Vol 12 (2015) - Issue 6

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Insolvency Reform in Guatemala: An Incentive for Domestic and Foreign Investors

1. Introduction
Guatemala does not have a specialised legal framework for insolvency yet. Due to our cultural tradition and legislative background, regulation corresponding to debt restructuring and insolvency is associated primarily with failure, crime and business closure. This negative perception of the debtor has a direct effect on its employees, service providers, tax authorities, financial institutions, investors and clients.
In practice, debt restructuring, seen as a first option, goes through a process of changing original conditions of contracting for the purpose of meeting obligations. In several cases, financial institutions seek to restructure debt prior to initiating a judicial collection process where uncertainty may pose obstacles to efficiency.
From the company’s perspective, this situation poses a risk to their ongoing operations, and they are faced with the challenge of adopting solutions with use of the existing framework to protect their assets, such as operating inter-company transfers or even adopting a new name. In consequence, these improvised solutions pose a risk to employees, creditors and shareholders, further affecting the competitiveness and access to credit for entrepreneurs in a growing economy.

2. Guatemala in numbers
According to the Central Bank of Guatemala, GDP annual growth rate is expected in 2015, between 3.6% and 4.2%, due to the thriving activity reported in agriculture, textile industry, commerce, financial sector, and private services.
The World Bank has affirmed that despite the global financial crisis, Guatemala continues to have a huge potential for economic growth. According to the Doing Business Report – Economy Profile 2015 for Guatemala, Guatemala stands at 98 in the ranking of 189 economies on the ease of starting a business.
Statistics published by the General Mercantile Registry of the Republic of Guatemala, in 2015 and as of June, show that 14,734 new companies have been registered and 1,111 have been cancelled. Through 2015, the Mercantile Registry has implemented reforms and technological advances to its procedures as to minimise costs associated with the formalisation of small and medium enterprises.
According to the Global Entrepreneurship Monitor report for Guatemala 2014-2015, 12% of entrepreneurs are not yet in a stage where they can develop stable income, and 60% of ventures are currently developing in an early stage by youth, under 35 years old, reflecting the reality of limited opportunities that youth has to incorporate to the productive sector, and how, in consequence, the availability of capital is limited to these, and where 43% of such businesses initiate with no more than USD 1,500. This, in addition to a conservative financial sector, an unpredictable regulation, taxes and other costs, reflects how public policy has not been efficient to facilitate entrepreneurs with access to markets and capital in being able to succeed.

3. Efforts to reform
In the past five years, the Guatemalan Government through the Ministry of Economy, the Congress of the Republic, and representatives of the private sector have supported bill initiatives to have Guatemala adopt a modern legal framework that may prove efficient to manage distress and insolvency.