BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL. COLOMBIA Brigard & Urrutia

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1 BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL COLOMBIA Brigard & Urrutia CONTACT INFORMATION Carlos Fradique-Méndez Felipe Alarcón Sierra Tomás Holguín Mora Brigard & Urrutia Calle 70 No (57 1) Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. Under Colombian law, all assets may be generally charged with a security interest, to secure the payment of obligations. The general mechanisms set by law to establish a security interest as described above are: (i) the mortgage for immovable assets (real estate), (ii) the pledge for moveable assets (iii) other special types of security interest such as, inter alia, a mortgage on vessels and aircraft and the pledge of rights, ongoing concerns and mining grants. Collateral trust is also an alternative broadly used to create a security interest over assets. Notwithstanding the foregoing, applicable law establishes that certain assets may not be charged, liened and/or encumbered. Any security interest established over such assets will be deemed null and void, and will be unenforceable before the Courts of Colombia. Examples of such assets are: (i) assets held by the State or by government authorities which are used in the benefit of all the inhabitants of the country (such as streets, roads, parks, etc.) 1, (ii) natural parks 2, (iii) the communal lands of ethnic groups, such as Afro- 1 Article 63 of the Colombian Constitution and 674 of the Colombian Civil Code. 2 Article 63 of the Colombian Constitution.

2 Colombian Communities 3, (iv) indigenous inhabitants reservations (resguardos) 4, (iv) assets which are deemed to be a part of the archaeological patrimony or which make up the cultural identity of the nation 5, and (v) the electro-magnetic spectre 6. It is also important to note that it is unlawful to establish security interest over assets which have been judicially attached 7. Some assets may not be judicially attached. Among others, the following assets may not be judicially attached: (i) assets which are devoted to the rendering of public services by state-owned public utilities, (ii) two-thirds of the revenues of territorial subdivisions of the Republic of Colombia, (iii) the revenues incorporated into the National Budget, and the budget of the District of Bogotá, (iv) public funds which have been advanced, or are bound to be advanced to contractors in public works projects, pursuant to binding agreements, (v) monies deposited in savings accounts in the amounts established by applicable law, (vi) workers salaries in the proportions established by law and fringe benefits, (vii) premises used for religious rites and burial grounds, (viii) the domestic wares and clothing of a debtor, and (ix) a debtor s place of residence if it has been encumbered as a so-called family estate (patrimonio de familia inembargable) subject to the terms and conditions set forth under applicable law 8. Establishing a security interest on any such assets would not be effective or enforceable before local courts. 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this in your jurisdiction, whether bilateral or multi-lateral? Are there any requirements for enforcement in your jurisdiction? Security interests granted over assets are deemed to be in rem rights established in favor of the relevant creditor. Article 20 of the Colombian Civil Code provides that in rem rights over assets located in Colombia must be governed by Colombian law. Accordingly, as a matter of public policy, the creation and enforcement of security over assets located in Colombia is subject to Colombian laws and to the exclusive jurisdiction of Colombian courts. Colombian law does not establish any limitation that would restrict the ability of foreigners to take security in Colombia. Self-help remedies are generally deemed to be illegal and unenforceable. Therefore, any rights granted to a creditor pursuant to any particular security interest established in Colombia, must be enforced through collection proceedings before the ordinary courts of Colombia. Collection proceedings, distrait and public auctions are governed by the 3 Ibid. 4 Ibid. 5 Article 73 of the Colombian Constitution 6 Article 75 of the Colombian Constitution. 7 Article 1521 and 1524 of Civil Code. 8 Article 684 of the Code of Civil Procedure, Colombian labor Code, Law 70 of 1931.

