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

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TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS livestock and industrial operations, and créditos refaccionarios, 65 which refer to loans for more permanent operations, machinery, improvements and installations). The guaranty then follows into not only the production assets acquired with the credits, but also into the goods produced with those assets and their proceeds. Production credits may be created by a private document, but must be inscribed in both the real property and the commercial registries before the guaranties associated with them take effect against third parties. 66 The legal figure of production credits is known in other Latin American countries as well, but the Honduran Commercial Code includes one of the clearest legislative treatments of it. Among notable provisions, the Commercial Code gives guaranties for créditos de habilitación o avío precedence over those for créditos refaccionarios, and the latter precedence over all other guaranties. 67 It also places responsibility on the creditor to assure that the credit is used for production purposes, at the risk of losing the special priority if it is not, 68 but the special priority so gained follows the guarantied assets into the hands of third party purchasers who purchase directly from the debtor and also affects subsequent purchasers who “knew or should have known of the guaranty created against them.” 69 Another mechanism developed in the Honduran Commercial Code beyond its treatment in many Latin American Commercial Codes even today is the fideicomiso de garantía, or guaranty trust. 70 In Honduras, only authorized banks may act as a trustee. 71 The trustee “shall exercise powers of disposition over the goods and rights given in trust,” 72 according to the terms and conditions of the trust instrument. 73 The statute specifically recognizes trust arrangements that “signify acquisition or substitution of goods and rights, or investment of money or liquid funds,” 74 operations that easily correspond to collateral guaranties. The guaranty trust under Honduran law permits virtually immediate, extra-judicial execution against collateral upon debtor’s default. In the event of debtor-settlor’s non-payment, the trustee may simply sell the collateral and turn over the proceeds to the beneficiary-creditor, so long as the trust instrument provides for such process. 75 Among more sophisticated lenders and their lawyers in Honduras, the guaranty trust is a favored form for structuring secured transactions, although its costs make it prohibitive for most small and medium enterprises seeking credit. 65 CdCom, Arts. 918-919, 927. 66 CdCom, Art. 921. 67 CdCom, Art. 923. 68 CdCom, Art. 922. 69 CdCom, Art. 925. 70 CdCom, Arts. 1033-1062. The statute does not refer specifically to the fideicomiso de garantía, but in a nice turn of legislative phrase the statute does state, “The trust may be constituted to serve all purposes imaginable as legal activities, so long as they are licit and specified.” (El fideicomiso puede constituirse para servir todas las finalidades imaginables como actividades jurídicas, siempre que sean lícitas y determinadas.) CdCom, Art. 1049. Consistent with its unlimited purposes, the trust may operate against “all class of goods and rights.” CdCom, Art. 1048. 71 CdCom, Arts. 1040, 1054. While no bank may serve both as trustee and beneficiary of the same trust, CdCom, Art. 1038, one bank may serve as trustee to the benefit of another bank. 72 CdCom, Art. 1037. 73 CdCom, Art. 1048. 74 CdCom, Art. 1056. 75 CdCom, Art. 1057. VI-5
TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS Honduran law would permit many forms of secured transactions, particularly through application of the more agile and imaginative provisions written into the Commercial Code, which contemplate development of new mechanisms as new commercial circumstances emerge over time. In fact, however, the Honduran credit market has not exploited even the statutory bases available to it, because of its strong aversion to risk. Banks and other credit sources simply do not make many loans, and usually turn away potential borrowers with movable collateral to offer as guaranties. These policies regarding risk analysis and lending are characteristic of the attitude of Honduran lenders, rather than justified by Honduran laws. 2. Enforcement Procedures Honduras’s legal system provides for summary execution of guaranties against collateral, and creditors’ lawyers and bankers seem reasonably satisfied that they can obtain relatively expeditious execution against collateral goods in the event of a debtor’s failure to pay. Although both the Civil Code and the Commercial Code prohibit the pacto comisorio, defined as any contractual provision that authorizes a creditor to repossess and dispose of collateral without judicial process, available procedures come close. Liquidation of a guaranty trust provides essentially the same extrajudicial, self-help execution available in the United States under the Uniform Commercial Code. In Honduras, the constitutional guarantee of due process (debido proceso) and a right to a hearing (derecho de audiencia) before a party may be deprived of any rights in property seem to be satisfied by minimal judicial participation and notice to debtors with a right to object when a non-trust guaranty is foreclosed. The constitutional guarantee may be vindicated by allowing debtors to invoke a hearing if they feel that they have viable defenses against the creditor’s claims. However, where a debtor recognizes that the debt is delinquent and the creditor’s claim against the collateral is appropriate—a very common reaction—the creditor should be able to proceed extrajudicially and execute against the collateral in a matter or days, thus radically reducing the risk of nonpayment and the associated enforcement costs. C. IMPLEMENTING INSTITUTIONS Until promulgation of the LdP in June 2004, 76 Honduras had an antiquated, nonfunctional registry system administered by the Supreme Court (for which it provided a source of revenue). 77 The LdP created an Instituto de Propiedad, which will administer all registries for Honduras. The LdP has begun its reforms by concentrating on real property registries, with an ambitious plan to convert the entire system to electronic entries, coordinated with a national cadastral survey. The reform of the Commercial Registry, which will include inscription of guaranties against movable property, should occur in the near future if the Honduran executive branch can carry out its program. Some doubt exists, however, concerning the constitutionality of the reforms; and vested interest groups—who view the new LdP as a serious threat to their professional role and revenue—have hurried to file cases raising constitutional challenges. As of the date of this assessment no decisions had been handed down by the Supreme Court in this matter. 76 Ley de Propiedad, Decreto No. 82-2004, 15 June 2004. 77 Ley de Propiedad, Decreto No. 82-2004, 15 June 2004. VI-6
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