1026 of 2014, 1553 of 2014 and 63 of 2015) which established specific dispositions related, among other aspects, to:

  • the nature of the bidders in PPP projects;
  • the availability, service levels and quality standards;
  • the definition of public contributions;
  • public and private initiatives for the development of projects;
  • the prequalification system;
  • treatment of risks;
  • approvals of the projects; and
  • the implementation of PPPs in the drinking water and basic sanitation sector.

Since the 1980s, Colombia has structured several public-private concessions; nevertheless, Law 1508 reformed and solved several issues that existed within the concession projects. As a result, the PPPs facilitate the provision and maintenance of infrastructure within established parameters of availability and quality, and apply the regulation to all sectors in which the provision of infrastructure and its related services are needed. All of which are made within the following parameters:

  • there are no advance payments and aims to attract long-term investors, including both institutional and financial entities;
  • it introduces the concept of payment for availability and level of service;
  • additions are limited to 20% of the agreement’s value (CAPEX and OPEX);
  • it includes a regulatory regime applicable to unsolicited proposals, involving correct incentives for their development;
  • it allows proper structuring of projects regarding risk analysis, socio-economic assessment, justification to the implementation of the project and includes the concept of value for money;
  • the infrastructure reverts to the public sector at the end of the concession period (a maximum of 30 years); and
  • it stipulates requirements oriented to enabling – legal capacity, ability and experience in financial investment or project structuring and development.

The robustness of the current project pipeline in Colombia proves that the legal framework of the PPPs in Colombia effectively created an appropriate and attractive framework. However, and despite the large usage of PPPs for infrastructure projects, Law 1508 of 2012 sets forth restrictions related to the termination payment method, contract term and object.

Eight years from the enactment of the aforementioned law, the government has seen the necessity to develop social infrastructure programmes in Colombia, which comprise, among others, the possibility to make PPPs for the construction and financing of schools, museums, hospitals, prisons, and water and sewage systems, as well as progressing in the way the agreements are structured to gain efficiency and allocate appropriate risk between the parties. In this regard, the main challenge Colombia currently has is funding, as these type of PPPs lack project-specific revenue sources to fund the project, creating the necessity for public funding.

All in all, the PPPs face important challenges to seek alternative and more innovative sources of funding, coupled with suitable risk-sharing and risk-allocation mechanisms to make PPP structures more bankable and profitable.

Before starting the structuring of the deal per se, the following elements must be determined. Firstly, if the project will produce adequate revenues to remunerate the risks assumed by the lenders under the financing. Secondly, how likely it is that the resources disbursed by the project lenders will be repaid – eg, that the project revenues will be sufficient to service the debt granted by the lenders. For this, a proper risk assessment and allocation must be made by means of a legal due diligence, where the main risks must be identified regarding construction and termination, operation, force majeure and political issues surrounding the project.

Additionally, the following four objectives are key to an appropriate approach to negotiation:

  • obtaining resources on time;
  • avoiding unnecessary acceleration of credit;
  • ensuring that shareholders receive a timely return on their capital; and
  • agreeing on a prepayment regime that allows the refinancing of credit.

Now, when structuring a project finance transaction, the lenders and the sponsors should consider the following issues when contemplating the transaction:

  • the project’s deal structure – note that a specific analysis of the type of project, the parties involved and the concession agreement must be made;
  • the debt-to-equity ratio;
  • payments;
  • the security package;
  • representation and warranties; and
  • conditions precedent.

Assets typically available as collaterals to lenders are those given in the in rem guarantees. In rem guarantees are those in which the borrower gives as security an asset of its own or of another person; the most common is the mortgage. According to Article 2432 of the Colombian Civil Code, the mortgage is a pledge right that is constituted on real estate, which remains in the possession of the borrower and, upon the occurrence of a default, gives the right to the lender to commence a collection proceedings (proceso ejecutivo) before a court in order to sell the mortgaged assets at a court-administered public auction.

Mortgages are perfected by: (i) having the borrower and the creditor execute a public deed (escritura publica) before a notary public (or a consular officer overseas) which must include information that identifies the borrower, the lender, the secured obligations and the real estate subject to the mortgage; and (ii) recording such public deed at the Registry of Public Instruments (Oficina de Registro de Instrumentos Públicos) sitting at the place where the real estate is located.

