Trade and Commercial Law Assessment - Honduras - Economic ...

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TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS III. COMPANY LAW A. INTRODUCTION Although the Commercial Code in Honduras is modern by regional standards, sections of the code remain outdated and in some cases leave significant legislative voids. Specifically, the code does not allow for fully owned subsidiaries, requires equity capital, and lacks mechanisms to protect minority shareholders and enforce principles of corporate governance. These issues detract from the country’s business climate and should be addressed through reform of the Commercial Code. Problems associated with the legal code are exacerbated by the poor functioning of the Commercial Registry. The excess of requirements imposed by the registry deters foreign and domestic business growth and has encouraged the trend of businesses’ operating in the informal economy. Lack of access to credit further inhibits business growth. Access to credit is scarce for formal businesses and nearly nonexistent for informal firms. The stock market, which could be used as an alternative source of capital, is underdeveloped. Income taxes are relatively high and the tax system is complex. The government has also had problems in tax collection and has imposed direct taxes on consumers to compensate for low collection rates. The unreliability of the judicial system further weakens the code. In fact, companies are reluctant to take cases to court because of the unpredictability of the judicial system. B. LEGAL FRAMEWORK The majority of company law in Honduras is found in the Commercial Code, a comprehensive set of rules drafted in 1950, which provides the legal framework for business organizations, commercial instruments, and trade. The code contains certain provisions, such as those related to appearance, 14 that are very progressive for regional standards. The Commercial Code allows for the majority of common forms of business organization, such as limited liability partnerships and limited liability corporations. The latter type of corporation is known as Sociedad Anónima and is the most widely used organizational structure in Honduras. Most Sociedades Anónimas are family owned. Honduras imposes capital requirements to incorporate a company. For example, a minimum equity of $1,500.00 is required for registration of Sociedades Anónimas. A company cannot 14 With respect to the provision on appearance, if an act appears to be something that it is not, and has created reasonable expectations among good faith third parties that it is, under the code, the act would be considered that which it purported to be. This provision has an impact on the liability of informal business because it means that lack of registration does not protect a firm against the claims of good faith parties that contracted with the entity under the assumption that it was officially recognized. This is the case for so-called de facto companies; that is, the parties affected by the actions of the unregistered company are entitled to sue the person who acted on its behalf and to reach his or her assets to enforce a favorable judgment. III-1
TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS initiate operations if it does not meet its capital requirement. This requirement was intended to provide creditors with a form of guarantee in case of default. Companies comply with minimum capital requirements by submitting evidence that money has been deposited into a bank account. After incorporation, however, the money is usually used for other purposes and thus is no longer available to guarantee the rights of the company’s creditors. To complete the incorporation of a company, founding parties must consent to the company’s articles of incorporation and bylaws. These documents outline the rules regarding management structure, duties of directors, shareholders meetings, and the rights of shareholders. Articles of incorporation and bylaws must be filed with the Commercial Registry for a company to be granted full legal personality`. If a company fails to register the articles of incorporation, it is considered irregular but can still operate without the full rights associated with registration. The consequence of not registering is that shareholders and administrators are jointly and fully liable for the actions of the company. This condition is important in the case of a Sociedad Anónima where shareholders are not liable if the company is fully registered. The legal personality of a company is considered, in words of a prominent local lawyer, “the Berlin wall.” It can hardly be pierced even when a company has been used for fraudulent purposes. Only in few cases, such as when a bank has defaulted on its clients and the bank is a subsidiary totally owned and controlled by a parent bank, can the banking regulatory entity consider lifting the corporate veil and imposing sanctions on the parent bank. Creditors of the subsidiary, however, still could not reach the assets of the parent bank. Sociedades Anónimas can be private or public; however, no company has ever issued shares publicly. There are some private companies with many shareholders, but ownership tends to remain within families. Companies are able to issue bearer shares but rarely do so, choosing instead to issue nominal shares. Companies can issue preferred shares if their total assets are greater than $27,000. Preferred shares do not grant voting rights to shareholders, but instead grant preferred rights on dividends or to the liquidated assets after the company has been dissolved. Companies are not authorized to buy their own shares. Until 2000, the Commercial Code required that Sociedades Anónimas have at least five shareholders. The Law on Administrative Simplification, passed in 2000, changed this provision so that companies now must have only two shareholders. Nonetheless, wholly owned subsidiaries are still not possible. This limitation affects foreign investments because most foreign companies operate through companies in which shares are wholly owned. The code also does not provide for incorporation of companies without equity, as is the tendency now in many countries. Although the Commercial Code provides for joint venture contracts, 15 lawyers rarely use these structures. In some cases, banks use financial trusts to devise corporate structures where there is interest in organizing a business and having partners but not on creating a company. Although the Commercial Code has provisions for mergers and acquisitions, 16 mergers rarely occur because the tax law is not favorable to them. The code does not have provisions for 15 Commercial Code (CdCom) Art. 1283. III-2
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