3 Code of Civil Procedure 9 and are mandatory provisions. Hence, it is not possible to enforce security interests in Colombia by means other than those set forth under Colombian laws and through the local courts. Notwithstanding the above, local financial institutions subject to the supervision of the Finance Superintendence of Colombia have certain prerogatives generally to exercise their rights. In particular, if an obligation secured by a pledge becomes due and payable and has not been paid twenty days thereafter, a limited exception to the prohibition of undertaking self-help remedies applies, and such institutions are entitled to hire an auction service provider in order to have the pledged asset auctioned-off 10. Furthermore, a judgment rendered by a foreign court in connection with the validity or enforceability of a security interest granted over assets located in Colombia would be unenforceable. This is due to the fact that any judgment rendered by a foreign court which is intended to be enforced in Colombia must be subject to so-called Exequatur proceedings before the Supreme Court of Colombia. By law, the Supreme Court will not grant the relevant Exequatur if the foreign judgement refers to in rem rights over assets located in Colombia, or when the subject matter of the judgment is subject to the exclusive jurisdiction of the courts of Colombia, among others, which is the case of a foreign judgment concerning security interests over assets located in Colombia. 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? Floating charges are only allowed in the form of a pledge over the rotating stock of inventory of an ongoing concern, with the relevant pledge agreement expressly including the rotating stock of inventory within the pledge In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: (a) Aircraft. A security interest on Aircraft registered before the Colombian National Civil Aviation Authority (Departamento Administrativo de Aeronáutica Civil or Aerocivil) may be established by means of a mortgage, with the same principal characteristics as a mortgage over real estate described in section 4 (j) below. Mortgages over aircraft are perfected by (i) having the mortgagor and the mortgagee execute a public deed (escritura publica) before a notary public (or a consular officer overseas) which must include, among other requirements, information that identifies the mortgagor, the mortgagee, the obligations being secured and the aircraft subject to the mortgage and (ii) recording said public deed at the Aircraft Register (Oficina de 9 Articles 488 to 580 of the Code of Civil Procedure. 10 Article 124 of the Financial Statute. 11 Article 532 of the Code of Commerce.

4 Registro Aeronáutico). The mortgage must be registered within a term of 90 business days immediately following the execution of the deed of mortgage. Otherwise, the mortgage deed would not be effective. It is important to point out that the mortgage is not valid or enforceable unless and until it has been properly registered (the registration requirement is ad substantiam actus) 12. Security over aircraft is perfected by means of a mortgage and its registration at the Aircraft Registry. Registration of an aircraft mortgage at the Aircraft Register would cost between 20 to 88 minimum daily wages (from c. USD$144 to c. USD$636), fixed according to the weight of the aircraft. The aforementioned registration takes approximately five business days to be concluded. (b) Bank Accounts. There are no specific provisions under Colombian law for the establishment of a security interest over bank accounts or monies deposited therein. Notwithstanding the foregoing, under Colombian law, checking accounts and savings accounts (the two types of bank accounts provided for under applicable commercial and banking regulation) are agreements between a bank and its clients which are specifically regulated by law 13. As such, the rights under the agreements establishing bank accounts may be pledged in accordance with the general rules for the pledge of rights. A pledge of rights grants the pledgee the same rights granted to a pledgee of goods described in section 4 (d) below. In particular such pledge allows the pledgee to commence collection proceedings (proceso ejecutivo) in order to sell the pledged right in a public auction to obtain payment of the secured credit with the proceeds resulting from the sale, in the event of a payment default. (c) Animals, Crops (in ground and severed) and Timber. There are no specific provisions under Colombian law for the establishment of a security interest over animals and crops. Under Colombian law, animals (semovientes) 14, and crops 15 are deemed to be moveable assets. As such, security interest over animals and crops may be established over them, in order to secure payment of commercial obligations, by means of a pledge over moveable assets, in the manner described in section 4 (d) below. (d) Equipment. The pledge is a security interest over a moveable asset (including but not limited to equipment) that grants a creditor (pledgee) the right to commence collection proceedings (proceso ejecutivo) in order to sell the pledged asset in a public auction to obtain payment of the secured credit with the proceeds resulting from the sale, in the event of a default. 12 Articles 2434 and 2435 of the Civil Code. Law 56 of 1904 and Article 43 of Decree 1250 of Articles 1382 through 1392, and 1396 through 1398 of the Colombian Code of Commerce. 14 Article 655 of the Civil Code. 15 Article 659 of the Civil Code