However, and even if the aforementioned guarantees can be used in project finance, since the enactment of Law 1676 of 2013 security structures have been modified for projects in Colombia and new types of collaterals have been more commonly used (eg, pledge agreements over movable assets). Law 1676 established a regime for movable guarantees which, although they are real (not personal) guarantees, have the advantage of granting the possibility of enforcing the secured obligation through more expeditious extrajudicial mechanisms. Law 1676 regulates matters relating to movable guarantees and stipulated the possibility of granting a collateral over:

  • movable property;
  • all the assets of a borrower, including existing or future, tangible and intangible assets (including contractual rights) over which the guarantor acquires rights after the constitution of the movable guarantee;
  • intellectual property rights;
  • rights to the payment of money deposits;
  • shares, quotas and interest parts representing the capital of civil and commercial companies, provided that they are not represented by book entries;
  • bank accounts;
  • rights to claim performance of a contract that is not very personal by the obligor or by a third party designated by the parties as a substitute obligor, that can be evaluated economically; and
  • in general, over all other movable property including fungible, corporeal and incorporeal, rights, contracts or shares to which the parties attribute economic value, but excluding certain movable assets subject to special regimes (eg, aircraft and large vessels).

In line with the above, trust structures as collateral are also typical in the security package for project finance. These collaterals are also considered as movable asset guarantees and imply a transfer of property to the trustee under the trust agreement (if implemented by means of a trust) and must also follow the requirements established in Law 1676. A trust structure offers “bankruptcy remoteness” advantages provided that assets are transferred to a guarantee trust (fiducia en garantía) and consequently the borrower ceases to be the owner of such assets; this will only apply if the trust agreement is registered in the national registry for security interests over movable assets (Registro Nacional de Garantías Mobiliarias).

The guarantee trust agreement contains specific instructions that the trustee is required to comply with (eg, rules and procedures to conduct the foreclosure of the real estate assets). Typically, the instructions set forth in the relevant guarantee trust agreement provide for rules regarding the management and maintenance of the assets in trust, as well as for instructions to sell the assets in case those funds are required to pay for secured obligations. Also, the instructions may entail the transfer of the assets in trust to a lender as payment in kind of a secured obligation.

Law 1676 modified substantially the rules on enforcement of security interests within insolvency proceedings. Now, although a pledge agreement does not offer a strict “bankruptcy remoteness” scenario, Law 1676 set forth that secured creditors may enforce their security interests even though the borrower is subject to a reorganisation proceeding (reorganización empresarial) unless the asset is required for the operation of the borrower’s economic activity. Nevertheless, please note that this enforcement is not automatic and must be authorised by the Colombian Insolvency Authority (Superintedencia de Sociedades).

Finally, regarding the applicable formalities and perfection requirements of pledge agreements, according to Article 14 of Law 1676 in order to create a security right in a movable asset it is necessary to have a written agreement and to identify the guarantor, the borrower, the lender, the details of the asset given as security and the value of the secured obligations. This implies that a maximum value covered by the movable guarantee must be established. In general, the guarantee is perfected at the time of the conclusion of the respective pledge agreement. However, the guarantee must be registered in the national registry for security interests over movable assets (Registro Nacional de Garantías Mobiliarias) in order for it to: (i) be enforceable against third parties; and (ii) give rise to rights of priority with respect to other creditors of the guarantor. Please note that if a pledge agreement over the shares of a company is executed it must also be registered in the company’s stock ledger.

According to the applicable Colombian law it is possible to create a blanket lien or ongoing concern pledge over a group of assets. In this case, security may be granted by means of either a commercial establishment pledge agreement (garantía mobiliaria sobre establecimiento de comercio) or an assets pledge agreement (garantía mobiliaria sobre activos) and shall be registered before the national registry for security interests over movable assets (Registro Nacional de Garantías Mobiliarias), which provides priority and enforceability against third parties.

Furthermore, it is also possible to grant security over assets by transferring these to a security trust. For this purpose, parties should execute a trust agreement with a trustee and register such agreement before the said national registry.

However, security over certain assets such as real estate, aircraft and ships must be created by means of mortgage agreements and cannot be part of a general security agreement.

The cost of a mortgage, notarial expenses, registration tax and registration rights for real estate are required as follows:

  • notarisation fees may range between 0.471% and 0.57% of the value of the mortgage;
  • for the registration tax, tariffs range between 2% and 2.5% of the value of the mortgage, depending on the municipality in which the mortgage is registered;
  • registration rights tariffs are 0.3% of the value of the mortgage, which corresponds to the value determined for the calculation of notarial expenses; in case the mortgage does not specify an amount, the registration rights will be USD20.

