CMS Expert Guide for taking security in Colombia

Introduction:

Under Colombian law, Guarantee generally means any obligation that is contracted by one person (an individual or a legal entity) who becomes liable for the obligations of another person (an individual or a legal entity).

There are two types of Guarantees under Colombian law: (i) Personal Guarantees -garantías personales- and (ii) Guarantees on Real Estate or Personal Property -garantías reales-.

For purposes of this expert guide, whenever we refer to “Guarantee” without specifying anything else, it should be understood to include both types of guarantees.

Under Colombian law, there are many differences between Personal Guarantees and Guarantees on Real Estate or Personal Property.  For example, the beneficiary of a Personal Guarantee has the right to go against the guarantor for payment. But it does not have any right regarding any specific real or personal property of the guarantor.  On the other hand, the beneficiary of a Guarantee on Real Estate or Personal Property does not have any right to go against the guarantor for payment. It does have, however, the right to collect payment against the specific real or personal property that has been pledged or mortgaged to it by the guarantor.

For the purposes of this Guide, reference to Personal Guarantees means what it is known in Colombia as “garantía personal”. Reference to Guarantees on Real Estate means mortgage and reference to Guarantees on Personal Property means guarantees over movable assets or securities, which are regulated under Law 1676/2013.

Guarantee by an individual

Yes. According to Colombian laws, an individual can secure obligations of another person (including an individual and a legal entity).

Guarantee by a legal entity

Regarding legal entities, the general rule is that they are authorized to grant Guarantees to secure obligations of another person (including an individual and a legal entity), provided that the legal entity granting the guarantee has capacity and authority do so. The capacity of a legal entity is determined by its bylaws -estatutos-.

Legal entity’s bylaws include the main corporate purpose, providing a “clear and complete” list of activities that are part of said main corporate purpose.  Therefore, legal entities have “capacity” and “authority” to perform said activities -main activities or main purpose-.  In certain types of legal entities, there is no need to include a “clear and complete” list of activities that are part of the “main corporate purpose” but rather a general description like: “perform all legal activities, agreements, negotiations, contracts, except for those expressly prohibited in the bylaws, or those that require authorization of a corporate body”.

In addition to “main corporate purpose activities”, legal entities also have capacity and authority to perform (i) all activities required to develop the main activities and main purpose, and (ii) all activities required to exercise the rights and fulfill the obligations legally or conventionally derived from the existence and activity of the company.

Therefore, provided the legal entity has capacity and authority to do so based on the abovementioned rules, a legal entity can grant a Guarantee to secure obligations of another person (including an individual and a legal entity).

No. Please see “Introduction” section above.

No.

Yes. Please see answer to question 1 above.

Yes. Please see answer to question 1 above.

Yes. Please see answer to question 1 above.

Limitations of guarantor’s obligations vis a vis beneficiary’s obligations:

The guarantor of a Personal Guarantee may not undertake a more stringent obligation than the one undertaken by principal debtor.  It may undertake an equal or less stringent obligation than the one undertaken by the principal debtor.

Through the Personal Guarantee, the grantor will be bound to pay a sum of money in exchange of something of equal or greater value.

Guarantees on Real Estate or Personal Property (securities) to replace Personal Guarantee:

The guarantor of a Personal Guarantee is generally not permitted to replace it with a Guarantees on Real Estate or Personal Property (security) without the consent of the creditor/beneficiary of the Guarantee.

Guarantor’s liability:

There are three degrees or levels of “negligence” under Colombian law: Gross negligence (culpa grave), ordinary or slight negligence (culpa level) and low negligence (culpa levísima).

It is understood that a person has acted with gross negligence (culpa grave) if said person “did not manage the business of others with at least the care that even a negligent person or a person with poor prudence usually uses in its own businesses/affairs”.

It is understood that a person has acted with ordinary or slight negligence (culpa level) if said person “did not act with at least the care that a person ordinarily employs in its own businesses/affairs”.

It is understood that a person has acted with low negligence (culpa levísima) if said person “did not act with at least the care that a careful and cautious person employs in the management of its own important businesses/affairs”.

The guarantor of a Personal Guarantee shall be liable “up to slight negligence” in connection with all the obligations it must comply with.  In other words, the guarantor of a Personal Guarantee shall be liable if it does not act with at least the care that a person ordinarily employs in its own businesses/affairs.

Transferability:

The rights and obligations of guarantors of Personal Guarantees, that are individuals/natural persons, are transferred to heirs of the guarantors.

Prepayment of the obligation:

A guarantor of a Personal Guarantee who makes payment before the expiration of the principal obligation’s term may not assert a counterclaim against the principal debtor until expiration of said term.