5 The pledge is governed by the Civil Code and the Code of Commerce 16 and may have the form of a pledge where the creditor has the possession of the pledged assets (pledge with possession) 17 or a pledge whereby the creditor does not have possession of the pledged assets (pledge without possession) and the pledgor becomes a depositary of the assets and must keep them in proper condition 18. The pledge without possession is only admitted when the assets are deemed necessary for the development of the economic activity of the debtor. The pledge without possession could be created to guarantee future obligations of a debtor provided that a limit to the value of and a term to the pledge are established in the relevant agreement. Some important features of the pledge are the following: (i) (ii) (iii) (iv) (v) Preference: A pledgee has a preferred right for payment of its debt with the proceeds from the judicial auction of the pledged assets. Persecution: A pledgee is entitled to enforce the mortgage by attaching the mortgaged asset even if it is in the hands of a third party. The ownership and title to an asset subject to a pledge can be transferred to any third party if the creditor consents to the transfer or the total amount of the credit is paid-off 19. The pledge of an asset without possession by the creditor can be subject to more than one pledge 20. A pledge can secure any present and future obligations that a debtor owes to a creditor, up to a specified amount (open pledge) 21. The pledge with possession of the asset by the creditor is perfected by the delivery of the asset, whereas the pledge without possession of the asset by the creditor is perfected by means of a written document, identifying, among others, the parties, the particulars of the pledged assets, the terms of the secured obligations and the place where the asset would remain. This pledge would only be enforceable before third parties upon registration at the Chamber of Commerce sitting at the place where the assets are located 22. Registration of the pledge without possession at the Chamber of Commerce is transparent as it ensures publicity as well as access to the records to any interested party. However, the pledge with possession of the asset may not be recorded at the Camber of Commerce. 16 Article 2409 through 2431 of the Civil Code and articles 1200 through 1220 of the Code of Commerce. 17 Articles 1204 to 1206 of the Code of Commerce set forth the rules applicable to the pledge with possession of the asset by the creditor. The provisions of the Civil Code would also be applicable. 18 Articles 1207 to 1220 of the Code o0f Commerce provide for the pledge without the possession of the pledged asset by the creditor. 19 Article 1216 of the Code of Commerce and Article 2429 of the Civil Code. 20 Article 1211 of the Code of Commerce. 21 Article 1219 of the Code of Commerce. 22 Articles 1208, 1209 and 1210 of the Code of Commerce.

6 The process of registering security at the Chamber of Commerce is a simple procedure and typically lasts two business days. The interested party files the document containing the pledge before the Chamber of Commerce. For purposes of such filing, one must pay registration taxes and inscription rights. The registration tax is a set percentage of the value of the obligations secured by the pledge; such tax ranges between 0.3% to 0.7% depending on the regulations issued by the municipality where the pledge is registered. In the case of open-ended pledges that secure principal agreements not subject to registration, the rate is levied on the disbursements made under the credit being secured. Inscriptions rights correspond to approximately U.S.$9 23. (e) Intellectual Property. Security interest over patents, trademarks and industrial designs may be established under Colombian law by means of a pledge, provided that (i) the registration of the relevant industrial property right before the Trademark Office (the Superintendence of Industry and Commerce or SIC) is in force; (ii) the pledge agreement is in writing, and duly identifies the industrial property right to be pledged; (iii) the relevant pledge agreement is executed by the registered owner of the trademarks; and (iv) the agreement is registered with the Trademark Office. The proceeding registration of a security interest over industrial property rights, in Colombia, takes approximately one month. Security interests over economic rights (but not the moral rights) to creative or artistic creations (Copyright) may be granted under Colombian law by means of a pledge. The pledge agreement must be in writing and must, among others, clearly identify the pledged Copyright. In addition, the pledge agreement must be registered in the National Copyright Register (Registro Nacional de Derechos de Autor) maintained by the Ministry of Justice, for it to be binding upon third parties. (f) Inventory. Under Colombian law, the establishment of a security interest of a rotating stock of inventory in and of itself is not regulated. However, Colombian law does provide for the possibility of establishing a pledge of an ongoing concern, including its rotating stock of inventory, provided that the relevant pledge agreement expressly includes the rotating stock of inventory among the pledged assets, which are part of the relevant ongoing concern. 24 For the manner of establishment and main characteristics of a pledge on an ongoing concern please refer to section 4 (p) below. (g) Leases. 23 Article 230 of Law 223 of Articles 4 and 5 of Decree 650 of Article 58 of Law 788 of Article 532 of the Code of Commerce.

