- Streamlining insolvency proceedings
- Establishing effective reorganization proceedings
- Promoting creditor participation
Changes in insolvency regimes over the years—whether motivated by economic or financial crises or implemented as part of broader judicial or legal reforms—have led to the emergence of several trends and good practices. Among these is a unified international good-practice standard on creditor and debtor regimes and insolvency set forth by the World Bank and the United Nations Commission on International Trade Law (UNCITRAL). Good practices in many economies are aimed at improving both the efficiency and the outcome of insolvency proceedings. These include streamlining insolvency proceedings, establishing effective reorganization proceedings and promoting creditor participation in the proceedings.
STREAMLINING INSOLVENCY PROCEEDINGS
Establishing time limits for proceedings can enhance the efficiency of the insolvency process. Long proceedings reduce creditors’ chances of recovering outstanding debt and can create unnecessary uncertainty for all parties involved(1). Efficient insolvency proceedings increase debt recovery by creditors by making it more difficult for the shareholders of a company to sell its assets at an unreasonably low price to a second company they own.
Many economies focus their reform efforts on improving the efficiency of insolvency proceedings. For example, in an insolvency law adopted in 2016, India introduced time limits for the insolvency process while Mexico shortened the time extensions allowed during reorganization proceedings in January 2014.
ESTABLISHING EFFECTIVE REORGANIZATION PROCEEDINGS
The highest recovery rates are recorded in economies where reorganization is the most common insolvency proceeding. Yet a third of economies around the world have no formal judicial reorganization proceeding, and in only 18 economies is reorganization the most common proceeding as recorded by Doing Business(2).
But things are looking up: since 2013, 19 economies have introduced reorganization proceedings, including Cabo Verde, Cyprus, India, Uganda and the United Arab Emirates. Other economies made improvements to their existing regulations on company reorganization. Chile, for example, adopted a new insolvency law in 2014 which facilitated the continuation of the debtor’s business during insolvency proceedings by prohibiting termination of contracts on the ground of insolvency and clarifying provisions on post-commencement financing. Mexico introduced provisions in January 2014 allowing debtors to apply for post-commencement financing during reorganization proceedings and permitting them to apply for reorganization in the event of imminent insolvency.
Figure 1 - Slovenia made resolving insolvency easier by adopting simplified reorganization procedures
Slovenia provides a good example of successful reforms aimed at improving reorganization proceedings—and has achieved some of the biggest improvements in the past several years as measured by Doing Business. The government of Slovenia adopted two amendments to the Financial Operations, Insolvency Proceedings and Compulsory Dissolution Act in 2013. These amendments established new restructuring procedures and introduced several mechanisms aimed at facilitating restructuring, such as debt-equity swaps, control of business operations by buyers of new shares and priority of restructuring plans proposed by major creditors. By 2015, the amendments began to have significant impact on the insolvency practice. Restructurings became common and survival of distressed but viable companies became the prevailing outcome. The time required to complete insolvency proceedings decreased. As a result, the recovery rate for secured creditors in Slovenia increased from 50.1 cents on the dollar in 2013 to 88.2 cents on the dollar in 2015 (figure 1).
PROMOTING CREDITOR PARTICIPATION
Research has shown that if creditors are not protected or allowed to participate in insolvency proceedings, they will have less incentive to lend in the future. That leads to a less developed credit market(3). Several recent insolvency reforms have addressed this concern. The Dominican Republic, for example, adopted a new law in 2015 that granted creditors the right to approve the sale of substantial assets of the debtor. Azerbaijan and Grenada reformed their insolvency laws in 2017 to provide creditors with the right to request information on the financial affairs of the debtor.
1. Cirmizi, Elena, Leora Klapper and Mahesh Uttamchandani. 2010. “The Challenges of Bankruptcy Reform.” Policy Research Working Paper 5448, World Bank, Washington, DC.
2. Doing Business database.
3. Claessens, Stijn, and Leora Klapper. 2003. "Bankruptcy around the World: Explanations of Its Relative Use." Policy Research Working Paper 2865, World Bank, Washington, DC.