10 positive aspects of insolvency law

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The Ministry of Economy presented a series of bills to the Congress of the Republic of Guatemala with the aim of reactivating the national economy. [1] Among these was Bill number 5446, which proposed a special law on insolvency matters to provide support to natural and legal persons who cannot pay their debts due to specific circumstances. It is important to note that insolvency should not be interpreted as the debtor’s delay in complying with his obligations.

Finally, on February 8, 2022, the Congress of the Republic of Guatemala approved the bill through Decree 8-2022, Insolvency Law (the “Insolvency Law” or the “Law”), which was published on March 3, 2022 in the Official Journal and will come into force on September 3, 2022. The Insolvency Law will delete articles 347 to 400 of the Code of Civil and Commercial Procedure (the “CPC”), articles 21 and 358 of the Commercial Code and will modify articles 219 of the Commercial Code and article 4 of the Securities Act.

Previously, the insolvency of a debtor was governed by the provisions of the CPCC, which limited his possibility and his power to continue carrying on his business to comply with his obligations, so that in the 50 years that this law was in force, only 14 bankruptcy procedures have been initiated (according to our survey). The insolvency law proposes a course of action different from the previous legislation and offers the debtor the possibility of undertaking a financial and patrimonial reorganization of his company in order to keep it operational to effect the payment of its debts. The insolvency law follows Chapter 11 of the bankruptcy law of the United States of America, which promotes the financial recovery of the debtor and allows his economic activity to be the main source of income to pay his obligations. [2]

The main features and benefits that the insolvency law grants are:

  1. General applicability

The law generally applies to natural and legal persons. An exception applies to companies belonging to the banking, financial or insurance sectors that are supervised by the Guatemalan Banking Authority (i.e. Superintendencia de Bancosin Spanish), as these have specific laws that govern their insolvency proceedings.

  1. It removes the reputational stigma of a company in financial difficulty

The law allows businessmen in financial difficulty to pursue an option to improve their liquidity through reorganization and refinancing, without necessarily having to sell their assets.

  1. It allows you to carry out a restructuring of your assets

Insolvency law does not primarily seek to liquidate the debtor’s assets; rather, he favors the continuation of the debtor’s activity that the yields of the enterprise serve as a mode of payment of its debts in favor of its creditors. This characteristic is similar to the provisions of US bankruptcy law, which has played a crucial role in the economy of this country for the financial recovery of large companies such as General Motors, Marvel Entertainment and Avianca. Unlike the old Guatemalan legislation, the law will benefit all parties involved, because if the debtor’s financial situation improves, his creditors will have a greater likelihood of recovering their debts.

  1. Possibility of concluding amicable transactions

A judicial declaration of insolvency is not necessary for the creditors and the debtor to reach amicable agreements relating to the reorganization of the debtor’s assets, for the payment of his debts. This is useful since the debtor and her creditors are fully aware of their financial needs.

  1. Possibility for the debtor to continue to exercise its activity

The insolvency law privileges the continuation of the debtor’s activity and therefore allows him to remain in possession of his assets, as opposed to a scenario in which the liquidation of the assets is necessary to pay the debts. It is only in limited situations, such as mandatory insolvency proceedings, that the debtor’s right of possession over his property is limited.

  1. Revocation of contracts

In order to protect creditors against the unjustified exhaustion of the debtor’s assets, the insolvency law introduces the possibility of revoking contracts (that is to say cancellation) which cause financial damage and which are not part of the debtor’s normal economic activities. For example, if the insolvent debtor transfers his property free of charge (instead of earning income to pay his debts), this act may be declared void by a judge. [3] This figure reinforces the objective of insolvency law, which is the financial recovery of the debtor and the payment of his debts in favor of the rights of creditors.

  1. Types of credits and their preferential payment order

In order to provide creditors and debtors with legal certainty, the insolvency law introduces specific provisions which establish different types of credits and a preferential order of payment, as follows:[4]

The new legal framework offers greater legal certainty to local and foreign investors as to their position in the event of an insolvency situation; this, in comparison with the old legislation which was not clear as to the types of credits and the priority of payments.

  1. Simplified insolvency procedures

Guatemala’s legal history has shown that collective executions under the CCPC were either impractical or did not provide any benefit to debtors and creditors, as only 14 proceedings were initiated, of which 8 were either abandoned by the parties or dismissed by the presiding judge. In this regard, the insolvency law is innovative because it establishes that (i) the steps of the insolvency procedure are oral in nature and can even be carried out online; (ii) it is possible to undertake a brief insolvency procedure (that is to say with shorter terms) [5]; and, (iii) new specialized insolvency courts will be created within 5 years of the entry into force of the insolvency law.[6]

Moreover, the figure of the insolvency administrator[7] is created. The role of the insolvency administrator will be to supervise the reorganization or liquidation proceedings of the insolvent debtor. The person to be appointed as insolvency administrator must demonstrate his knowledge of financial, accounting or legal matters. This person must only act for the benefit of the insolvency proceedings, for which he will be liable for any damage caused by negligence, incompetence or ignorance.

It should be noted that proceedings under the CPCC which are currently pending or which will be commenced before the entry into force of the insolvency law will continue to be governed by the provisions of the CPCC.

  1. insolvency administrator

The law establishes the figure of the insolvency administrator, who will monitor the uses that the debtor gives to his assets, but not in an intrusive way. In other words, the insolvency administrator will serve as a guarantee that the debtor’s business will continue to operate.

  1. It does not eliminate the execution procedure but adds a new alternative

The enforcement procedure provided for by the CPCC is not abolished and does not affect creditors having a right of priority over the debtor’s assets (that is to say pledges, mortgages and security trust agreements). Insolvency proceedings are an additional option.

In conclusionthe insolvency law will be crucial for the improvement of the Guatemalan legal and financial frameworks, this for the benefit of any foreign investment, because it will grant greater legal certainty.

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