In Colombia, a company is considered insolvent when it is no longer able to meet its financial obligations in an orderly and regular manner. Colombian Insolvency Law (Law 1116 of 2006) recognizes two main legal scenarios in which insolvency may arise, allowing companies to act either after a default has occurred or before the situation becomes irreversible.
1. Actual Default on Financial Obligations
A company is deemed to be in default when it fails to pay two or more obligations to at least two different creditors for a period exceeding 90 days, provided that the unpaid obligations represent at least 10% of the company’s total liabilities, as reflected in its financial statements.
This situation reflects a material disruption of the company’s payment capacity and typically triggers the need for immediate legal and financial intervention.
2. Imminent Insolvency (Foreseeable Inability to Pay)
Colombian law also allows companies to act before an actual default occurs, through what is commonly referred to as imminent insolvency.
Imminent insolvency arises when a company can reasonably foresee that it will be unable to meet its financial obligations in the near future, even if it is still complying with its payments at the time of filing. This mechanism is designed to encourage early action, preserve business value, and avoid the destruction of the company’s operations, employment, and commercial relationships.
From a practical standpoint, this option is particularly relevant for companies experiencing:
- Persistent liquidity constraints
- Deteriorating cash flow
- Increasing debt pressure
- Structural operational or financial imbalances
Acting at this stage often provides greater flexibility, broader negotiation margins with creditors, and a higher likelihood of successfully preserving the business.
Why Early Legal Action Matters
One of the core objectives of the Colombian insolvency regime is not liquidation, but business preservation. The law seeks to protect creditor rights while maintaining viable companies as ongoing economic units and sources of employment.
However, the effectiveness of these mechanisms largely depends on timely decision-making. Delaying legal action may significantly reduce the available options and expose directors and managers to additional legal and financial risks.
Key Takeaway for Business Owners and Investors
Insolvency does not necessarily mean the end of a business. When addressed early and strategically, it can become an opportunity to reorganize, stabilize operations, and protect long-term value.
Understanding whether a company is facing actual default or imminent insolvency is a critical first step in determining the most appropriate legal path forward.
Does insolvency mean that a company must shut down its operations?
No. Insolvency does not automatically mean that a company must cease its activities. Colombian insolvency law is designed primarily to preserve viable businesses through reorganization mechanisms. When addressed in a timely manner, insolvency can allow a company to restructure its obligations, stabilize operations, and continue operating under a court-supervised framework.
When should a company seek legal advice in an insolvency scenario?
Ideally, legal advice should be sought before an actual payment default occurs. When a company identifies early signs of financial distress or imminent insolvency, acting promptly significantly increases the range of available legal options and the likelihood of reaching effective agreements with creditors.
Can foreign-owned companies or branches of foreign companies use insolvency proceedings in Colombia?
Yes. Colombian insolvency proceedings are available to foreign-owned companies, branches of foreign companies, and other eligible business structures operating in Colombia, provided they meet the legal requirements established under Law 1116 of 2006. This allows international investors to access the same legal protections as local businesses.
What happens if a company delays action and ignores early signs of insolvency?
Delaying action may severely limit the company’s legal options and increase financial and operational risks. In many cases, late intervention leads to forced liquidation, loss of business value, and potential exposure for directors and managers. Early legal assessment is key to preserving value and avoiding irreversible consequences.
If your company or its subsidiary in Colombia is facing financial pressure or early signs of insolvency, seeking legal advice at the right moment can make a decisive difference.
Our team assists local and international businesses in assessing their financial situation, evaluating available legal mechanisms, and designing tailored insolvency and restructuring strategies under Colombian law.
Contact us at corporate@nietolawyers.com to discuss your situation confidentially.
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