Honduras has virtually no bankruptcy practice. Lawyers interviewed for this assessment remembered only a single insolvency proceeding in the country within the past few years. Typically, businesses in Honduras carry out de facto insolvency proceedings by simply shutting their doors and ceasing to exist.
According to lawyers interviewed for this assessment, several banks have failed within recent memory, and banks have since come under much more careful scrutiny and control by the Commission for Banking and Insurance. Currently, insolvency laws do not cover bank insolvencies. The Commission for Banking and Insurance is prepared to step in if a bank or insurance company goes bankrupt by acquiring the stricken institution and transferring it to a healthy bank or insurance company. The commission is rigorous in its auditing and oversight of Honduran banks and insurance companies and its requirements for reserve funds to cover obligations. It could be argued that the restrictions imposed by the commission contribute to the extreme risk aversion and the conservative lending policies of Honduran banks.
No lawyers interviewed had ever handled an insolvency proceeding, let alone considered such practice part of their own expertise or normal workload. Further, no lawyers knew of any other attorneys who did. One of the major reasons for the lack of bankruptcy practice is that insolvency proceedings fall under the jurisdiction of Honduras’s all-purpose trial courts, which have a reputation for inefficiency. Such courts have no experience with insolvency proceedings, which are relatively complicated and lengthy.
Honduras has a well-drafted and detailed insolvency law, promulgated as part of its Commercial Code in 1950, but its statutes lack many aspects present in modern bankruptcy laws around the world.
- First and most important, Honduras’s insolvency laws do not provide debtors with a full and final discharge of their debts. This leaves the debtor with little incentive to initiate insolvency proceedings, since they help creditors but add costs that reduce the payoff and leave debtors responsible for any deficiency.
- Second, Honduras’s insolvency laws retain a vestige of ancient bankruptcy law that is absent from modern statutes: extensive provisions for assigning blame and even criminal penalties based on a presumption of blameworthy conduct on the part of any debtor who cannot pay his or her debts.
- Third, modern insolvency regimes depend on creditors’ effective remedies in collecting debts, most notably the ability to foreclose on collateral guaranties, to drive honest debtors to seek relief in insolvency proceedings. Honduras’s debtors lack such an incentive—first, because insolvency offers no discharge from their debts and, second, because creditors use forms of guaranty that elude insolvency proceedings (e.g., fideicomisos de garantía) or cannot collect debts in a manner efficient enough to pressure debtors into such proceedings.
- Finally, modern bankruptcy laws in other countries operate in tandem with collateral guaranty laws to provide two major elements lacking in Honduras: (a) the clear demarcation of priorities among creditors and (b) the vindication of those priority claims. Honduran insolvency and collateral laws lack such internal pressure points and therefore cannot exert the proper leverage on modern creditor-debtor relations.
Honduras’s lack of a bankruptcy practice and updated legislation hampers business and investment by leaving creditors without an effective ultimate remedy against defaulting debtors and by leaving debtors without the means of making a fresh start after financial failure. A desirable credit dialectic should run from (a) default by debtor, to (b) foreclosure against collateral by creditor, forcing (c) bankruptcy by debtor that temporarily stops foreclosures but leads to the recognition of secured creditors’ collateral claims and means that all debts will be resolved in the relatively short term, and (d) leaves the debtor finally discharged from all responsibility for the debts. Without effective bankruptcy creditors cannot foreclose, even on debts secured by movable collateral, let alone assert unsecured claims, with any hope of payment in a realistic time frame. The attendant increased risk to any lender reduces the supply of credit offered to potential borrowers and weeds out a number of such borrowers even when their collateral should be sufficient to guaranty a needed loan. In addition, debtors who might return to economic viability by shedding their obligations through insolvency enjoy no such alternative.
