Frequently Asked Questions
- How is the recovery rate calculated?
- How is the strength of insolvency framework index calculated?
- What is a no practice economy?
- What are the main good practices?
- Does the Resolving Insolvency indicator record the de jure (the law) or de facto (the practice) situation?
How is the recovery rate calculated?
The recovery rate is recorded as cents on the dollar recovered by secured creditors through reorganization, liquidation or debt enforcement (foreclosure or receivership) proceedings. The calculation takes into account the outcome: whether the business emerges from the proceedings as a going concern or the assets are sold piecemeal. Then the costs of the proceedings are deducted (1 cent for each percentage point of the value of the debtor’s estate). Finally, the value lost as a result of the time the money remains tied up in insolvency proceedings is taken into account, including the loss of value due to depreciation of the hotel furniture. Consistent with international accounting practice, the annual depreciation rate for furniture is taken to be 20%. The furniture is assumed to account for a quarter of the total value of assets. The recovery rate is the present value of the remaining proceeds, based on end-2015 lending rates from the International Monetary Fund’s International Financial Statistics, supplemented with data from central banks and the Economist Intelligence Unit.
The formula for the case where the company continues to operate is as follows:
The formula for the case where the company is sold piecemeal is as follows:
25*20%*time accounts for the depreciation of the hotel furniture.
(1+lending rate)^time accounts for the fact that the creditor is repaid at the end of the process (not today) and Doing Business measures how much that payment is worth today.
How is the strength of insolvency framework index calculated?
The strength of insolvency framework index is calculated as the sum of the scores on 4 other indices: commencement of proceedings index (with a range of 0–3), management of debtor’s assets index (0–6), reorganization proceedings index (0–3) and creditor participation index (0–4). The strength of insolvency framework index ranges from 0 to 16, with higher values indicating insolvency legislation that is better designed for the rehabilitation of viable firms and the liquidation of nonviable ones.
What is a “no practice” economy?
An economy receives a “no practice” classification if it had zero cases a year over the past 5 years involving a judicial reorganization, judicial liquidation or debt enforcement (foreclosure or receivership) procedure. This means that creditors are unlikely to recover their money through a formal legal process. The recovery rate for “no practice” economies is zero. In addition, a “no practice” economy receives a score of 0 on the strength of insolvency framework index even if its legal framework includes provisions related to insolvency proceedings (liquidation or reorganization).
What are the main good practices?
- Establishing or promoting reorganization or liquidation procedures
- Eliminating formalities and introducing or tightening time limits
- Regulating the profession of insolvency administrators
- Strengthening creditors’ rights
- Clarifying rules for commencing insolvency proceedings
- Improving provisions applicable to treatment of contracts and voidable transactions
- Introducing provisions on post-commencement financing
Does the Resolving Insolvency indicator record the de jure (the law) or de facto (the practice) situation?
Both. The Resolving Insolvency indicator measures the time, cost and outcome of insolvency proceedings in practice. It also measures the insolvency law in the strength of insolvency framework index.