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Law 2069 of 2020 expressly repealed the ground for dissolution for losses, according to which, companies had to be dissolved when losses decreased their assets below 50% of their share capital.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.

New Regulation for Work-From-Home Agreements in Colombia

On April 27, through Decree 649 of 2022, the Colombian Ministry of Labor regulated the procedure for authorizing work from home, understood as the occasional, temporary, and exceptional authorization given by employers to workers to perform their work from their home. This authorization is granted based on extraordinary circumstances that are expected to be overcome given time, which allows employers to accept that workers can perform their functions in a different location from their usual place of work, without this implying a modification or affectation to the rights and guarantees of workers or to the working conditions agreed upon at the beginning of the labor relationship. Thus, we explain bellow what the procedure for authorization is, as established in this new decree.

The authorization to work from home may be requested by workers, who must inform in writing, either by physical or digital means, of the occurrence of exceptional circumstances, attaching the evidence that accredits their occurrence, and asking for the authorization to carry out their duties from home. However, the mere submission of the application does not imply that employers must accept it, since it is not the worker’s right. On the other hand, the authorization to work from home may be implemented by employers regarding one or more of their workers because of the occurrence of these extraordinary situations, without the need of a prior request. In both cases, the decision to enable work from home must be made in writing, by means of a notice sent to workers, physically or digitally, in which they are informed of: (i) the occasional and exceptional situation that allows for the authorization of working from home to be granted; (ii) the term of this authorization, which may be a maximum of six (6) months, unless the circumstances that gave rise to the authorization persist, in which case it will remain in force until such circumstances disappear[1]; (iii) the duties that the worker must perform during the authorization; (iv) the means of communication through which employers and workers may report any updates, (v) the channels for complaints from workers so they may  submit their concerns or claims of infringement of their right to disconnect from work or of workplace harassment; (vi) the physical address from which workers will perform their duties, (vii) if there is an agreement for workers to use their own equipment for the performance of their duties, and if compensation will be paid or not, otherwise in case of a lack of agreement, it must be supplied by employers, indicating all the equipment and tools that will be delivered along with the liability regarding their custody and the procedure for the delivery and return of said tools, and (ix) the computer security measures workers must comply with. In addition, this decree also establishes new obligations, prior to the authorization for working from home, that employers must comply with, such as: (i) filling out the form provided by the workers’ compensation administrators (ARL, by its Spanish acronym), informing them about the authorization to work from home, the period for which the authorization will be granted and the physical address from which  workers will perform their tasks, (ii) having the necessary procedure to guarantee the right to disconnection from work, and (iii) training workers to ensure the proper use of information and communication technologies.

In case of receiving a request to authorize work from home, employers must respond in writing within a period not exceeding five (5) days and, take into account within the criteria to grant the authorization, in addition to the existence of exceptional circumstances, the possibility that workers’ duties can be performed outside the usual place of work without affecting the adequate provision of the service or workers’ productivity and whether the company has the necessary tools. Once the authorization to work from home is granted, employers must include work from home within their methodology to identify, evaluate, assess and control dangers and risks to workers and adopt all the necessary actions in the Annual Work Plan of the Occupational Health and Safety Management System (SG-SST, by its Spanish acronym). Likewise, employers must take the corresponding actions to protect and guarantee human dignity and workers’ rights.  When the period of authorization to work from home expires or the conditions that gave rise to this authorization are overcome, employers must inform workers, immediately, about the expiration and their return to the usual place of work.

Finally, bear in mind that the authorization to work from home includes the possibility of working from abroad with the prior authorization of the employer, who must report this situation to the ARL and take all necessary measures to ensure that workers are enrolled and protected by the Social Security System of Colombia. Additionally, there is also the possibility of implementing work from home under the alternation model, that is, employers may determine that some days of the week workers perform their duties in person at the usual place of work and other days from home.

In case you have doubts regarding these obligations or any labor issue, do not hesitate to contact us so that we can provide you with the counsel you need.

[1] Law 2088 of 2021, article 7.