• The guarantor of a Personal Guarantee must be domiciled in Colombia.
• Although not mandatory, we recommend that the Personal Guarantee be in writing.
• Although not mandatory, we recommend that the Guarantee contract be in Spanish. Please note, two column Spanish-English (or any other language) documents are fully valid, case in which it is recommendable to agree that the official language is Spanish.
• Although not mandatory, we recommend including a “jurisdiction clause” in Personal Guarantee contracts, according to which any dispute between the parties in connection with the contract should be subject to Colombian courts or arbitration.
• Colombian courts have exclusive jurisdiction in connection with foreclosure on Guarantees on Real Estate or Personal Property.
• Although not mandatory, we recommend including an “applicable law clause” in Guarantee contracts, according to which the contract should be subject to Colombian law. Please note, even if there is no “applicable law clause” in the Guarantee contract, Colombian courts may decide that Colombian law applies, if performance of the Guarantee’s obligations must be performed in the country.

Yes.

Personal Guarantees entail “accessory obligations” and thus are dependent on the validity of principal obligations.  As a result, a Personal Guarantee terminates if the principal obligation is extinguished, wholly or partially.

Guarantees on Real Estate may or may not entail “accessory obligations” and therefor their validity may or may not depend the validity of principal obligations.

Guarantee on Personal Property (securities) entail in theory “principal obligations” and thus, in theory, are not dependent on the validity of principal obligations.  However, defences that the debtor of a guarantee can propose to its beneficiary include “the extinction of the guaranteed obligation” and “unenforceability of the guaranteed obligation because it is subject to a term or condition precedent”.

Yes. Personal Guarantees and Guarantees on Real Estate can be continuing for as long as guaranteed obligations remain outstanding.

However note, Guarantees on Personal Property must be registered in the Colombian Securities Registry (Registro de Garantías Mobiliarias de Colombia – “RGM”) for the period of time agreed upon by the parties.  However, if the term is not specified by the parties, the default term will be five (5) years.  In any case, said terms may be extended in the RGM for periods of three (3) years until the security is terminated (i.e. due to fulfillment by the principal debtor of its obligations).

Yes. Please note that there are certain foreign exchange regulation requirements that need to me fulfilled and complied with. (Please see answer to question 15).

Yes.

It is worth mentioning that Commercial Trust (fiducia mercantil) is a very useful and broadly used instrument to secure obligations in the Colombian market.  Specifically Security Trust (fiducia en garantía), a type of Commercial Trust under Colombian regulation.

Security Trust (fiducia en garantía) must be registered in the RGM.

Creditors are entitled to assign their credits/rights to a new creditor unless said “assignment right” is specifically prohibited by the parties.

However, if the creditor assigns its credit/right to secure/guarantee an obligation with said credit/right, then the assignment will take effect among the assignor (guarantor), the assignee (secured creditor), and the debtor of the assigned credit (once it has been notified), regardless of the existence of any agreement prohibiting or restricting assignment of the credit (without prejudice to the parties’ rights under the contract in case assignment results in breaching of contractual obligations).

Assignment of creditor's credits/rights to a new creditor requires actual delivery of the title or document evidencing the credit. If such document does not exist, the assignment may be created by the assignor issuing a document to the assignee.

Assignment of a credit/right does not have any effect against the debtor/obligor or third parties (i.e. guarantor) until it has been notified by the assignee to the debtor or accepted by the latter.

Assignment of a credit/right includes the Personal Guarantees, privileges, and mortgages (generally Guarantees on Real Estate or Personal Property), but it does not transfer the personal defences the assignor has against the debtor/obligor.

Personal Guarantees may not be presumed, nor should they extend beyond the stated in the Guarantee agreement.  However, parties may agree in the Personal Guarantee’s agreement (and they typically do) the possibility to make changes to guaranteed/secured obligations and that said changes would be covered by the Personal Guarantee.

Regarding Guarantee on Personal Property, any changes to the guaranteed obligations must be agreed upon by the parties.  However, parties may agree in the Guarantees on Personal Property’s agreement (and they typically do) the possibility to make changes to guaranteed/secured obligations. Any change to the secured obligations must be registered in the RGM.

Under Colombian law, there is no specific conflict of law rule that clearly precludes Colombian entities/companies from consenting to the application of a foreign law, provided that a relevant international element exists in the relationship. However, according to Article 869 of the Commercial Code “contracts executed/performed in Colombia shall be ruled by the Colombian law” (Lex Loci Solutionis).

