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Corporate Insolvency Law Revisions Proposed in New “Law of First Employment”

December 19, 2010

In a bold attempt to generate greater employment in the formal economy, President Santos has proposed to the Colombian Congress the much-heralded “Law of First Employment.” 

As I explained in my post on the proposal, the Government will create incentives (tax breaks, financing options, and the like) to encourage creation of small businesses by, and first time employment (including “telework”) of, youths under age 28, certain technical professions, the agricultural industry, women under 40, and in three specific states. A key part of the program is the progressive implementation of income taxes and “parafiscal” payments (like social security, health insurance, and the like) – initially at zero percent of the norm and phased in over 5 to seven years. These breaks apply to employers of vulnerable groups and low-income individuals.  The National Government will also establish a technologically modern national employment search database to help connect workers and jobs.

The bill also aims to simplify labor-related procedures. It prohibits employer discounts from salary payments, provides uniform procedures for employee loans, vacation compensation, and housing support.

To simplify business procedures, there are substantial revisions to the corporate insolvency law, known as Law 1116 of 2006.  Reform is needed.

In a post I wrote about dispute resolution procedures in Brazil, Mexico, and Colombia, I found that the World Bank’s 2010 Doing Business survey found, “Colombia compares favorably to Latin America and the Caribbean on closing businesses, with rankings that are fairly high. Colombia’s bankruptcy procedures for closing a business are considerably better-ranked than the LAVCA Scorecard ranks them.”  True enough, but the World Bank survey, I also found, was subject to some methodological criticism. Therefore I also looked to the Latin America Venture Capital Association (LAVCA) Scorecard, which  ranks Colombia lower. “When it comes to bankruptcy procedures,” I found, “LAVCA scores Brazil 3 out of 4 points, Colombia 2 out of 4 points, and Mexico 1 out of 4 points.” 

LAVCA’s leadership knows Colombia quite well, and its criticism and calls for improvement merited a significant response.

What are the changes? Many deadlines have been shortened in the process to identify debts and assets, resolve objections, propose a voluntary agreement for reorganization, or adjudicate the case, if a voluntary plan cannot be agreed up, starting with an attempt to agree on a plan of liquidation. 

Procedures have also been established to reverse decisions to liquidate companies, to clarify that companies in reorganization or dissolution may be the subject of mergers and divisions, to adjudicate assets that appear after liquidation, and to specify that debtors may serve as reorganization “promoters.”  See translation of new bankruptcy procedures.

 

 

 

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