7 Under Colombian law, it is possible to create a security interest over the rights derived from an agreement, including, but not limited to a lease agreement. For the manner of establishment and main characteristics of a pledge of rights, please refer to section 4 (b). (h) Mineral Interests, including Hydrocarbons. Under Colombian law, security interest over mines which property was acquired prior to 1887 in accordance with the applicable law at the time, may be established by means of a mortgage over real estate 25 (please refer to section 4(j) below). Currently no such property may be acquired; as of 1887 the Colombian State is sole proprietor of the subsoil, and may grant mining grants to individuals and private entities thereto, in accordance with applicable law. Notwithstanding the foregoing, under applicable law, the rights derived from mining grants (i.e. the right to explore and produce with regards to State owned mines) may be pledged, solely to secure payment of obligations acquired in order to enable the building, setting-up and production of the relevant mining grant or concession (the socalled mining pledge) 26. In addition to a mining pledge, the Colombian mining code also allows the beneficiary of a relevant mining grant to pledge the rights to receive future mineral production under the relevant mining grant, in accordance with the general rules for the pledge of rights (please refer to Section 4 (b) above) and to pledge the moveable assets, machinery and other tools located in the relevant mine and used for mining production thereof, in accordance with the general rules for the pledge of moveable assets without possession 27 (please refer to Section 4 (d) above). The mining pledge is perfected by means of a written document, identifying, among others, the parties, the particulars of the mining grant and the terms of the secured obligations. This pledge would only be enforceable before third parties upon its registration at National Mining Registry (Registro Nacional Minero) 28. (i) Promissory Notes and Chattel Paper. Colombian law provides for the establishment of a security interest on promissory notes, bills of exchange and other negotiable instruments, as defined by the Colombian Code of Commerce 29. This is done by means of a restrictive endorsement, including the expression in guarantee or any other similar expression. A security interest established over a negotiable instrument in the manner described above grants, the secured party, the same rights granted to a pledgee under commercial law (please refer to section 4(d) above), and, in addition, the rights to collect all monies owed under the relevant negotiable instrument 30. (j) Real Estate. 25 Articcle 237 of the Colombian Mining Code. 26 Article 238 of the Colombian Mining Code. 27 Article 239 of the Colombian Mining Code. 28 Articles 331 and 332 e of the Colombian Mining Code. 29 Article 671 et seq. of the Colombia Code of Commerce. 30 Article 659 of the Code of Commerce.

8 A mortgage (hipoteca) is a security over real estate that grants to a creditor (mortgagee) the right to commence collection proceedings (proceso ejecutivo) in order to sell the mortgaged assets in a public auction to obtain payment of the secured credit with the proceeds resulting from the sale, in the event of a payment default. The mortgagor maintains the possession on the mortgaged asset. Mortgages are deemed in rem rights and are subject to the rules set forth in Articles 2432 to 2457 of the Civil Code. A mortgage is granted to secure the performance of a principal obligation and is therefore considered as an accessory right. Some important features of the mortgage are the following: (i) (ii) (iii) (iv) (v) (vi) (vii) Preference: A mortgagee has a preferred right for payment of the debt with the proceeds from the judicial auction of the mortgaged asset. Persecution: A mortgagee is entitled to enforce the mortgage by attaching the mortgaged asset even if it is in the possession of a third party 31. To create a mortgage, the mortgagor is required to own or have so-called usufruct rights over the relevant asset 32. Title and ownership to real estate subject to a mortgage may be transferred to any third party regardless of the fact that a mortgage is in effect 33, unless the mortgage agreement expressly restricts such transfer or requires the prior consent of the creditor. A real estate property may be subject to more than one mortgage, in which case their order of priority will be subject to the chronological order in which they are registered at the Registrar of Public Instruments ( Office of Registration - Oficina de Registro de Instrumentos Públicos) 34. The amount secured by the mortgage cannot exceed twice the amount of the obligations being secured. The rules of the Civil Code also provide for so-called open mortgages, which secure any present and future obligations that a debtor owes to a creditor, up to a specified amount. In addition, mortgages are perfected by (i) having the mortgagor and the mortgagee execute a public deed (escritura publica) before a notary public (or a consular officer overseas) which must include, among other requirements, information that identifies the mortgagor, the mortgagee, the obligations being secured and the real estate subject to the mortgage and (ii) recording said public deed at the Registrar of Public Instruments sitting at the place where the real estate is located. The mortgage must be registered 31 Article 2452 of the Civil Code. 32 Article 2443 of the Civil Code. 33 Article 2440 of the Civil Code 34 Article 2440 of the Civil Code.