Therefore, in order to assess whether the agreement at hand could be subject to a law different from Colombian law, it is important to verify if the parties´ main obligations under the agreement are performed in Colombia or abroad.

Choice of law in international arbitration:

Colombian conflict of law rules are different when it comes to international arbitration. Under Colombian law, provided certain requirements are met, the parties to a contract can agree that all disputes arising out of or in connection with the contract shall be finally settled by one or more arbitrators appointed in accordance with certain international arbitration rules. Requirements of international arbitration are typically met in connection with Guarantee contracts where the parties are based in different jurisdictions. Under the “conflict of law rules” of international arbitration, “the arbitral tribunal shall decide in accordance with the rules of law chosen by the parties”. Therefore, whenever there are significant doubts as to whether or not the parties to an agreement can agree to “foreign law”, the parties may choose international arbitration as a mean to mitigate the risk.

However, regarding Guarantee on Real Estate or Personal Property, due to restrictions or limitations, the general rules is that they must be subject to Colombian law.

Other comments:

1. Public Policy Considerations: the chosen governing law should not violate Colombian public policy. Provisions that contravene fundamental principles of Colombian law may be deemed unenforceable.
2. Mandatory Rules: Some provisions of Colombian law are considered mandatory, and the parties cannot contractually override them. Guarantees on Personal Property are subject to several Colombian Mandatory Rules.  For example, according to Mandatory Rules applicable to Guarantees on Personal Property, the law applicable to the creation, enforceability, registration, priority, and enforcement of the Guarantee shall be that of the State where the asset subject to the Guarantee is located.  But if the secured asset is commonly used in more than one State, the applicable law shall be that of the State where the grantor is located. And if the secured asset is subject to registration in a special registry, the applicable law shall be the law of the State under whose jurisdiction the registry is located.

Under Colombian regulation on Guarantees on Real Estate, contracts entered into outside the country shall grant mortgages on assets located in Colombia, provided they are fully registered in the Real Estate Public Instruments Registry (Registro de Instrumentos Públicos). Consequently, it is understood that foreign law may be stipulated in a Guarantee on Real Estate agreement, concerning property located in Colombia. Please note this is not common at all and there may be some practical challenges for registration.

Registration and Formalities: Depending on the nature of the Guarantee, there may be specific registration and formality requirements under Colombian law, and these requirements are typically subject to the law of the jurisdiction where the property is located.

In relation to Personal Guarantees, there are no rules prohibiting the parties to agree on foreign jurisdiction or international arbitration. However, considering that the guarantor of Personal Guarantees must be domiciled in Colombia and that, in general, the obligations of the guarantee should be typically fulfilled/complied with in the country, Colombian courts may determine that the applicable jurisdiction for the Personal Guarantee contract shall be Colombian.  Also, parties to a Personal Guarantee contract may agree that controversies may be solved by Colombian courts or domestic arbitration.

However, for the same reasons stated above, the general rule regarding Guarantees on Real Estate or Personal Property is that disputes in connection with them must be subject to Colombian courts.

According to the law applicable to Guarantees on Personal Property, “Any controversy that arises regarding the constitution, interpretation, priority, compliance, execution and liquidation of a security interest may be submitted by the parties to conciliation, arbitration or any other alternative dispute resolution mechanism, in accordance with national legislation. and applicable international treaties or conventions.”.

According to External Resolution No. 1 of 2018 and Regulatory Circular DCIP-83 of the Colombian Central Bank -Banco de la República-, Personal Guarantees in foreign currency may be granted by Colombian residents and non-residents to Colombian residents non-residents, or foreign exchange market intermediaries to secure any obligation.

As a general rule, issuance of a Personal Guarantees does not trigger any reporting obligation, except if and when the Personal Guarantee has been granted by a foreign exchange market intermediary (i.e. a bank).

However, whenever payment of the Personal Guarantee creates a foreign exchange external credit, said external credit must be reported to the Central Bank.

The hardening period (English law) is known as “Suspect Period” -periodo de sospecha- under Colombian law. The Suspect Period refers to the period preceding the declaration of bankruptcy or insolvency where certain transactions carried out by the debtor may be reviewed and contested if they are deemed to have been made to the detriment of creditors. The goal is to prevent the debtor from making improper asset transfers before the declaration of insolvency.

During insolvency proceedings, actions may be brought before the Bankruptcy Judge seeking revocation or nullification of certain acts or transactions carried out by the debtor when such acts have harmed any of the creditors or affected the order of payment priority and when the assets comprising the debtor's estate are insufficient to cover the total recognized credits.