Regarding movable assets, registry costs to complete the national registry for security interests over movable assets (Registro Nacional de Garantías Mobiliarias) are approximately USD15. Nevertheless, additional registrations might be needed, depending on the type of asset (eg, motor vehicles and airplanes).

Law 1676 establishes that the general or specific description of the assets given as collaterals are permitted. Nevertheless, the applicable law must also be applied when they are assets subject to special registration requirements (eg, real estate property, transportation vehicles such as airplanes). In this last case, an individualisation and identification of the asset must be made within the agreement and the specific registry.

Under Colombian law, generally any type of asset is available as collateral to creditors, except for certain assets that cannot be subject to attachments (bienes inembargables) which – according to Article 63 of the Colombian Political Constitution, Article 594 of the General Procedural Code, Article 166 of the Civil Code and Article 1677 of the Labour Code – include assets of public use and assets intended for a public service.

Lenders can carry out due diligence on the assets given as collateral by searching in the national registry for security interests over movable assets (Registro Nacional de Garantías Mobiliarias) for movable guarantees, the Registry of Public Instruments (Oficina de Registro de Instrumentos Públicos) for real estate and the various special registries that relate to specific assets (eg, Aeronáutica Civil Unidad Administrative Especial for aircrafts). All of these registries are searchable and record the existence of other liens of the asset that is being given as collateral, if any.

Securities are usually released with the cancellation of the collateral in the specific registry. In the case of movable guarantees, this cancellation is made electronically by the secured party and is immediate.

A secured party can enforce its collateral in the event of partial or total default of the agreement, depending on the terms and conditions defined in the agreement. Usually alternatives to an extrajudicial negotiation between the creditor and the debtor are exhausted before the creditor enforces its collateral.

The general collection proceedings apply to all types of collaterals. The admission of a collection claim is conditioned upon the existence of a collectable instrument (eg, promissory notes). An instrument is deemed as collectable whenever the obligations incorporated therein are deemed clear, express and enforceable (Section 422 of the General Procedural Code). A general procedure for collection of debts is set forth by the General Procedural Code, under which precautionary measures may be decreed over the secured assets, to ensure debt repayment.

The stages of a collection procedure under the General Procedural Code may be summarised as follows:

  • payment order – if the legal requirements are met, the court shall issue a payment order against the defendant/borrower;
  • challenges against the payment order – the defendant/borrower may file a reconsideration petition against the payment order;
  • merit defences – if the petition is granted, then merit defences will be submitted by the defendant/borrower, and the plaintiff will be granted a term to file its response to the merit defences, after which the court will rule on such merit defences;
  • confirmation of the payment order – if merit defences are not successful, the court will confirm the payment order, granting the defendant/borrower a term to pay the outstanding debt and will also rule on the costs of the proceeding;
  • liquidation of the debt – once the payment order becomes enforceable, the parties may file the liquidation of the debt, and the borrower’s assets may be seized by the court in favour of the plaintiff; and
  • public auction of the assets – once the payment order becomes enforceable, and even before the liquidation of the debt is approved by the court, the plaintiff may request for a hearing to be set for carrying out a public auction of the defendant’s/debtor’s assets (Article 448 of the Colombian General Procedural Code).

The General Procedural Code establishes two additional collection proceedings: (i) allocation special enforcement of security interests, by means of which the plaintiff/lender may request that the assets are allocated to him from the start of the collection proceeding (self-help remedies), and (ii) a procedure where the plaintiff may seek, in an expedited manner, that the debt is paid only out of the proceeds of the secured assets’ sale.

Considerations regarding foreclosure of security interests over movable assets: proceedings to foreclose on movable assets subject to security interest procedures include direct payment, special foreclosure and judicial proceedings.

According to the Colombian Code of Commerce, agreements to be performed in the Colombian territory are subject to Colombian law – eg, concession agreements, onshore trust agreements and engineering, procurement and construction (EPC) agreements. However, international arbitration can also be agreed upon the agreement and be enforceable. Agreements pertaining to in rem rights over assets located in Colombia (including agreements for the transfer of property and mortgage agreements) must be governed by Colombian law. If substantial parts of the agreement are to be performed outside Colombia, agreements may be governed by foreign law, depending on applicable conflict-of-law rules.