9 within a term of 90 business days immediately following the execution of the deed of mortgage. It is important to point out that the mortgage is not valid or enforceable unless and until it has been properly registered. 35 A certificate issued by the Registrar of Public Instruments evidences the existence of the mortgage. Colombia has adopted the recording system for mortgages, whereby mortgage public deeds must be recorded before the Registrar of Public Instruments sitting at the place where the respective real estate is located. The Registrar of Public Instruments must register mortgages in the so-called mortgages registry book ( libro de anotación de hipotecas ) following the chronological order in which the mortgages are filed. Indeed, registration of mortgage deeds is very important not only because it perfects the security, but also because it determines its order of priority for purposes of enforcement, if a mortgaged asset is subject to more than one mortgage 36. Therefore, failure to register the mortgage in a timely manner may have the effect of jeopardizing the priority rights of a creditor. The process of registration typically lasts 3 business days. It begins with the filing of the public deed containing the mortgage. An officer at the Registrar of Public Instruments formally reviews the deed, registers the mortgage and issues a certificate evidencing the registration. The date of registration of the mortgage is the date when the mortgage is recorded in the registry, not the date in which the deed of mortgage is filed for registration at Registrar of Public Instruments. The recording of a mortgage deed is a simple procedure. Anyone can file a mortgage deed at the Registrar of Public Instruments sitting at the place where the real estate is located. For purposes of such filing, one must provide to the relevant Registrar of Public Instruments the first counterpart copy issued by the notary where the deed is executed, together with the receipts evidencing payment of registration taxes, fees and rights. The cost of executing a mortgage involves notarial expenses, a registration tax and the so-called beneficiary rights. Notarial expenses are equivalent to a set percentage of the value of the obligations being secured by the mortgage; such expenses range between 0.28% to 3%. The registration tax is a set as a percentage of the value of the obligations secured by the mortgage; such tax ranges between 0.5% and 1% depending on the municipality where the mortgage is registered. If the mortgage were an open-ended mortgage, the rate is levied on the amount disbursed under the loan agreement 37. (k) Receivables (credit rights under contracts or invoices). 35 Articles 2434 and 2435 of the Civil Code. Law 56 of 1904 and Article 43 of Decree 1250 of Article 2435 of the Civil Code. Mortgages are subject to the roman principle known as Primus in tempore primus in jure 37 Article 58 of Law 288 of 2002.

10 Under Colombian law, it is possible to create a security interest over contract rights, including, but not limited to rights evidenced in receivables and invoices, or which are not evidenced in any document whatsoever. For the manner of establishment and main characteristics of a pledge of contract rights, please refer to section 4 (b) above. (l) Rights under Contracts (excluding Receivables). Under Colombian law, it is possible to create a security interest over the rights derived from an agreement. For the manner of establishment and main characteristics of a pledge of rights, please refer to section 4 (b) above. (m) Shares (in book-entry and certificate form and other securities). Pursuant to the Code of Commerce 38, the pledge over shares is perfected by its registration in the stock ledger of the relevant corporation. Therefore, the relevant page of the stock ledger evidences the creation of this pledge. If a company is listed, and its share are deposited in Colombia s Central Securities Depositary (known as Deceval), security interest over said shares will be perfected by the book entry made by Deceval 39. (n) Vessels. Under Colombian law a security interest over vessels registered before the Port Authority (Capitanía de Puerto) may be established by means of a mortgage, which will have the same principal characteristics as a mortgage over real estate as described in section 4 (j) below. Mortgages over vessels are perfected by (i) having the mortgagor and the mortgagee execute a public deed (escritura publica) before a notary public (or a consular officer overseas) which must include, among other requirements, information that identifies the mortgagor, the mortgagee, the obligations being secured and the vessel subject to the mortgage and (ii) recording said public deed with the Port Authority (Capitanía de Puerto). The mortgage must be registered within a term of 90 business days immediately following the execution of the deed of mortgage. Otherwise, the mortgage deed would not be effective. The mortgage is not valid or enforceable unless and until it has been properly registered (the registration requirement is ad substantiam actus) 40. (o) Vehicles. As moveable assets, security interest may be granted over vehicles by means of a pledge, as described in section 4 (d) above. Notwithstanding the above, the pledge over vehicles is perfected by means of its registration at the Vehicle Office sitting at the place where the vehicle is registered. (p) Business as an ongoing concern. 38 Article 410 of the Code of Commerce. 39 Law 964, article Articles 2434 and 2435 of the Civil Code. Law 56 of 1904 and Article 43 of Decree 1250 of 1970

