Practical implications of regime change in the microfinance sector in Nicaragua

By: María Lizeth Prado 

On November 15, 2022, was published in The Gazette Official Daily No. 214, Law No. 1137 “Special Law for the Change of Legal Regime of Non-Profit Organizations” which, according to its text, has the purpose of establishing the procedure for the change of regime from non-profit to mercantile of the entities whose activity is to create financial services or microfinance, all in accordance with the law of the matter and that were constituted under the figure of Association or Non-Profit Foundation (hereinafter “NPO”), having as maximum term to execute the transfer on February 13, 2023.

From the law, the route to be adopted by the NPOs would be the transformation of the legal nature of the entity. In this sense, it is important to remember what the figure of transformation consists of, which from a doctrinal point of view, some jurists define it as: <<… the adoption by the company of a legal type different from the one adopted before, with the consequence of having to submit (henceforth) to the regime corresponding to the new type, being free from the rules that governed it until that moment” (Ferrara); <<…the transformation does not imply dissolving, nor liquidating the organization of the holder. It supposes, simply, the change of its structure and legal regime to another of a different kind without affecting its existence” (Morales Acosta, 1991); <<…it has been said that transformation does not imply the loss of the identity of the primitive society, since it only changes its external appearance”. (Saul Argeri).

We note that certain of the above-mentioned considerations are included in the law, since Article 1 of the law states that “the mercantile companies created are successors without solution of continuity of the corresponding non-profit associations or foundations and may continue their economic activity in compliance with the constitutional principle of entrepreneurial freedom“.

However, subsequently, Articles 4 and 5 mandate the cancellation of the existing legal entities or their registration, as applicable, and indicate that “the new commercial corporations must be registered before the corresponding institutions in accordance with the corresponding law”. Finally, Article 6 authorizes the transfer of assets to the mercantile company. Under the current Nicaraguan legal system, which had not adopted the figure of transformation, this treatment established in law had a series of implications at the moment of wanting to execute them in practice, since the change of regime could not be framed in an ordinary procedure.

Therefore, the NPOs that were previously under the control and supervision of the Ministry of  the Interior through the Department of Registration and Control of NPOs, are dissolved by virtue of the cancellation of their legal personality and their registration as NPOs in Nicaragua, and their operations are taken over by a mercantile company created under the corresponding mercantile legislation, which had to carry out the entire ordinary process of incorporation and registration before the various agencies, including the Mercantile Registry, Taxpayer Registration, Employer Registration, Banks, etc. This, in turn, generated a change in the tax regime, since they are now treated as exempt entities, except in certain cases, and are now subject to a general tax regime with responsibilities to withhold, collect, and pay taxes, and at the same time, they continue under the supervisory framework of the National Microfinance Commission, in the case of microfinance entities.

For the purposes of transferring the assets to the mercantile company, in some cases, it was necessary to obtain no objection or authorization from the creditors of the entities where the NPO was the majority or controlling shareholder, prior to the formalization of the act of transfer, by virtue of the clauses agreed upon in the financing or funding contracts signed. For this purpose, the creditors, mostly foreign, had to have a clear understanding of the scope and specialty of the law and of the continuity of the relationship with the created company, which would have new statutory rules to be considered. Additionally, it was required to notify suppliers, allies, banks, companies in which they had participation, about the change of entity and to comply with the requirements that each case indicated, for example the update of the legal file, its final beneficiaries, etc.

For the act of transferring and recipient the assets, it was important to consider the accounting aspects for the corresponding record in compliance with the Accounting Manual applicable to Microfinance Institutions. CONAMI, as the authority in charge of applying the special law, was a key element in providing recommendations and clarifications as required. Likewise, it involved an effort in the adequate coordination with the authorities involved in the process, among them, CONAMI, MIGOB, Public Registries through its General Directorate, Mayors’ Offices, General Revenue Directorate, among others.

In relation to the assets, in the case of the NPOs that had real estate or guarantees registered in the Public Registry, it implied a change of the owner of those assets or rights, which had to be treated as a change of corporate name under the basis of succession without solution of continuity by the mercantile companies’ recipient the assets of the NPO.            In a strict sense, the entity object of the change did not have as such a modification in its corporate name, since its legal personality and registration was cancelled, and another mercantile entity was “born” in its replacement.

From a tax point of view, it was not possible to integrate the previous taxpayer account with the taxpayer account of the new company, so a process of cessation of economic activity had to be initiated by the NPO and a new taxpayer registration of the new company. The proof of cessation of economic activity was even required by some governmental entities.

With respect to labor issues, an employer substitution was required, where the recipient company acquired the labor liabilities under its employer registration, removing the employees from the NPO’s payroll and adding them to the payroll of the new company.

All of the above were some of the processes that the NPOs had to carry out within the 90 days established by the law in order to comply with Article 7, which referred to “the transfer and registration of the property and assets of the related entities must be carried out under the principles of speed, publicity and immediacy within the established term…“, which posed a series of significant challenges for the agencies in terms of time, authorizations or clarifications.

In view of the foregoing and returning to the definitions of the figure of transformation, one could not strictly speak of the adoption of this figure within the framework of Law No. 1137, since as such it implied a cancellation and cessation of the activity of the NPO that would be the entity object of the transformation and the creation and registration of a new mercantile company recipient the patrimony.

It should not be lost sight of that it was an important effort on the part of the NPOs and the various public entities to establish the framework to be followed to guarantee the execution of the regime change within 90 days, when the ordinary processes did not frame special considerations to implement a transformation.