Financing agreements, in the context of cross-border financing transactions involving Colombian residents and foreign lenders, are typically governed by New York State law or English law. However, financing documents between Colombian residents and local banks must be governed by Colombian law, while trust agreements and security documents over assets located in Colombia are usually governed by Colombian law.

Under Colombian law a final and conclusive judgment of a foreign court can be enforced in Colombia without retrial of the merits, provided that the interested party submits the judgment to a proceeding known as "exequatur", before the Civil Chambers of the Colombian Supreme Court of Justice (Supreme Court), for the purpose of obtaining recognition of the subject judgment. The Supreme Court will grant the exequatur if the judgment satisfies the requirements set forth in articles 605 and 606 of General Procedure Code. Likewise, an arbitral award would be enforceable in Colombia without retrial of the merits, with a recognition of enforceability in the terms set forth in Law 1563 of 2012 (the Arbitral Statute). However, in accordance with Article 112 of the Arbitral Statute, regardless of the country in which it was made, the recognition of an arbitral award may be refused it is proven that it does not comply with the terms and conditions set forth in the applicable law.

Parties may validly submit to foreign jurisdiction. Nevertheless, if a Colombian judge has jurisdiction over a matter, the said judge may assume jurisdiction if the specific criteria for assumption of jurisdiction listed in the Colombian General Procedural Code applies. In such an event, the parties to the litigation should request from the Colombian judge a dismissal or stay of the Colombian proceedings. Additionally, please note that waiver of immunity will be valid and enforceable, provided that only the individual rights of the waiving party are affected.

The current exchange control regime authorises residents in Colombia to receive foreign loans from non-residents, if the following criteria are fulfilled: (i) any kind of entities domiciled abroad of Colombia, or (ii) individuals that do not spend more than 183 days in Colombia on a 365-day basis. However, natural persons qualified as non-residents are only authorised to grant foreign loans to residents in Colombia for special purposes (eg, leasing, purchase of bonds, among others).

The granting of guarantees in Colombia is regulated and authorised as per the exchange control regime, as it is considered a controlled transaction. The guarantees regulated by the exchange regime are: (i) the execution of guarantees given by any kind of non-residents to secure obligations of Colombian residents that reside in Colombia or abroad (eg, foreign loans), and (ii) guarantees given by residents to secure liabilities of other residents in Colombia or non-residents. In case of default and foreclosure, the guarantees will be considered a foreign loan under the exchange regime.

Pursuant to foreign exchange regulations, foreign investors in Colombia and Colombian residents that invest abroad must properly complete their operations through the foreign exchange market and register their investments with the Colombian Central Bank, in order for it to supervise investment flows.

Foreign investment is freely allowed in all sectors of the economy except for the following activities: (i) defence and national security, and (ii) processing and disposal of hazardous or radioactive products not produced in Colombia. The most important principle guiding foreign investment in Colombia is that foreign investments must receive equal treatment vis-à-vis those of Colombian investors (commonly referred to as the "national treatment principle").

The Foreign Exchange Regime classifies foreign investment in foreign direct investment (FDI) and portfolio investment. Some examples of FDI are:

  • the company’s capital contribution by means of the acquisition of shares, quotas in limited liability companies, or convertible bonds;
  • the acquisition of rights in trust agreements with trust companies under surveillance of the Superintendence;
  • the acquisition of real estate, directly or by means of a trust agreement, or securities issued in connection with a real state securitisation or REITs;
  • the contributions by investors in joint ventures and concessions, among others, when they do not represent company’s capital contributions and the income obtained is related to the businesses’ properties;
  • contributions to the assigned capital or the supplementary investment to the assigned capital of branches;
  • participation of non-residents in local private investment funds; and
  • intangibles.

Foreign investment in Colombia can be performed: (i) in currencies transferred through the exchange control market (eg, financial entities in Colombia and compensation accounts); and (ii) in relation to any legal agreement. To register the foreign investment in the Central Bank in case of foreign currencies, the investor must complete the transfer of funds through the foreign exchange market, filing a Foreign Exchange Declaration for Foreign Investments (formerly known as Form No 4). Foreign investments can also be performed in kind or by any legal agreement, which allows the registrations as foreign investment and can be completed with the Central Bank with a Declaration for Registration of Foreign Investments (Form No 11).