11 The pledge on an ongoing concern (establecimiento de comercio) must be registered before the Chamber of Commerce having jurisdiction over the places where the pledged ongoing concern is located 41. A certificate issued by the Chamber of Commerce regarding the relevant ongoing concern evidences if a particular ongoing concern is subject to a pledge or other liens or limitation to ownership rights. 5. Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? Self-help remedies are not available in Colombia. Hence, a creditor must commence collection proceedings before the civil courts to obtain payment of its debts. To commence collection proceedings, the creditor must have a so-called execution title; this is, a document evidencing that his credit is clear, express and has become due and payable ( título ejecutivo ). Collection proceedings, distraint and public auctions are governed by the mandatory rules set forth in the Code of Civil Procedure 42. The Civil Code and the Code of Commerce also provide for rules with respect to the enforcement of the pledge 43. The restriction with respect to self-help remedies is applicable both to real estate (immoveable assets), as well as to personal property (moveable assets) and rights and, therefore, enforcement of rights over a pledge must take place by means of collection proceedings before the civil courts. In connection with rights, moveable and immoveable assets, it is worth noting that Article 2422 of the Civil Code and Article 1203 of the Code of Commerce expressly prohibit self-remedies, stating that a creditor would not be entitled to dispose or acquire ownership of a pledged asset by means others than those set forth in the laws (sale in an public auction as a result of a collection proceeding). To commence collection proceedings, a pledgee must file a claim before a competent court, accompanied by (i) a document originating from the debtor evidencing that the credit is clear, express and has become due and payable ( título ejecutivo ), (ii) a duly registered pledge, if applicable, and (iii) an affirmative statement of the pledgee to the effect that the credit has not been paid. The Court will review the complaint to ascertain that it fulfils all applicable requirements. Upon the filing of the complaint to foreclose on the pledged or mortgaged assets, the claimant may request the attachment of said pledged assets. The court will then proceed to issue a writ ordering the debtor to pay the debt and the attachment and foreclosure of the pledged assets. The court will then issue a foreclosure order and place the asset under the administration of a receiver (secuestre). For purposes of such attachment, the plaintiff must post a bond for an amount equivalent to 10% of 41 Article 532 of the Code of Commerce. 42 Articles 488 to 580 of the Code of Civil Procedure. 43 Articles 2422 to 2427 of the Civil Code.

12 the value of the credit being collected to secure the damages that the defendant might suffer if its defenses prevail in the collection proceedings. The pledgee has the right to respond to the claim. The defendant may also file an appeal against the writ that ordered the payment of the debt. The court will then summon third parties that may have rights over the pledged assets to enable them to exercise their rights within the course of the proceedings. Assuming that there are no grounds to revoke the writ and provided that the court finds that the defenses raised by the defendant lack merits, the court then will collect the evidence requested by the parties and issue a judgment declaring that the execution must proceed. Upon issuing the judgment ordering the execution to go forward, the court orders the liquidation of the credit and that the pledged asset be valued for sale in a public auction. Once the debt is liquidated and the pledged asset has been valued, a date for the auction is determined by the court. Any party interested in submitting an offer would be required to deposit 40% of the base price to be able to make an offer during the auction. If the first auction fails, the base price will be lowered successively and new auctions will be conducted but the price of the pledged asset cannot be reduced to less than 40% of the valuation. However, the pledgee may request that if the auction fails, the property be awarded to the creditor to cover its debt. Collection proceedings allow a defendant various defenses (motions to dismiss and declaratory defenses) further to due process rules. Although collection proceedings are supposed to be summary, they may be subject to substantial delays. In certain cases, depending on the nature of the defenses raised by the debtor, it may take between one to three years to obtain a judgment. If the judgment were subject to appeal, this may delay matters for another year in order for the appeal to be resolved. The liquidation of the credit and the public auction for sale of the asset would take between 3 to 6 months. 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? There is nothing under Colombian law that mandates that security be granted to all lenders, or that would prevent a syndicate of lenders from appointing a security agent or trustee to act on their behalf with regards to the establishment, administration and enforcement of any security granted under a particular loan. In this case, only the security agent or trustee, as the case may be, would be entitled to undertake any act or measure, before the grantor of the security interest, or would be entitled to enforce the relevant security interest upon an event of default. Considering the above, under Colombian law there would be two alternatives to do this (i) appointing a security trustee by means of an irrevocable mandate agreement, and (ii) appointing a local trust company as security trustee.

