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Resolving insolvency: New funding and business survival

Author: Doing Business
Publication: Doing Business 2016

Overview

New funding provided to a debtor company after the start of insolvency proceedings – known as post-commencement finance - helps businesses in financial distress to recover. Doing Business collects data on specific aspects of insolvency laws and regulations in each economy, including the availability and priority of post-commencement finance. The data show possible connections between the existence of regulations on post-commencement finance and the likelihood of business survival. This case study shows that business rescue is more likely in economies where the law provides for post-commencement finance.

Main Findings

  • New funding provided to an insolvent company after the start of insolvency proceedings—known as post-commencement finance—can enable the business to continue operating during insolvency.
  • The authorization of post-commencement finance and the treatment of the claims of post-commencement creditors are two important areas that need to be addressed in insolvency law. But half the 189 economies covered by Doing Business have no provisions in these areas.
  • Clear and effective regulations on post-commencement finance may improve the availability and terms of new funding for viable firms undergoing insolvency proceedings—funding that can support their   successful reorganization or enable their sale as a going concern in liquidation.
  • Financially distressed businesses are more likely to pursue reorganization—and more likely to emerge from insolvency proceedings as a going concern—in economies that have provisions on post-commencement finance.
  • Many economies are introducing provisions on post-commencement finance as part of an overall effort to strengthen mechanisms for business rescue.