Foreign investment duly registered with the Central Bank gives the following rights to the investor:

  • to transfer abroad the dividends resulting from the investment;
  • to reinvest or capitalise dividends and income derived from the disposal of such investment; and
  • to transfer abroad any income derived from the sale of the investment, the liquidation of the company or portfolio or the reduction of the company’s capital.

Foreign investment duly registered with the Central Bank gives the following rights to the investor:

  • to transfer abroad the dividends resulting from the investment;
  • to reinvest or capitalise dividends and income derived from the disposal of such investment; and
  • to transfer abroad any income derived from the sale of the investment, the liquidation of the company or portfolio or the reduction of the company’s capital.

Companies incorporated in Colombia are not entitled to have onshore accounts (opened in local banks) in foreign currency. However, local companies are entitled to maintain offshore foreign currency accounts with banks located abroad. These accounts can be treated as free market bank accounts or compensation accounts. In this last case, bank accounts must be registered with the Colombian Central Bank to perform transactions under the exchange control regime (imports and exports of goods, international indebtedness, international investments, guarantees in foreign currency and derivatives). Compensation account holders are obliged to report before the Central Bank and to the National Tax Authorities. Furthermore, onshore foreign currency and domestic currency accounts maintained by non-Colombian residents are subject to numerous restrictions and are permitted only for specific purposes.

Under Colombian law the enforceability of financing documents and project documents does not require any filing or registration, with the exception of the above-mentioned in 2.1 Assets Available as Collateral to Lenders, 2.4 Granting a Valid Security Interest,and 4.3 Foreign Investment Regime, registration requirements before the national registry for security interests over movable assets (Registro Nacional de Garantías Mobiliarias), before the public instrument registry office (Oficina de Registro de Instrumentos Públicos) for security over real property, and before the Central Bank. Nevertheless, agreements with governmental entities must be previously authorised by the corresponding governmental authority of the national, regional or local order, and must be published in an official database.

In addition, indebtedness of public entities must fulfil certain requirements. Specifically, foreign indebtedness must be authorised in advance by the Ministry of Finance and Public Credit. Also, local indebtedness of public entities must be authorised in advance by the Ministry of Finance and Public Credit and requires the previous issuance of a favourable opinion of the Colombian National Planning Department (Departamento Nacional de Planeación).

In general, licences to hold land or natural resources depend on the particular case and project. Foreign entities are allowed to hold such licences. However, the exploitation of certain assets, including oil fields, mines and water sources, requires a concession granted by the competent public authority. Foreign entities may obtain any such concessions. A foreign entity that is a party to a concession agreement must establish a subsidiary or a branch in Colombia.

Under Colombian law agent and trust concepts are recognised and commonly used in project finance transactions. By means of a commercial trust agreement, an autonomous estate (patrimonio autónomo) is created in respect of the assets transferred to it. Once a person transfers the assets to said trust, that person ceases to be the owner of the assets and the trust acquires property title over them. Nevertheless, it is important to note that the assets transferred to a trust can be assets of the borrower itself or assets from a third party that agreed to provide them as collateral for the benefit of the lenders. Likewise, the agents are commonly used in project finance transactions where both local and international entities participate. The obligations and appointment of such agents is commonly regulated in specific agreements such as intercreditor agreements.

According to Law 1676, the registry before the national registry for security interests over movable assets (Registro Nacional de Garantías Mobiliarias) provides: (i) enforceability against third parties' (oponibilidad) effects to the security, and (ii) preferential rights with respect to other creditors in a foreclosure or bankruptcy proceeding to the respective secured party. Therefore, the securities registered before the national registry for security interests over movable assets (Registro Nacional de Garantías Mobiliarias) will be governed by Colombian law, particularly Law 1676 which should be applied with preference to rules contained in other laws for the constitution, enforceability against third parties, register, preferential rights with respect to other creditors and foreclosure procedures of securities. Therefore, the rules of priority regarding movable assets and mortgages depend on the moment the registration is made.

Priority of payment is established in the Colombian Civil Code and cannot be contractually varied. Under Article 2493 and following the Colombian Civil Code, claims are classified as follows:

  • first-class claims (judicial costs, salaries and other payments derived from employment contracts, and liabilities in favour of the tax authorities);
  • second-class claims (claims secured with a pledge);
  • third-class claims (claims secured with a mortgage);
  • fourth-class claims (obligations with suppliers of raw materials or services related to the core business); and
  • fifth-class claims (all other creditors).