13 6.1. Appointment of a Security Agent The lenders could appoint any person of their choosing to act as security agent by means of an irrevocable mandate agreement. As mentioned above only the security agent would have standing to take acts or measures with respect to the grantor of the relevant security, and to enforce said security, however, the security agent would be bound to the lenders to do so in the terms set forth in the relevant mandate agreement Appointment of a Security Trustee In addition, it is also common to establish a commercial trust agreement in order to guarantee the payment of an obligation with the sale of the trust property. In this case, the trust company which acts as trustee would act as security trustee, in accordance with the terms and conditions set forth under the relevant trust agreement. By means of an irrevocable trust agreement a debtor (settlor) transfers its ownership rights and title to specified assets to a trust company 44 with the purpose of creating a trust with such assets, in order to secure the obligations of the settlor to one or more creditors that would be the beneficiaries of the trust. Although the trust does not create a security interest over the trust property, it isolates the debtor s assets from other creditors and guarantees performance of the debtor s obligations. If the trust property generates cash flow, it may be used as a source of payment to repay the debt. Alternatively, the debtor can continue to comply with its obligations and in an event of default, the trust company would be empowered to realize the assets in order to pay off the creditors with the proceeds from the sale. Alternatively, the trust assets may be delivered to the creditor in payment of the debt. If a debtor is subject to reorganization proceedings under law 1116 of 2006, the arrangements for payment of certain creditors with the trust assets are suspended. Any assets of the debtor company that may have been transferred to a trust to secure obligations of creditors would be part of the estate for purposes of the reorganization of the debtor company. This implies that the arrangements made pursuant to the trust for the benefit of certain creditors would be disregarded. The only exception where the rights of the creditors that are beneficiaries of a security trust are preserved is in the event of a securitization 45. If the restructuring proceedings of the debtor are not successful and, as result, the debtor is subject to mandatory liquidation because its assets are not sufficient to cover its debts, the assets subject to the trust can be restored to the debtor s liquidation estate. Such assets may then be sold to pay the debtor s credits in accordance with the rules of priority provided in applicable law. For purpose of paying the creditors who are beneficiaries of the trust, such beneficiaries would be deemed creditors secured by a 44 Articles 2434 and 2435 of the Civil Code. Law 56 of 1904 and Article 43 of Decree 1250 of Article 38 of Law 1116 of 2006

14 pledge or a mortgage (depending on the type of asset), and their credits would be paid in priority over any credit other than the First Class credits 46. A trust over a real estate must be executed by means of a public deed (escritura publica) before a notary public and must be registered before the Office of Registration, which issues certificates evidencing such registration. A trust over movable property and personal rights may be executed by a private instrument, rather than by public deed, provided that the signatures of the representatives of the parties are certified by a notary public as being authentic. The trust over movable assets and rights does not require registration. 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? 7.1. The suspect periods In the course of reorganization proceedings, any creditor, the promoter or the receiver may request the revocation for fraudulent conveyance ( Acción de simulación ) of the following acts executed by the debtor when such acts (i) adversely affect any creditor or affected the priority for payment and (ii) the assets that comprise the debtor s patrimony are insufficient to satisfy all credits recognized within the proceedings: (a) Payment of obligations, payments in kind, and any act resulting in the transfer, disposition, constitution or cancellation of liens or property rights of the debtor that diminish its patrimony, or leases that hinder the reorganization proceedings; in both events, those acts taking place during the 18 months prior to the commencement of the reorganization and when there is no evidence that the transferee or lessee acted in good faith. (b) Gratuitous acts executed within the 24 months prior to the initiation of reorganization proceedings; and (c) Amendments to the by-laws within the six months prior to the commencement of reorganization proceedings when such amendments diminish the debtor s patrimony in prejudice of the creditors or modify the liability of the partners/shareholders of the debtor Claw-Back (a) Reorganization Proceedings Article 22 of Law 1116, 2006 establishes that no proceedings may be started or carried out as of the start of the reorganization proceeding seeking the restitution of ownership of movable or real estate assets which the debtor uses to conduct its corporate purpose, insofar as the claimed cause for such proceedings is the default in the payment of rents, 46 Article 50 (7) of Law 1116 of 2006

15 tariffs, monthly lease installments or any other compensation corresponding to lease or rent agreement. Lack of compliance with the payment of the rents caused after the start of the proceedings may be sufficient cause for the termination of the agreements, and will enable the creditor to start the executive and restitution proceedings, and in such proceedings, the existence of the reorganization process may not be claimed as a cause for exception. Therefore, the general rule is that during the reorganization proceedings it is not possible to start processes for the restitution of rented operational assets. (b) Judicial Liquidation Proceeding. Pursuant to Article 55 of Law 1116, 2006, the following assets will not be considered part of the equity to be settled: (A) Assets the debtor might have in the capacity of a depositary. Nonetheless, the creditor will have to demonstrate its rightful ownership by filing documents such as a copy of the depositary agreement. (B) In general, any assets still in hands of the debtor which belong to another person, which condition must be proven by the latter. Therefore, the Claw-back is only possible in the terms established above Types of rights which have preference over security granted According to article 2495 of the Civil Code, the following rights have preference over security granted: (a) (b) (c) The judicial fees caused in the proceedings. The rights deriving from the Labor Agreement. (Labor, pension and social security creditors) The tax credits which the debtor has with the Government. However it is important to note the following amendments established pursuant to article 41 of Law 1116, 2006: (a) Parties to a reorganization agreement are allowed to change the priority rules for payment of credits set forth in the Civil Code provided that such amendment (i) is cast by a number of votes exceeding 60% of the admissible votes, (ii) has the purpose of facilitating the objectives of the reorganization agreement, (iii) does not diminish the class of any creditor and, on the contrary, improves the condition of a creditor that provides fresh funds to the debtor or adopts any action that contributes to improve the working capital and recovery of the debtor, and (iv) does not affect the priority for payment of labor, pension and social security creditors.

