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

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TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS C. ♦ ♦ subsidiary laws, regulations, and policies governing one or more of the areas addressed in this report. For example, courts are usually a crucial institution in the examination of CLIR. Problems uncovered often relate to bureaucratic inefficiency, lack of resources and training, and, of paramount concern, real or perceived corruption. With respect to the flow of goods, services, and people, Customs and Immigration authorities are the chief implementing institutions. Supporting Institutions. The Assessment then considers the environment of organizations, individuals, or activities without which the legal framework or policy agenda cannot be fully developed, implemented, or enforced. Examples include notaries, banks, consumer groups, chambers of commerce, professional associations, and other similar ancillary service providers. Of particular interest with respect to supporting institutions is whether the institutions have any meaningful involvement in what the law says. Where there has been buy-in from affected constituencies, a law is more likely to be understood, to be used properly, and to achieve its purpose. Social Dynamics. Finally, the Assessment studies social dynamics, which entails asking whether the affected constituencies of a law or policy perceive a need for change and, if so, how they are demonstrating this need. For example, Are they effectively lobbying institutions that can make a change? Are the media seizing the issue as a topic of public concern? Are individuals speaking out? On the other hand, have social dynamics taken a less positive approach (for example, is the “gray economy” growing in response to burdensome conditions for market entry)? Analysis of social dynamics can affect how an assistance project is ultimately designed. Where outside participation is strong and public understanding high, a reform program might involve a relatively small number of government officials who are capable of meeting the demands. In contrast, where mistrust and misunderstanding are abundant, an approach that involves significant engagement of “end users” will likely be necessary. SUMMARY OF SUBJECT-SPECIFIC FINDINGS Based on this multifaceted review process, reports for each area were completed and quantitative indicators scored. It should be noted that some repetition of material occurs in the various sections so that each chapter reads as a complete whole. The general findings in the 13 subject matter areas addressed in this report are as follows: ♦ Company Law. Although the Commercial Code in Honduras (i.e., the Honduran Code of Commerce of 1950) is modern by regional standards, sections of the code remain outdated. Specifically, the code does not provide for fully owned subsidiaries, requires equity capital, and lacks mechanisms to protect minority shareholders and enforce principles of corporate governance. These issues keep private sector participants in Honduras from meeting their economic potentials, and should be addressed through legislative reform. In addition, a variety of institutional weaknesses, including the Commercial Registry, the courts, and the tax system, combine to deter foreign investment and domestic business growth on the margin, and encourage the trend toward operating in the informal economy. Access to credit is scarce for formal businesses and nearly nonexistent for informal firms. The stock market, which could be used as an alternative I-5
TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS ♦ ♦ ♦ ♦ source of capital, is underdeveloped. Income taxes are high and the tax system overly complicated, and the government has imposed direct taxes on consumers to compensate for inadequate collection. Contracts. Although it is not difficult to enter into contracts in Honduras, barriers to company growth emerge from (a) the absence of legal provisions for modern contract types and (b) inadequate implementing and supporting institutions. First, the current legal framework does not address modern contracts, such as leasing, franchising, factoring, and electronic contracts. Distribution agreements are claimed to be unfavorably regulated on behalf of local distributors. Powers of attorney granted in a foreign country, including Central American countries, must pass through a complicated process of legalization and permits before they are deemed valid. Moreover, the process of enforcing contracts is complicated, slow, and expensive. Second, the legal system, including both judges and lawyers, requires change to meet the demand of modern international commerce. The system that empowers notaries to profit from political connections is in particular need of reform. Real Property. The entry into force in June 2004 of Honduras’s Property Law (Ley de Propiedad, or LdP) represents an important new initiative for rationalizing the country’s property system by recognizing settlers’ rights, resolving title disputes, and modernizing the Property Registry. The law includes the creation of a new entity in charge of property matters, Instituto de Propiedad, which will have authority over both the Real Property Register and a national cadastre map. The LdP began 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. This effort is supplemented by important administrative reforms underwritten by the World Bank. Currently, perhaps because of the complexity of the issues involved, there is a lack of public understanding about the intentions and anticipated benefits of property reform as it pertains to the daily lives of Hondurans. There are also significant challenges to the authority of the new law: its ultimate impact awaits the resolution of cases challenging its constitutionality. As of the date of completion of this report, these cases were still before the Supreme Court. Collateral Law (Secured Transactions). Financing in Honduras relies today on mortgage-based loans or loans guaranteed by individuals, with immovable collateral as their guaranty. With the exception of automobile loans to consumers, there is only a small private credit market in Honduras that is secured by movable property. The lenders who occupy the vacuum left by this deficit tend to be public foundations and business associations that do not have lending philosophies that support and encourage development and growth. Rather, these last-resort lenders tend to provide holdover loans that permit borrowers to survive at their current levels of operation but not to expand. Thus, legal and institutional reforms in the area of collateral law are greatly needed to help businesses and entrepreneurs remain competitive. Commercial Dispute Resolution. The judicial system in Honduras requires broad reforms to create an environment conducive to private sector growth. The system suffers from untenable delays, inadequate training of both professional and administrative staff, a perception of political influence and corruption, and under-qualified personnel in important positions. While public confidence in the judiciary remains low, certain steps I-6
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