BizCLIR

Insolvency systems are an important element of financial stability. An effective insolvency system facilitates the rehabilitation of enterprises and also provides an efficient mechanism for liquidating those enterprises that cannot be rehabilitated. Increasingly, the reform of the legal framework for insolvency has become an important component of international donors’ economic programs in many countries because of the impact such reform can have on that country’s economic and financial system.

In the absence of adequate insolvency laws, individual creditors may compete to be the first to seize collateral or to obtain a judgment against a failing debtor. It is in the collective interest of creditors that the reorganization or liquidation of a debtor be carried out in an orderly manner. In April 2001, the World Bank issued a report on “Principles and Guidelines for Effective Insolvency and Creditor Rights Systems.” Even though the insolvency principles focus primarily on corporate insolvency, some of the concepts identified are also helpful for developing principles for bank and systemic insolvency.

The World Bank Report establishes that a modern economy requires predictable, transparent, and affordable enforcement of both secured and unsecured credit claims by efficient mechanisms both within and outside the insolvency system. These systems must be designed to work in harmony. The World Bank Report includes an in-depth analysis of a number of principles, some of which are summarized here. In general terms, an effective insolvency system should (a) be integrated with the country’s broader legal and commercial systems—insolvency reform is often ineffective without parallel reform of other commercial laws; (b) maximize the value of the company’s assets by enabling it to reorganize; (c) strike a careful balance between liquidation and reorganization; (d) provide for equitable treatment of similarly situated creditors—including both foreign and domestic creditors; (e) provide for timely, efficient, and impartial resolution of insolvency proceedings; (f) prevent the premature dismemberment of the debtor’s assets by individual creditors; (g) provide a transparent procedure that contains incentives for gathering and dispensing information; (h) recognize existing creditor rights and respect the priority of claims with a predictable and established process; and (i) establish a framework for cross-border insolvencies, including recognition of foreign proceedings and judgments as well as cooperation and assistance among courts in different jurisdictions.

Guatemala fails to meet most of the requirements established under the above principles. The Guatemalan legal framework does not facilitate efficient, transparent, and reliable methods for recovering debt, either within or outside of bankruptcy proceedings. Rules on bankruptcy are not integrated with the broader commercial system; in fact, because of amendments to the Commercial Code, specific bankruptcy rules were repealed in 1970 and only procedural aspects are currently regulated. Among other things, the lack of specific substantive regulation severely limits a creditor’s ability to ascertain the validity of transactions conducted by the bankrupt individuals or entity once it became insolvent—a factor that in turn may significantly confine the number of assets that may be available to such creditors to satisfy their debts. In addition, because of protracted and formalistic judicial procedures, the notion of efficient and impartial resolution of bankruptcy procedures effectively does not exist.

Guatemala’s rules on bankruptcy focus on the liquidation of business entities rather than on their reorganization. However, several interviewees noted that, unlike other Central American countries, Guatemala does provide (at least in theory) for an equitable treatment of creditors, including creditors located abroad.

As a matter of practice, there are hardly any (if any) bankruptcy cases in Guatemala. Companies would rather attempt to reach an agreement with their creditors outside the judicial process or even close operations altogether and set up a new entity without going through a formal bankruptcy procedure—effectively leaving all or a significant number of creditors completely unprotected.

In contrast, the legal framework for the liquidation of financial entities was reformed in 2002 in an effort to modernize the system and adapt it to international standards. However, the system has not been tested to date and a few ongoing cases of bank liquidations are being handled under the previous legal system—a solution criticized by many because of irregularities and lack of transparency.