16 (b) (c) (d) (e) The first class priority for payment assigned to tax credits by the rules of the Civil Code will be shared by any other creditor that, pursuant to the reorganization agreement, advances or agrees to advance new funds to the debtor, including capital contributions. This priority for payment is maintained even during the liquidation of the debtor. Additionally, creditors that make capital contributions to the debtor will have priority for the restitution of their contribution (up to the amount of the contribution) upon the liquidation of the debtor. Creditors that advance new monies partially forgive their credits or grant grace periods will have the same advantages that the reorganization agreement sets forth for those creditors who gave the same benefits to the debtor. If the obligations which priority has been waived by the relevant creditors are not satisfied as a result of a breach of the reorganization agreement, the priority of such obligations will be restored. 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? Article 41 of Law 1116 of 2006 establishes that the priority of credits may be amended in the agreement, as long as the following conditions are met: (a) (b) (c) (d) The decision is adopted with a majority that is higher than sixty percent (60%) of all admissible votes. Its purpose is to facilitate the purposes of the reorganization agreement. It does not degrade any creditor s class, but rather improves the category of those that deliver new funds or that, in general, adopt conducts and behaviors which contribute to the improvement of the working capital and the debtor s recovery. It does not affect the priority of credits pertaining to pensions, labor issues, social security, home buyers, notwithstanding the fact that a pensioner or employee, or any other creditor, expressly accepts the effects of a clause in the agreement pertaining to a waivable right, as long as it leads to the recovery of their credit. Thus, the creditors may subordinate their claims, provided that this decision is included in the Reorganization Agreement and the creditor must expressly accept this situation. Should the agreement not be fulfilled or carried out in such a way that it satisfies the obligations that have been waived seeking a priority or preference, these shall recover said priority or preference, regardless of the way in which the insolvency proceedings are concluded. 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.)

17 A debtor can assign its rights derived from a contract, as well as its position in a contract, as security for the benefit of a creditor, provided that the contractual counterparty consents to such assignment, if the consent is required, or if such consent is unnecessary, provided that the other parties to the contract are given proper notice of the assignment 47. According to Colombian Civil Code, the novation of an obligation consists in the willing termination of an obligation and its substitution by a new obligation between the same parties, a new debtor to the same obligation as previously existed, or when a debtor of any particular obligation acquires a new obligation as debtor with a third party and simultaneously is freed of its original obligation with the original creditor thereof 48. When a novation occurs, Colombian law establishes that all security interest granted by the original debtor to secure payment of the original obligation will cease to exist, unless the parties expressly agree to keep them. In addition if the novated obligation is more onerous than the original obligation then the security interest will only cover payment for the amounts owed under the original obligation, unless otherwise expressly agreed Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? A debtor can assign its rights derived from a contract, as well as its position in a contract, as security for the benefit of a creditor, provided that the contractual counterparty consents to such assignment, if the consent is required, or if such consent is unnecessary, provided that the other parties to the contract are given proper notice of the assignment. The effectiveness of the assignment may be conditional upon the debtor s default. Through the conditional assignment of rights to a contract the creditor that receives the assignment (assignee) would be able to step-into the rights of the assignor to take over the assignor s position in the contract when an event of default occurs. Although the conditional assignment of rights derived from contracts is frequently used in project finance transactions, it should be pointed out, however, that such method does not create any preferential rights or any rights of priority in favor of the creditor that receives the assignment. 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? As stated in section 10, above, a debtor may assign its rights derived from a contract, as well as its position in a contract, as security for the benefit of a creditor, provided that the contractual counterparty consents to such assignment, if the consent is required, or if such consent is unnecessary, provided that the other parties to the contract are given proper notice of the assignment. The effectiveness of the assignment would be conditional upon the debtor s default. 47 Article 1959 and 1961 of the Civil Code. 48 Article 1687 of the Civil Code. 49 Arrticle 1701 and 1702 of the Civil Code.

18 Through the conditional assignment of rights to a contract the creditor that receives the assignment (assignee) would be able to step-into the rights of the assignor to take over the assignor s position in the contract when an event of default occurs. The use of conditional assignments to establish step in rights in favor of the creditor is frequently used in project finance transaction in Colombia.