Colombia is using AI to improve insolvency proceedings

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Panorama

Panorama

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Around the world, the COVID-19 pandemic has prompted significant changes to rules, regulations, and procedures. Moreover, the swift onset of the pandemic made governments everywhere swiftly recognize that they were facing a budding global economic crisis.

All that is just as true for Colombia, where the digitalization of many fundamental professional and legal activities has accelerated. In Colombia, one of the most notable areas where this change is occurring is in insolvency proceedings. Early on, to address the economic crisis, the Colombian government enacted a decree under its extraordinary legislative powers allowing the use of artificial intelligence in the administration of insolvency proceedings.

In 2021, the Superintendence of Companies, a government agency, which has been acting as Colombia’s bankruptcy court for almost five decades, has added new digital functionalities to its Insolvency Module (MI, its acronym in Spanish). This artificial intelligence tool, hosted on the agency’s website, creates a completely new experience for the interaction of the user with the insolvency system. The rule is simple: Article 3 of Decree 772 of 2020 states that “Superintendence of Companies may use technological and artificial intelligence tools in the development of the different stages of insolvency proceedings”. 

This user-friendly ecosystem includes an app allowing authentication of the user through biometric tools and allowing users and practitioners to monitor the entire insolvency process and communicate with the court, through their smartphones. Users must submit filings through the MI Module, which is based on a learning machine structure through which an algorithm reviews the content of the main filing documents, consults public databases in real time and determines whether a submission is complete. That outcome serves as input for the court’s decision-making process.

Every day, the algorithm learns more about how to identify documents and sources, enhancing its knowledge and expediting the progress of cases and their results. Overall, this system is reducing the time between a filing and the start of the reorganization process.

For instance, if the legal representative of a firm is not a Colombian citizen but a foreign person, the system will ask for proper identity documents, and will validate such foreign documents as a permissible alternative support for future cases, attaching the authentication source to the internal proceeding. Other examples are the identification of financial statements and confirming the propriety of the signatures of auditors, accountants, and legal representatives, including ensuring that signatures submitted to the system correspond to the same person’s signatures in public records. It is feasible that the system will eventually be able to identify inconsistencies in the content of financial information.

For struggling companies, short-term survival may depend on a quick resolution of their insolvency case. Colombia’s AI-based process is important because it is enabling faster intake into the system, thus addressing debtors’ concerns about the recovery process and moving debtors closer to an effective granting of the automatic stay of individual collection actions and security interest executions. This helps to protect debtor assets and the going-concern value of the firm.

The documents required in filing for a reorganization process under the Colombian insolvency regime are rigorous and profuse, and the available manpower and resources to process them are limited. This simple AI-based process is already making a significant difference in terms of efficiency in processing the vast amounts of information debtors need to provide.

Going forward

There are broad, important implications in all of this. First, it is expected that the regulations and best practices being developed in the insolvency process will ultimately be extended to other aspects of the insolvency process. For instance, data mining of the information gleaned with each insolvency proceeding may allow an understanding of causes of insolvencies as well as potential remedies, overall allowing some market sectors to better identify red flags; informing government in the creation of public policy on regulatory issues; and perhaps even leading to economic incentives for some market participants. And, given the important role that the digitized process is playing, it is may also be time to think of reorganization agreements as smart contracts which facilitate the alignment of interests, and generate trust among the stakeholders.