Doing Business Reforms
PROMOTING EFFICIENT BANKRUPTCY REGIMES
Efficient regulation of corporate insolvency is associated with increased access to credit for firms and on better terms (1). Creditors are more willing to lend because they are more likely to recover their loans. Additionally, economies that reform their insolvency law to provide a mechanism for business rescue may reduce the failure rate among firms, help maintain a higher overall level of entrepreneurship in the economy and preserve jobs (2). By facilitating the efficient business exit and liquidation of nonviable companies, an insolvency framework supports the efficient reallocation of resources across the economy (3).
In 2016/17 Doing Business recorded 13 reforms making it easier to resolve insolvency. The most common feature of reform was the introduction of a reorganization procedure as an alternative to liquidation. Cabo Verde, the Dominican Republic, Grenada, India, Kosovo, Liberia, Malawi, Panama, Singapore and the United Arab Emirates adopted legal regulations enabling parties to make use of reorganization procedures for the purpose of saving viable businesses where there is a prospect of financial recovery.
The reform in Kosovo is particularly noteworthy. A comprehensive insolvency law, which was adopted in July 2016, introduced a number of modern features that are aligned with international good practices. In addition to establishing reorganization and liquidation procedures, the law provided the debtor with the option to submit a pre-packaged rehabilitation plan before the commencement of reorganization proceedings and established expedited insolvency proceedings for small and medium-size enterprises. These new elements not only streamline liquidation and reorganization proceedings in Kosovo in general, but are also likely to shorten the timeframe for resolving insolvency. The law also allows the debtor to obtain new financing after the commencement of insolvency proceedings to facilitate continued operations, regulates the treatment of contracts and establishes a cross-border insolvency regime.
Upper-middle-income and high-income economies mainly focused their efforts on strengthening the rights of creditors in insolvency proceedings in 2016/17. Azerbaijan, the Dominican Republic, Grenada, and Panama made important amendments to their legal frameworks to provide creditors with additional safeguards and enable their participation in important decisions that affect their interests. The Dominican Republic and Grenada granted creditors the right to approve the sale of substantial assets of the debtor. Azerbaijan and Grenada provided creditors with the right to request information on the financial affairs of the debtor at any time. Additionally, Azerbaijan and Georgia granted creditors the right to object to the decision accepting or rejecting creditors’ claims.
1. Cirmizi, Klapper and Uttamchandani 2010.
2. Klapper and Love 2011.
3. For more on how insolvency frameworks support the efficient reallocation of resources across the economy, see Djankov 2009, Funchal 2008, Klapper 2011 and Visaria 2009.
RESOLVING INSOLVENCY REFORMS BY ECONOMY DB2008-DB2018