In a series of reports published in 2003 and 2004, the World Bank noted that the insolvency and creditor rights systems in Honduras were deficient on the legislative, institutional, and cultural level. Troubled firms too often simply closed their doors, leaving creditors unsatisfied. The public perception was that recourse to the courts was too complex, too expensive, and too lengthy. The World Bank noted that there was no provision in law for reorganization or for the settlement of creditor claims out of court. It also stated that the judiciary had insufficient knowledge and experience in commercial law in general and insolvency proceedings in particular. Any new insolvency legislation in Honduras would need to address these shortcomings. The World Bank's 2008 "Doing Business" guide for Honduras noted that it takes, on average, 3.8 years to complete the process of closing a business in the country, at a cost equaling 15% of the estate, with an average recovery rate of 20.3 cents on the dollar. This compares to a regional average of 3.2 years, 16.4%, and 25.9 cents on the dollar. For member states of the Organization for Economic Co-operation and Development, the average time is 1.3 years, costing 7.5% of the estate, and returning 74.1 cents on the dollar.

General Overview

The World Bank's 2003 "Project Appraisal Document" on Honduras noted a significant problem regarding indebtedness, which "points to an inadequate framework for corporate bankruptcy" (p. 5). While the document noted that Honduras had regulations in place that dealt with corporate dissolution, liquidation, bankruptcy, and suspension of payments, this regulatory framework did not change the fact that the legally available venue is rarely used, either by creditors or by debtor firms. According to this report, "this [situation] arises due to legislative, institutional, and cultural factors" (p. 5). There is a widespread perception that said proceedings are very costly, complicated, and time consuming. In 2003 the World Bank initiated the "Financial Sector Technical Assistance Credit" project which focuses on the creation of an oversight unit for monitoring corporate sector soundness and improving the legal and institutional frameworks for insolvency and creditor rights. The World Bank website discloses that the closing date for this project is June 2009.

In 2004, the World Bank issued another report, "Honduras Development Policy Review," which also included a section on the country's creditor rights and insolvency systems. This report reiterated the observation that these systems displayed problems on legislative, institutional, and cultural dimensions. Often, financially troubled businesses would simply close their doors, leaving their creditors unsatisfied. On those occasions when creditors had some forewarning of trouble, they might turn to the courts to attach the assets of the troubled firm. Reorganization is infrequently considered as an alternative to business closing. Security is nearly always required for the issuance of credit. Claims against a debtor firm usually can be enforced only after lengthy court proceedings, including numerous appeals. As a result, pre-emptive creditor claims are frequently filed and there is a significant amount of destruction of both asset value and jobs. According to the World Bank, Honduras needs to pass new legislation that would institute "a modern and safe registration system of property rights and securities, both for immovable and movable assets, as well as for insolvency proceedings" (p. 67). Any new insolvency legislation would have to address both reorganization and out-of-court settlements as alternatives to liquidation. Enforcement mechanisms must be made more efficient for both secured and unsecured creditors, and institutional reforms to the judiciary aimed at capacity building must also be explored.

According to the World Bank's two-volume "Investment Climate Assessment," also published in 2004, Honduras scores relatively low with regard to creditor rights protection. According to the assessment, this is primarily due to inadequate training and practice in handling insolvency proceedings. The report suggested that Honduras take steps to improve its judiciary's experience and knowledge with regard to commercial law. This, the World Bank noted, would "raise firms' trust in the judicial system, improve creditor rights, and increase use of insolvency procedures" (vol. 2, p. 96).

The World Bank's 2008 "Doing Business" series analyzes the performance of some 178 countries on a variety of dimensions, including "closing a business." In assessing business closings, the World Bank looks at three elements: the time it takes to complete the proceedings, the cost (expressed as a percentage of the debtor estate), and the recovery rate for creditors (expressed as cents on the dollar). To put these figures into some sort of meaningful context, the World Bank provides comparable averages for the region and the average experienced by the member states of the Organization for Economic Co-operation and Development (OECD). In Honduras, it takes, on average, 3.8 years to complete the process of closing a business, at a cost equaling 15% of the estate, with an average recovery rate of 20.3 cents on the dollar. This compares to a regional average of 3.2 years, 16.4%, and 25.9 cents on the dollar. For the OECD member states, the average time is 1.3 years, costing 7.5% of the estate, and returning 74.1 cents on the dollar.