In principle, the claims of each category must be paid in full before any claim in the next category receives any distribution. However, pursuant to Law 1676, secured creditors now have privileges within insolvency proceedings. Moreover, under certain circumstances the priorities may be modified in the reorganisation plan with the approval of the creditors representing at least 60% of the votes recognised by the insolvency court. Additionally, contractually certain subordination of payment in the project finance deals can be agreed but can never be contrary to the law. Therefore, in an insolvency proceeding contractual subordination can survive if the judge deems so. However, recently we have seen in different arbitral tribunals that contractual subordination may not uphold.

In general terms, project companies are organised under Colombian law as sociedades por acciones simplificadas. Articles 471 and 474 of the Colombian Commercial Code establishes that in order for a foreign company to undertake permanent business in Colombia, it shall establish a branch with domicile in the national territory, for which it shall comply with the requirements of the law. In this sense – and as the project company will carry out permanent activities in Colombia as they will intervene as a contractor in the execution of works or in the provision of services, participate in any way in activities whose purpose is the management, use or investment of funds from private savings, engage in the extractive industry in any of its branches or services, or obtain from the Colombian state a concession or one that has been assigned to it under any title, or that in any way participates in the exploitation of the same – it should be organised under the laws of Colombia or have a subsidiary. Additionally, concession agreements normally stipulate this requirement in the tender offer of the project.

Law 1116 of 2006 ( the Insolvency Regime) sets forth the general regime for reorganisation and liquidation/winding-up proceedings for business entities in Colombia. Business reorganisation proceedings seek to preserve sustainable businesses and normalise its commercial and financial relationships through an operational, administrative and/or general restructuring. On the other hand, judicial liquidation proceedings seek to liquidate the assets of a company in a prompt and orderly manner with a view to satisfy creditor’s claims.

Business Reorganisation Proceedings: once a reorganisation petition is filed, the debtor will be stayed from performing certain actions without prior authorisation from the insolvency judge. These actions include:

  • amending the by-laws;
  • granting or enforcing security interests over a debtor’s assets, including collateral trusts;
  • paying or otherwise compensating any outstanding obligations;
  • entering into arrangements or settlements regarding any outstanding obligations;
  • terminating judicial proceedings; and
  • transferring assets and carrying out operations out of the ordinary course of business.

Failure to comply with the above-mentioned limitations may result in different economic and administrative sanctions to the company.

Once the insolvency court admits a business reorganisation petition against a debtor, creditors must suspend and cannot commence any collection proceedings against the debtor, and any ongoing proceedings will be merged with the reorganisation proceeding. Further, if any forbidden act is executed after admission of the debtor to an insolvency proceeding without the prior approval of the insolvency court, the relevant act would be ineffective ipso jure (without the need for a declaration by a court of law), aside from the fines that may be imposed upon officers and directors of the debtor and the postponement of the payment of the creditor’s claim until any and all other obligations have been paid.

Upon the commencement of a reorganisation proceeding in Colombia, secured lenders are granted priority over unsecured creditors for payment (including that of employees’ salaries and taxes). Therefore, secured creditors are allowed to enforce their security interests during the reorganisation proceeding under certain circumstances; for instance, if the secured assets are not deemed necessary for the continuation of the operations of the debtor’s business. In general, from the date of commencement of the reorganisation proceeding, any demand for execution or any other collection proceeding against the debtor regarding movable assets or real property necessary for the operation of the debtor’s business will be stayed. Please note that a claim filed by a creditor under an insolvency proceeding will be deemed to be secured up to the value of the encumbered asset.

Upon the commencement of judicial liquidation proceedings, the debtor’s encumbered property may be excluded from the liquidation estate for the benefit of the secured creditors or beneficiaries of the security interest, subject to certain rules. Therefore, if there is no reorganisation agreement and the company enters into liquidation, creditors will be paid in their respective order of priority, with preference to the specific assets over which said creditors have security interests (provided that there are still available funds and assets after paying creditors with a higher ranking).

In the course of insolvency proceedings, any creditor, the promotor or the liquidator may request reversal or declaration of fraudulent transfer of some acts executed by the debtor when such acts adversely affect any creditor or the priority order among creditors. Pursuant to the Insolvency Regime, the acts that may be revoked by the insolvency court are the following.

