Doing Business studies the time, cost and outcome of insolvency proceedings involving domestic legal entities. These variables are used to calculate the recovery rate, which is recorded as cents on the dollar recovered by secured creditors through reorganization, liquidation or debt enforcement (foreclosure or receivership) proceedings. To determine the present value of the amount recovered by creditors, Doing Business uses the lending rates from the International Monetary Fund, supplemented with data from central banks and the Economist Intelligence Unit.  The most recent round of data collection for the project was completed in May 2018. See the methodology for more information.

Doing Business Reforms

PROMOTING EFFICIENT AND QUALITY-BASED 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)

Doing Business recorded 14 reforms making it easier to resolve insolvency in 2017/18, mainly in the regions of South Asia, Sub-Saharan Africa and Europe and Central Asia. The most common feature of reform making it easier to resolve insolvency was the introduction of a reorganization procedure as an alternative to liquidation or to improve the likelihood of successful reorganization. Afghanistan, the Arab Republic of Egypt, Malaysia and Pakistan adopted legal regulations enabling parties to make use of reorganization procedures to save viable businesses where there is a prospect of financial recovery.

Afghanistan improved the ease of resolving insolvency the most as measured by Doing Business 2019 (see table). A new legal framework for insolvency adopted in 2018 introduced a reorganization procedure for commercial entities as an alternative to the previously-available option of liquidation. The framework set specific rules on how creditors vote on the reorganization plan, established rules governing the contracts and assets of the debtor during insolvency proceedings and provided for more active participation by creditors in the proceedings.

Afghanistan’s previous and new legal frameworks for insolvency compared

Previous legal framework

New legal framework

Can the debtor continue performing contracts essential to its survival or reject overly burdensome contracts?

No specific provisions.

Yes, a debtor can continue performing contracts essential to the business survival.

Can undervalued or preferential transactions be avoided (invalidated) before the filing for insolvency/commencement of insolvency proceedings?

No specific provisions.

Yes, such transactions can be rescinded within two years prior to the time of commencement of procedures.

Can the debtor, after the commencement of insolvency proceedings, obtain financing necessary to function during the proceedings?

No specific provisions.

Yes, the debtor is allowed to obtain post-commencement finance. 

Do creditors vote on the reorganization plan?

No reorganization available.

Yes, only creditors whose rights are affected by the reorganization plan.

Must the reorganization plan specify that the anticipated return to dissenting creditors be at least equal to the return that they would obtain in a liquidation?

No reorganization available.

Yes, creditors dissenting to the reorganization plan will receive at least what they would obtain in a liquidation proceeding.

Can creditors approve the sale of substantial assets of the debtor in the ordinary course of insolvency proceedings?

No specific provisions.

Yes, creditors can approve the sale of substantial assets of the debtor.

Another common feature of reform in 2017/18 was improving the management of the debtor’s assets during insolvency proceedings. Afghanistan, Azerbaijan, Kenya, the Kyrgyz Republic, Pakistan, Rwanda and Sudan established provisions allowing the continuation of the debtor’s business during insolvency proceedings. Azerbaijan, the Kyrgyz Republic and Sudan allowed courts to invalidate undervalued transactions concluded before the commencement of insolvency proceedings. Kenya allowed for the continuation of contracts supplying essential goods and services to the debtor, giving the administrator the power to continue or disclaim contracts of the debtor. Morocco established the possibility for the debtor to receive new financing after the commencement of insolvency proceedings and introduced corresponding priority rules.

Other economies reformed their insolvency laws to strengthen the rights of creditors. For example, the Kyrgyz Republic granted an individual creditor the right to access information about the debtor’s business and financial affairs.

--------------------

1. Cirmizi, Elena, Leora Klapper, and Mahesh Uttamchandani. 2010. “The Challenges of Bankruptcy Reform.” Policy Research Working Paper 5448, World Bank, Washington, DC.
2. Klapper, Leora, and Inessa Love. 2011. “The Impact of Business Environment Reforms on New Firm Registration.” Policy Research Working Paper 5493, World Bank, Washington, DC.
3. For more on how insolvency frameworks support the efficient reallocation of resources across the economy, see: Djankov, Simeon. 2009. “Bankruptcy Regimes during Financial Distress.” Working Paper 50332, World Bank, Washington, DC.
Klapper, Leora. 2011. “Saving Viable Businesses.” Public Policy Journal Note 328, World Bank Group, Washington DC.
Visaria, Sujata. 2009. “Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India.” American Economic Journal: Applied Economics 1(3): 59–81.

 

RESOLVING INSOLVENCY REFORMS BY ECONOMY DB2008-DB2019

= Doing Business reform making it easier to do business. = Change making it more difficult to do business.