Guatemala: Insolvency law in Guatemala: a necessary tool to alleviate the negative economic effects of COVID-19

The current Covid-19 pandemic is affecting the economy worldwide, and the countries of the Central American region are no exception. In recent months we have seen how the governments of Central American countries have adopted a series of plans and programs to mitigate the negative effects on their economies and thus protect, as much as possible ,the household economy of their citizens.


In Guatemala, measures have been adopted by the Government, as well as by the Congress of the Republic, through the issuance of laws that facilitate the continuity of basic services for citizens, as well as greater access to credit and micro-credit, with the intention of alleviating the difficult economic situation that the country is going through. However, several laws have yet to be discussed that would allow the State to provide this additional support in order to keep the national economy afloat, not only in the short and medium term, but also in the long term.


Among these laws is Bill No. 5446, the Insolvency Act, which would allow individuals and businesses to meet their legal and contractual obligations when they become insolvent, in some cases maintaining their business and assets.


Insolvency is currently regulated by the Code of Civil and Commercial Procedure (Decree-Law No. 107 and its amendments), which entered into force on July 1, 1964. This legal provision is out of step with the current needs of the population. It regulates the various procedures for the declaration of Insolvency and the eventual Bankruptcy of a person (whether individual or legal entity).


The provision is intended to protect the creditor, since it seeks to guarantee payment of the debtor’s obligations to the creditor through the realization of the insolvent party’s assets. This is contrary to the world trend, where, in the vast majority of legislations, through insolvency proceedings, maintaining business activity is the objective.  In turn, better protecting the national economy as well as the entrepreneur and his creditors.


The current Civil and Commercial Procedural Code provides the possibility for the insolvent party to seek an agreement with its creditors and, thus, resolve its situation through what is known as the Voluntary Creditors’ Meeting. Nevertheless, this option also entails the risk to insolvent parties of losing control of their businesses, as well as an eventual possibility that, if the agreement is not reached, they will be subject to a collective execution process, where the insolvent party will be totally disempowered, not only from control of its businesses, but also from its assets, through the Necessary Creditors’ Meeting.


Consequently, the process of insolvency in Guatemala is an unattractive tool for entrepreneurs, both from the point of view of the debtor, who face the total loss of their businesses, as well as for creditors, who are subject to the fate of what was rescued to obtain payment of their credits. Hence, the need for the State of Guatemala, through the Congress of the Republic, to provide an essential tool in these moments of crisis, in order to obtain viable and agile solutions for debtors and creditors, through which the former can get out of their situation of insolvency and, the latter, can obtain payment of their credits.


The initiative No. 5446 Insolvency Law, in summary, seeks to develop a modern and agile legal regime, which has as its central axis the reorganization of companies that are in a state of insolvency, prioritizing the continuity of the debtor’s activity in a controlled manner so that, through it, payment can be made to its creditors, and if in certain cases, this option proves unfeasible, proceed to liquidate them by means of agile and orderly legal processes with the greatest possible legal certainty.


The above acquires national relevance, since it not only allows companies to face cases of insolvency and maintain their businesses, but also because a study in the World Bank’s  Doing Business, shows Guatemala has been left behind in comparison with the rest of the region, who in their great majority do have a modern and agile insolvency law.


The negative effects of Covid-19 are already beginning to be felt at a global level, signaling why we must consider the need for Guatemala to have this tool.  It will allow many people and businesses to keep their businesses open, keeping their sources of work and investment afloat.  It will also allow the insolvent party to alleviate its economic situation, which in the case of the pandemic was impossible to foresee, providing certainty to the creditor that it will not be subject to the failure of the insolvent party, but on the contrary, obtain the certainty of the recovery of its credits when the  latter can follow the corresponding legal procedures.


It bears recalling, that in accordance with article 7 of the Judicial Authority Act, procedural laws have immediate effect, except as otherwise provided by law. It is therefore a matter of national urgency that the Insolvency Law be decreed as soon as possible.  In that way  all persons who, as a result of the effects of the Covid-19 pandemic, find themselves in a situation of insolvency, may protect their assets and businesses by maintaining them, thereby  guaranteeing the continuity of the business for the due payment of all their legal and contractual obligations. Both the debtor is protected, and the creditor retains the effective possibility of recovery of its credits.  Add to this the benefits to the national economy, maintaining open businesses and sources of work that arise from them.

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