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10 POSITIVE ASPECTS OF THE INSOLVENCY LAW

Mar/2022

The Ministry of Economy has presented a series of bills to the Congress of the Republic of Guatemala with the purpose 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 that cannot make payment of their debts due to specific circumstances. It is important to note that insolvency must not be interpreted as the debtor’s delay in the compliance with her 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 Gazette and will enter into force on September 3, 2022. The Insolvency Law will abolish articles 347 to 400 of the Civil and Commercial Procedures Code (the “CCPC”), articles 21 and 358 of the Commercial Code, and will modify articles 219 of the Commercial Code and article 4 of the Movable Securities Law.

Before, a debtor’s insolvency was governed under the provisions of the CCPC, which limited her opportunity and power of continuing carrying out her business to comply with her obligations, as a result, over 50 years that such law was in force, only 14 bankruptcy proceedings were initiated (according to our investigation). The Insolvency Law proposes a different course of action than the previous legislation and grants the debtor with the opportunity of entering a financial and patrimonial reorganization of her business with the purpose of keeping it operative to make payment of her debts. The Insolvency Law follows the United States of America’s Chapter 11 of the Bankruptcy Law, which favors the financial recovery of the debtor and allows her economic activity to be the main source of income to pay her obligations. [2]

The main characteristics and advantages that the Law on Insolvency grants are:

  1. General applicability

The Law applies on a general manner to natural and legal persons. An exception applies to companies pertaining to the banking, financial or insurance industries that are supervised by the Guatemalan Banking Authority (i.e. Superintendencia de Bancos, in Spanish), as these have specific laws that regulate their insolvency proceedings.

 

  1. It removes the reputational stigma from a business in financial struggle

The Law allows businesspersons in financial struggle to pursue an option to improve their liquidity through reorganization and refinancing, without necessarily having to sell their assets.

 

  1. It permits to carry out a patrimonial reorganization

The Insolvency Law does not firstly seek to liquidate the debtor’s assets; rather, it privileges the continuation of the debtor’s business for the business’ returns to serve as a payment method of her debts in favor of her creditors. This feature is similar as the provisions of the United States’ Bankruptcy Law which has been crucial in that country’s economy for the financial recovery of big companies such as General Motors, Marvel Entertainment, and Avianca. In contrast with the former Guatemalan legislation, the Law will benefit all the parties involved, as if the debtor’s financial situation improves, her creditors will have a higher probability of recovering their credits.

  1. Possibility of carrying out out-of-court deals

An insolvency judicial declaration is not necessary for the creditors and the debtor to achieve out-of-court agreements with respect to the debtor’s patrimonial reorganization, for the payment of her debts. This is useful given that the debtor and her creditors are fully aware of their financial needs.

 

  1. Possibility for the debtor to continue to carry out her business

The Insolvency Law privileges the continuation of the debtor’s business, and therefore it allows her to continue in possession of her assets, as opposed to a scenario under which the liquidation of assets is necessary for the payment of debts. Only in limited situations, such as the compulsory insolvency proceedings, the debtor’s right of possession over her assets is limited.

 

  1. Revocation of contracts

With the purpose of protecting the creditors from the unjustified depletion of the debtor’s assets, the Insolvency Law introduces the possibility of revoking contracts (i.e. making void) that cause a patrimonial harm and that are not part of the debtor’s normal economic activities. For example, if the insolvent debtor transfers her assets for free (instead of earning some income to pay her debts), such act may be declared void by a judge. [3] This figure strengthens the Insolvency Law’s purpose, which is the financial recovery of the debtor and the payment of her debts in favor of the creditors’ rights.

  1. Types of credits and their preferential payment-order

To provide creditors and debtors with legal certainty, the Insolvency Law introduces specific provisions that establish different types of credits and a preferential payment-order, as follows:[4]

The new legal framework provides greater legal certainty to local and foreign investors on their position in case of an insolvency situation; this, in comparison with the former legislation that was not clear with respect to the types of credits and the priority of payments.

  1. Simpler insolvency proceedings

Guatemala’s legal history has shown that the collective executions under the CCPC were not practical or granted any benefits to debtors and creditors, as only 14 proceedings were undertaken, of which 8 were desisted by the parties or rejected by the presiding judge. With that in mind, the Insolvency Law is innovative as it establishes that (i) the steps of the insolvency proceedings are of an oral nature and may even be carried out online; (ii) it is possible to undertake a brief insolvency proceeding (i.e. with shorter terms) [5]; and, (iii) new specialized courts on insolvency matters will be created within a 5 year term starting from the entry into force of the Insolvency Law.[6]

Additionally, the figure of the insolvency administrator[7] is created. The role of the insolvency administrator will be to oversee the insolvent debtor’s reorganization or liquidation proceedings. The person to be designated as insolvency administrator will have to demonstrate their knowledge on financial, accounting, or legal matters. This person must act only in benefit of the insolvency proceedings, for which she will be liable for any damages caused because of negligence, lack of skill, or ignorance.

It is worth to be noted that the proceedings under the CCPC that are currently ongoing or that will initiate prior to the Insolvency Law’s entry into force, will continue to be governed by the provisions of the CCPC.

  1. Insolvency Administrator

The Law establishes the figure of the insolvency administrator, who will oversee the uses that the debtor gives to her assets, but not in an intrusive manner. In other words, the insolvency administrator will serve as a guarantee for the debtor’s business to continue operative.

 

  1. It does not eliminate the enforcement proceedings but adds a new alternative

The enforcement proceedings under the CCPC are not eliminated and it does not affect creditors with a first priority right over the debtor’s assets (i.e. pledges, mortgages, and security trust agreements). The insolvency proceedings are an additional option.

In conclusion, the Insolvency Law will be crucial for the improvement of the Guatemalan legal and financial frameworks, this in benefit of any foreign investments, as it will grant greater legal certainty.

Arias’ team has professionals with bast experience on reorganization, insolvency, and bankruptcy matters, who can gladly provide you with assistance on these topics. Should you have any doubts or require additional information on these matters, do not hesitate to contact us.

 

Jorge Luis Arenales
Partner

jorgeluis.arenales@ariaslaw.com

 

Cindy Arrivillaga
Senior Associate

cindy.arrivillaga@ariaslaw.com

 

Andrés Marroquín
Associate

andres.marroquin@ariaslaw.com

 

Jorge Rolando Barrientos
Associate

jorge.barrientos@ariaslaw.com

 
 

[1]Bill number 6043 that proposes the approval of the Law for the Strengthening of the Energetic Infrastructure; Bill number 6029 that proposes the approval of the Law for the Promotion of Cross-border Electronic Commerce; Unified Bills number 5626 and 5770 that proposes the approval of the Law for the Implementation of the ILO’s Agreement 175 on Remote Work.

[2] Tittle 11, Chapter 11, United States Code.

[3] Article 47, Insolvency Law

[4] Article 48, Insolvency Law

[5] Article 101, Insolvency Law

[6] While the new courts are created, the insolvency proceedings will be carried out by First Instance Judges of Civil Matters.

[7] The Insolvency Law establishes that the insolvency administrator may act by herself or with the aid of an auxiliary administrator.


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