Depending on the facts at hand, the Suspect Period may by 6, 18 or 24 months. 

Yes to both. 

Yes, subject to same considerations as discussed in sections 1, 3 and 4 above.

A Guarantee on Real Estate must be executed through a public deed (public document granted before a Notary Public).

A Guarantee on Personal Property does not require to be notarized, but we do recommend it (reconocimiento en texto y firmas ante Notario).

Yes.

Guarantees on Real Estate must be registered in the Colombian Real Estate Public Instruments Registry. Otherwise, they will have no value.

Guarantees on Personal Property must be registered before the RGM (please see sections 8, 11, 12 and 13).

Guarantees on Real Estate contracts must be in Spanish (see section 17 (k) above).

Regarding Guarantee on Personal Property please see section 5 above.

Yes, regarding Guarantee on Personal Property that are subject to registration. 

In general terms, a debtor’s assets can all be used to satisfy debts owed to creditors. However, there are some exceptions. For example, assets secured with a security interest over movable assets or security interest can be excluded from the total assets which can be divided among creditors (extra-mass assets). Therefore, generally, these assets are not subject to distribution among all creditors.

Rights of priority of secured creditors are the following: credits secured with a security interest over movable or real estate assets would be paid before first, second, third, fourth, and fifth class priority credits. However, please note that according to ruling C-145/18 of the Colombian Constitutional Court this priority only proceeds provided that the other assets of the debtor are enough to ensure payment of (i) child support obligations (which only apply when the debtor subject to insolvency is an individual), and (ii) obligations regarding wages and labor/employment benefits derived from the employment contract. Otherwise, the pledged assets would be used to satisfy those obligations.

Then, credits are paid in the following order:

1. First priority: for example, labor, pension, and tax obligations.
2. Second priority: creditors with other rights over movable goods.
3. Third priority: this position included mortgage creditors. However, since Law 1676 of 2013 changed the priority of security interests, they are now even above first priority security interests.
4. Fourth priority: for example, strategic suppliers.
5. Fifth priority: creditors that do not fall within any of the above categories.

The obligations with superior rights to those of secured creditors are the ones related to child support obligations, and obligations regarding wages and labor/employment benefits derived from the employment contract.

Establishment of security and level of security regulation is generally:

Security easily established and encumbrances easily checked.

According to Colombian laws, when a digital signature is affixed to a data message, it is presumed that the subscriber intended to authenticate that data message and be bound by its content.

The digital signature will have the same force and effects as a handwritten signature, provided that: (i) it is unique to the person using it; (ii) it can be verified; (iii) it is under the exclusive control of the user; and (iv) it is linked to the information or message in such a way that if the content is modified, the signature is invalidated.

Additionally, Guarantees on Real Estate (mortgage) must be executed through a public deed. The digital or electronic signature will have the same effects as the autographic signature for the authorization and execution of public deeds.

Furthermore, since 2021, the Ministry of Housing in Colombia, in collaboration with the Superintendency of Notaries and Registration, aims to regulate electronic mortgages. Following a test conducted in 2021, these entities plan to issue regulations for the comprehensive digitization of both new and used properties in Colombia.

Regarding Guarantees on Personal Property, digital signatures are permitted, provided they meet the previously mentioned requirements. 

Yes. Guarantees on Real Estate must be registered at the Real Estate Public Instruments Registry. Said information is publicly available and accessible online.

Guarantees on Personal Property must be registered at the RGM. Said information is also publicly available and accessible online.

The secured creditor must be registered as such in the RGM and will be responsible for the registration of the Guarantees on Personal Property in the RGM.

Guarantees on Real Estate must be granted by the owner of the real estate through a public deed and subsequently registered at the Public Registry Office as a public instrument. The registration can be carried out by the real estate owner or any interested party who must provide an original or special authentic copy of the public deed. If the registration is conducted by an entity or individual other than the real estate owner, the owner must be notified within the next 5 days.

All in all, time required for perfection of any type of Guarantee is quick.

Cost for all Guarantees is low, except regarding Guarantees on Real Estate where cost may vary substantially depending on the value of the Guarantee, the way the Guarantee is structured and the length of the document.

Time: quick.

Cost: low

All Guarantees:

Time: quick.

Cost: low

Guarantees on Real Estate:

• Cost may vary substantially depending on the value of the Guarantee, the way the Guarantee is structured and the length of the document.
• Time: quick.

Required only regarding Guarantees on Real Estate:

• Cost may vary substantially depending on the value of the Guarantee, the way the Guarantee is structured and the length of the document.
• Time: quick.

