FAQ: Non-Compliance with the “Ongoing Business Hypothesis” as a Cause for Dissolution

Law 2069 of 2020 expressly repealed the ground for dissolution for losses, according to which, companies had to be dissolved when losses decreased their assets below 50% of their share capital. In its place, this law establishes that companies will enter into dissolution for non-compliance with the principle of ongoing business hypothesis. Below, we answer the most frequently asked questions.

1.What is the ongoing business hypothesis?

It is understood as the intention and capacity that a company has to continue with its operations in the foreseeable future. Thus, an important consideration to take into account in the analysis of compliance with this hypothesis is if the company has the necessary resources to fulfill its obligations when they are enforceable[1]. In accordance with the above, in the event that the company’s financial, operational or legal information does not allow this continuity in business to be inferred, it will be understood that this cause for dissolution has been fulfilled, since the company has no real alternatives other than termination of its operations and liquidation[2].

2. When should compliance with this hypothesis be verified?

Decree 854 of 2021 establishes that verification of compliance with the ongoing business hypothesis must be done at the time of preparation of the general-purpose financial statements at the end of each financial year. However, during the accounting year, the company’s directors must monitor the company’s financial information to determine if there is any loss of equity or risks of insolvency.

3. What information should be considered when verifying this compliance?

Decree 854 establishes that, for the verification of compliance with the ongoing business hypothesis by the company’s directors, all information and projections about the company’s future must be considered. This information must cover, at least, the twelve (12) months following the end of the reporting period. Thus, it is presumed that in cases where a company has a history of profitable operations and easy access to financial resources, it complies with the ongoing business hypothesis and a detailed analysis is not required.

Additionally, Decree 1378 of 2021 establishes that, for the verification of compliance with this hypothesis, directors must take into account all the indicators that are applicable to the company’s business model and the sector in which the corporate purpose is pursued and, if applicable, the following:

  • In the event that the company’s total assets 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.
  • 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.

However, it is important to bear in mind that these indicators are intended to facilitate the monitoring of the company’s situation but the fact that there is a loss of equity and / or risk of insolvency does not necessarily imply that the company must be dissolved and liquidated. In these cases, the company’s directors must inform the highest company body of the possible breach of the ongoing business hypothesis, for it to determine if it is possible to continue with the company’s business or whether, on the contrary, it should be dissolved.

4. What should directors do if they find that the hypothesis is not met?

In cases in which directors reasonably consider that the company does not comply with the ongoing business hypothesis and that it is therefore in grounds for dissolution, or when the analysis of the financial statements and projections of the company indicates losses of equity and risks of insolvency, as explained in the previous section, they:  (i) must not initiate new operations other than those of the ordinary course of the company’s business and, (ii) must immediately convene the general assembly of shareholders or partners’ meeting to inform them of this situation and to let them adopt the decision to dissolve and liquidate the company or continue operating the business. This is because the ongoing business hypothesis allows the company´s associates to carry out an analysis of the company’s situation according to their own criteria and taking into account the company’s particularities, since it is not a strict and objective cause that necessarily results in dissolution. If the directors do not comply with these obligations, they will be jointly and severally liable for the damages caused to the associates or to third parties (Article 4, law 2069 of 2020).

5. Is this cause of dissolution in force?

In order to support companies and reduce the effects generated by COVID-19, this cause of dissolution was temporarily suspended. However, this period of temporary suspension expired on April 16, 2022 so that, from this date, it again came into force.

In case you have doubts regarding this or any other issue affecting your company, please contact us.

[1] Annex 5 of Decree 2420 of 2015.

[2] Opinion 220-047475 of 2021, Colombian Superintendence of Corporations.

Share Capital Reduction with Reimbursement of Contributions

On April 27th, the Superintendence of Corporations issued Opinion No. 220-106568 on the share capital reduction of a Colombian company with reimbursement of contributions, in which it relates its previously issued opinions on this matter. Bear in mind that the share capital of a company is made up of the contributions that the partners or shareholders have made, which then become part of the assets of the entity, which can use these good to pursue its corporate purpose.[1] In accordance with article 122 of the Colombian Commercial Code, this decrease in share capital requires the company’s by-laws to be reformed, therefore, in addition to requiring the approval of the partners or shareholders to proceed with this measure, it must comply with what the by-laws and the law establish for the approval and formalization of by-laws reforms[2]. Additionally, the reimbursement of contributions refers to the repayment to associates of the amount of the contribution they previously made to the company. This amount will be calculated depending on the share capital reduction that is effectively enacted and in proportion to each associate’s participation, if something different has not been established in the by-laws[3].

In addition to the above, the Superintendence of Corporations has established in its Basic Legal Memorandum that, in accordance with article 145 of the Colombian Commercial Code, it authorizes, in a general manner, the share capital reduction of all companies that are subject to its inspection, surveillance or control and that are included in one of the following circumstances: (i) the company does not have external liabilities, (ii) the company does have external liabilities, but once the capital reduction is made, the company assets are at least double the external liabilities, or (iii) the creditors expressly accept in writing the share capital reduction, regardless of the company’s assets amount. However, in the event that the above is not met, the company must submit in writing a special request for the superintendence to authorize the intended share capital reduction with reimbursement of contributions. Additionally, in the event that the external liabilities of the company stems from social benefits, the competent labor authority must give its approval.

The reimbursement of contributions to interested partners or shareholders can be made through the delivery of money or goods. However, the way in which this reimbursement will be made and the appraisal of the assets that will be delivered to the associates, must be discussed and approved by the highest social body (shareholders’ assembly or meeting of partners), since there is no legal provision that indicates the procedure to be followed.

Finally, it is important to bear in mind that the company’s legal representative and statutory auditor (if appointed), are liable for any damages caused to the associates that do not participate in the reimbursement, or to the company itself, with the execution of this operation. Likewise, they must ensure that the pursuit of the company’s purpose is not adversely affected by the realization of this reimbursement operation.

For more information, contact us.

[1] Official Letter 220-53255 of 2001, Colombian Superintendence of Corporations.

[2] Article 147, Colombian Commercial Code.

[3] Article 144, Colombian Commercial Code.