  • Any act that results in the transfer or conveyance of property, including:
    1. transfer to a trust with collateralisation purposes;
    2. payment of a pre-petition claim;
    3. granting or cancellation of a lien; and
    4. execution of a lease agreement that obstructs the insolvency proceeding, if such act took place within 18 months prior to the commencement of the insolvency proceeding.
  • Any gratuitous act executed within 24 months prior to the commencement of the insolvency proceeding. The Superintendence of Companies has held that the act shall be presumed to be gratuitous if:
  • (a) the act was verbally concluded;
  • (b) the parties did not agree on compensation for the debtor; or
  • (c) although the parties agreed on compensation for the debtor, there is no evidence that such compensation was actually paid.
  • Any amendment to the by-laws executed within six months prior to the commencement of the insolvency proceeding in either of the following cases:
  • (a) if the equity of the debtor was reduced; or
  • (b) if the liability regime of the shareholders was altered.

Additionally, under Colombian law, claims are classified as described in 5.4 Competing Security Interests.

With regard to the enforcement of security interests during reorganisation proceedings, Law 1676 grants secured creditors priority over unsecured creditors. Thus, secured creditors are able to enforce their security interests during insolvency proceedings if the assets are deemed to be “necessary”. To enable the borrower or guarantor to carry on with its business in the ordinary course, essential assets will be stayed. Notwithstanding the foregoing, secured creditors’ collection proceedings to enforce security interests over assets that are not “necessary” for conducting debtor’s business (eg, non-essential assets), or that with the passage of time may risk deterioration or loss, may be commenced or, as the case may be, moved forward, with the prior approval of the insolvency court.

The risks the lenders face if the guarantor becomes insolvent, is that currently the valuation and execution of the guarantees under insolvency proceedings is yet to be defined. Nowadays, the recognition of the future flows of a security trust is in dispute before the Superintendence of Corporations, in accordance with the project finance scheme. Thus, in a reorganisation procedure, shareholders who are also suppliers may be in a better priority of payment of their credits as fourth-class suppliers than lenders if their credits are qualified as unsecured.

The general bankruptcy regulation is the Insolvency Regime, which applies to all entities unless a specific exception is applicable. In general, state-owned entities at the regional level (nivel territorial), State-owned universities, health promotion agencies (entidades promotoras de salud), stock exchanges, entities under surveillance of the Superintendence of Finance (Superintendencia Financiera – SFC) or the Superintendence of Solidary Economy (Superintendencia de la Economía Solidaria – SES), companies with public capital, companies that provide public services and non-trader individuals, have a different regulation in connection with bankruptcy proceedings than all other individuals or entities.

Under the Colombian National Constitution, the Colombian government must be compensated, through the payment of royalties, for the exploitation of non-renewable natural resources. The amount payable depends on the type of non-renewable natural resource. The general taxation regime would be applicable.

Other than the obligation to complete foreign exchange operations through the foreign exchange market, there are no restrictions, fees or taxes applicable to foreign currency exchange.

Insurance policies over project assets may be payable to foreign secured parties (unless this is specifically restricted by any project document). In any case, the payment of any amounts resulting from insurance policies to foreign creditors must be reported to the Central Bank for statistical purposes.

All interest rate payments will be subject to a withholding tax at a 15% tax rate. This rule may vary depending on any double taxation treaties in place and any special rules for a specific project finance.

Since withholding tax must be applied by the payer, gross-up clauses are used whenever parties have agreed on a specific net amount.

Loans granted abroad to Colombian credit establishments and loans granted to Colombian public entities are not subject to any withholding. Multilateral agencies in which Colombia is a member state are generally exempt from all Colombian taxes.

There is no specific tax applicable to the proceeds in connection with enforcement of a security interest, to the extent that any such payment is not sourced as Colombian income. Note, however, that if a guarantee is granted by a Colombian party to a foreign related party (principal debtor), transfer pricing rules may apply and require for the Colombian guarantor to charge an arm’s-length consideration for the guarantee.

Regarding the requirements to deduct the interest paid, it is important to mention that if no withholding applies, such payment of interest made by the project company will not be deductible. Conversely, if the interest payments made are subject to the corresponding withholdings, they will be fully deductible.

