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Criteria to Determine Whether a Company Should Be Liquidated Under the “Ongoing Business Hypothesis” Are Modified

In August of this year, the “ongoing business hypothesis” was adopted as a cause for the dissolution of commercial companies, repealing those provisions that referred to losses that reduced the company’s equity by certain percentages, depending on the type of company. With the ongoing business hypothesis, instead of establishing a certain percentage of losses, the intention, but above all the capacity, that the company has to continue with its operations in the future is taken into account, and the highest corporate body is the one called to analyze the situation and make the corresponding decisions regarding the continuity of the company’s operations.

However, on October 28, Decree 1378 of 2021 was issued and it modified the criteria on equity loss and insolvency risks in commercial companies. These new criteria allow directors to monitor the financial situation and make projections of the company in light of specific indicators to determine if there are possible equity losses and / or insolvency risks that must be reported in a timely manner to the highest body of the company.

According to these modifications, in the event that the total assets of the company are less than $0 a loss of equity is to be understood. Likewise, there is a loss of equity when negative profits are obtained in the results of two consecutive corporate years. On the other hand, there will be a risk of insolvency when during two consecutive corporate years a result of less than 1.0 is obtained from dividing current assets by current liabilities for each year. With these indicators, and others that are applicable depending on the business model and the economic sector in which the company does business, directors must determine if calling a meeting of the highest corporate body to decide on the dissolution of the company is necessary.

BéndiksenLaw provides comprehensive legal counsel on corporate issues. If you have doubts regarding any of these issues, do not hesitate to contact us.