Guarantees on Real Estate: 
The following taxes and fees must be paid:

1. Notarial Expenses: 3 x 1.000 or 3.5 x 1.000 over the mortgage’s value plus processing costs.
2. Beneficencia Tax: 1% of the mortgage's value plus the tax receipt (boleta fiscal) value (USD$ 7 approx.)
3. Registry Tax: is calculated in each case depending on the amount of the mortgage x the value of the tariff for each year (issued by the competent authority with formulas depending on the mortgage’s value) x 2%.

Yes, if agreed upon by the parties..

Yes, if agreed upon by the parties.

Yes, if agreed upon by the parties.

If the debtor, who is also the Guarantor, becomes insolvent:

The right to enforce a Guarantee on Real Estate or Personal Property arises (is triggered) when the debtor, who is also the Guarantor, becomes insolvent.  The moment at which enforcement rights arise (are triggered) within the insolvency process as well as the applicable requirements, vary depending on whether or not the security assets are necessary for the economic activity of the debtor/Guarantor.

If the debtor (who is different from the Guarantor) becomes insolvent:

The right to enforce a Guarantee (a Personal Guarantee as well as a Guarantee on Reat Estate or Personal Property) does not arise automatically (is not triggered automatically) when the debtor (who is different from the Guarantor, becomes insolvent). However, If the debtor becomes insolvent and thereby defaults on its obligations in favor of the secured creditor, the latter may enforce the Personal Guarantee against the Guarantor or “against the secured assets”.

If the Guarantor (who is different from the debtor) becomes insolvent:

The right to enforce a Personal Guarantee does not arise automatically (is not automatically triggered) when the Guarantor, who is different from the debtor, becomes insolvent. Whenever the Guarantor of a Personal Guarantee becomes insolvent, the debtor shall be obliged to grant a new Personal Guarantee issued by a new Guarantor.

The right to enforce a Guarantee on Real Estate or Personal Property does not arise (is not triggered) when the Guarantor, who is different from the debtor, becomes insolvent, as long as the debtor does not default on any of its obligations under the principal contract.  However, the parties may agree (and usually do), that insolvency of the Guarantor results in (i) acceleration of debtor’s obligations and/or (ii) obligation to provide a new guarantee to the satisfaction of the creditor/lender.

Yes, if agreed upon by the parties.

No. 

There are several our-of-court enforcement options that the parties can agree to.

But regardless of the out-of-court enforcement options agreed upon by the parties, or if no out-of-court enforcement option has been agreed, the beneficiary can opt for court enforcement.

There are not out-of-court enforcement methods regarding Personal Guarantees and Guarantees on Real Estate.

For Guarantees on Personal Property, there are some out-of-court enforcement methos available, as follows:

1. Special enforcement process (procedimiento de ejecución especial de la garantía);
2. Direct payment (pago directo).

For Guarantees on Personal Property: Yes.

Upon commencement of enforcement proceedings, the secured creditor may assume control and possession of the collateral. It is indeed possible for the parties to agree that the secured creditor will receive the collateral as payment for the guaranteed obligations in the event of default under the Guarantees on Personal Property contract.

For Guarantees on Real Estate: No.

In the case of a mortgage, default gives the creditor the right to pursue the mortgaged property. However, this must be done through judicial proceedings. The creditor must pursue its claims by filing a lawsuit before the appropriate judge to execute or enforce the mortgage (to foreclose on the Mortgage).

Yes. For Guarantees on Personal Property, it is possible to sell the collateral directly and privately to third parties, according to the Guarantee on Personal Property contract.

Regarding the special enforcement, the following should be considered:

• If the collateral assets are traded on the market where the enforcement takes place, they may be sold directly by the secured creditor at market value.
• The secured creditor may collect or enforce the guaranteed credits against obligated third parties.
• The secured creditor may exercise rights over the collateral assets and shares.
• Regarding control over bank accounts, the creditor has the right to immediately require direct payment or delivery of the amount.
• Movable assets under guarantee may be taken in payment by the secured creditor, at the value determined by an expert appraiser.
• The creditor may auction them off (via electronic auction), to the highest bidder, with a base price set at 70% of the appraised value.

N/A  1

N/A

Priority rights under insolvency regulations.

Based on our experience, the level of difficulty of enforcement processes varies significantly depending on variables such as: the type of assets, location of the assets, court/authority, type of enforcement process, etc

However, enforcement process regarding Personal Guarantees is generally fairly easy and average length; regarding Guarantees on Real Estate is generally fairly easy and long; and regarding Personal Property is generally fairly easy and quick.

No. Except in connection with electronic mortgage contract (section 23 above).