According to Colombian thin capitalisation rules, interest payments will not be allowed as a deduction if they originate on loans whose average amount throughout the corresponding fiscal year exceeds the result of multiplying by three the taxpayer’s net worth determined at 31 December of the preceding fiscal year. These Colombian thin capitalisation rules are aimed at limiting the deductibility of interest payments/accruals derived from debts that exceed the taxpayer’s net equity (patrimonio líquido) by more than three times (a 3:1 ratio). Note that Colombian thin capitalisation rules apply to both local and foreign loans as well as debts with related and unrelated parties.

Currently, there are no specific incentives for foreign investors or creditors. Nonetheless, please note that some incentives may apply depending on the type of project that is being financed in Colombia. For example, interests on loans granted to special purpose companies engaged in public-private partnerships for infrastructure projects may be subject to a preferential 5% withholding if the term of the loan is at least eight years. Also, certain relief or reduced withholdings may apply if the investor or creditor is a resident of a country with which Colombia has a treaty to avoid double taxation (eg, Canada, Chile, Mexico, Portugal, Spain and Switzerland, among others).

Foreign investment and loans are typically subject to income tax to the extent that they produce Colombian-sourced income (eg, dividends, interests, royalties, etc). Since 2015, a net wealth tax was created that also applies to foreign persons who hold Colombian assets in excess of a specific amount. Certain assets can be excluded from the tax base amount (eg, shares in Colombian companies), while others must be included and taxed (eg, loans to Colombian debtors).

Finally, it is noteworthy that a registration tax may apply on any document that requires registration with the Chamber of Commerce or the Office of Public Records (eg, public deeds or mortgages). A case-by-case analysis is required to determine if registration taxes will be applicable, and the tax base amount.

Under Colombian law, interest on internal operations in legal currency must not exceed one-and-a-half times the current banking interest (IBC) certified by the Colombian Superintendence of Finance, in accordance with Article 884 of the Code of Commerce. Usury is a criminal offence stipulated in Article 305 of the Colombian Penal Code, where any profit or advantage received, collected, directly or indirectly, in exchange of a loan or for the sale of goods or services that exceeds the IBC is considered as contrary to the law. Likewise, Article 886 of the Colombian Code of Commerce establishes that solely outstanding interest shall bear interest only from the date of the creditor's legal action, or by agreement subsequent to maturity, provided that in either case interest is due at least one year in advance. This is in accordance with Law 45 of 1990.

According to the Colombian Code of Commerce, agreements to be performed in the Colombian territory are subject to Colombian law. If substantial parts of the agreement are to be performed outside Colombia, agreements may be governed by foreign law, depending on applicable conflict-of-law rules. However, international arbitration can also be agreed upon the parties.

Financing agreements, in the context of cross-border financing transactions involving Colombian residents and foreign lenders, are typically governed by New York State law or English law. However, financing documents between Colombian residents and local banks must be governed by Colombian law, while trust agreements and security documents over assets in Colombia are usually governed by Colombian law. Therefore, cross-border multi-currency loans involving foreign and local banks would require certain financing agreements (eg, local loan agreements) in order to be governed under Colombian law.

Agreements to be performed in Colombia are governed by Colombian law – eg, concession agreements, onshore trust agreements and engineering, procurement and construction (EPC) agreements. Agreements pertaining to in rem rights over assets located in Colombia (including agreements for the transfer of property and mortgage agreements) must be governed by Colombian law.

Brigard Urrutia

Calle 70 Bis 4-41
Bogotá
Colombia

+571 346 2011

+571 310 0609

mercadeoycomunicaciones@bu.com.co www.bu.com.co
Author Business Card

Law and Practice

Authors



Brigard Urrutia is recognised as a leading law firm in Colombia and one of the most prestigious in Latin America, with presence in Barranquilla, Cali and Medellín. The firm’s size gives it the ability to offer an unparalleled range of first-class legal services and bespoke solutions to its global client base which includes leading domestic and foreign financial institutions, multinational corporations, private equity/venture capital funds, state-owned enterprises, governments and multilateral agencies. Their banking and financial services practice has the experience and knowledge required to advise entities on any type of regulatory matter before the Colombian authorities and financing transactions, including: syndicated loans, structured financing, project finance, asset-backed financing and implementation of collateral models. The practice is highly specialised and regarded as one of the leading departments in the market and advises important clients such as JP Morgan, HSBC, BNP Paribas, Credit Suisse, Goldman Sachs, SMBC, Citibank and BTMU.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.