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Third Session:
Roundtable on International
Reform Strategies
Chair:
Professor Michael Veder
(Radboud University Nijmegen and RESOR)
Panellists:
Mahesh Uttamchandani
(Debt Resolution and Business Exit Group, World Bank)
Fernando Dancausa
(Debt Resolution and Business Exit Group, World Bank)
Andres Martinez
(Debt Resolution and Business Exit Group, World Bank)
Professor Ignacio Tirado (Universidad Autónoma of Madrid)
Professor David Burdette (Nottingham Law School)
Dr Kristin van Zwieten (University of Oxford)
World Bank Group
Trade and Competitiveness
Global Practice
Debt Resolution and Business Exit
Insolvency reforms and Lessons Learned
Mahesh Uttamchandani
Andres F. Martinez
Fernando Dancausa
Insolvency is critical for the Private and
Financial Sectors
“Bankruptcy law and the depth of resale markets are particularly
important to liberate productive resources from an
unproductive enterprise and to ensure that creditors, and
potential investors in other enterprises, are protected if a
business fails”
-World Development Report 2014 (p.176)
“Enhanced predictability and improved
bankruptcy
procedures can help facilitate responsible risk taking
and reduce associated costs”
-World Development Report 2014 (p.179)
Benefits of an Effective Insolvency Regime
Studies have shown that effective insolvency reform is associated with:
1. Lower credit costs
2. Increased access to credit and higher degree of financial inclusion
3. Improved creditor recovery
4. Strengthened job preservation
5. Promotion of entrepreneurship
6. Enhanced certainty in the market and financial stability
7. Other benefits for small businesses.
Credit access and insolvency efficiency are
intertwined
 More developed insolvency
CORRELATION BETWEEN DOING BUSINESS
RECOVERY RATE AND DOMESTIC CREDIT
(as a percentage of GDP)
systems are positively
associated with higher levels of
credit.
 The correlation between the
creditor recovery rate for 2014
and the percentage of domestic
credit by banking sector as a
percentage of GDP is 0.70, and
is significant at the 1% level.
Economies with more developed insolvency systems
present higher recovery rates and higher levels of credit
Reorganization proceedings present the best outcomes
100
90
DB 14 Recovery Rate
80
79.2
Receivership
70
Reorganization
60
Liquidation
52.7
50
Foreclosure
40
30
29.8
(*) Size of the bubble
shows number of
economies
33.1
20
(*) Number inside
the bubble shows
average Recovery
Rate
10
0
0
50
100
150
Domestic credit provided by banking sector (% of GDP)
200
Empirical Evidence for Prioritizing Insolvency Reform
A study concerned with Brazil’s 2005 bankruptcy law reform found that there was a statistically
significant increase in the Brazilian private credit market after the reform with a 10% to 17%
increase in total debt, and a 23% to 74% increase in long-term lending.
(Araujo, Ferreira, and Funchal 2012)
A study across France, Germany and the UK showed that banks price their loans based on risk,
and that unfavorable creditor provisions in the French bankruptcy code resulted in greater
collateral requirements by French banks, with poorer recovery rates.
(Davydenko and Franks, 2006)
A study in Mexico showed that the enactment of a new corporate insolvency law increased the
average recovery rate for secured creditors from 19 cents on the dollar to 32 cents on the dollar, as
well as reducing the duration of proceedings.
(M Gamboa-Cavazos and F Schneider, 2007)
A study examining a new corporate reorganization code in Colombia, enacted in 1999, found to
dramatically improve the efficiency of reorganization proceedings, with the duration of
proceedings falling from an average of 34 months to 12 months.
(Gine and Love, 2010)
DRBE Product Provides Assistance in Multiple Areas
 The Debt Resolution and Business Exit team of the Trade and
Competitiveness Global Practice provides assistance to regional and
country level projects in tailoring their design to address governments’
needs and bridge the dialogue between the public and private sector. This
includes conducting scoping as well as providing ongoing technical
assistance to all projects.
 Upon government request and in coordination with relevant stakeholders,
assistance could include addressing the following:
 Insolvency Law,
 Companies Law,
 The Commercial Law,
 The Banking Law,
 Secured Transactions Law, and;
 ADR Laws (particularly mediation and arbitration);
 Elements of tax laws; and
 The Code of Civil Procedure
The DRBE Product Has A Strong International
Presence
The DRBE Product is currently working in 38 countries in all regions of the world
Challenge: How to quantify impact of
an insolvency reform?
-
- How to measure the success of an insolvency reform?
-
- How to quantify such success?
-
-
- How to attribute success specifically to the insolvency
reform and not to, for example, market factors
- Would “baseline surveys” (capturing data pre and post
reform) be an adequate tool? If yes, what content
-
- Should data be captured on specific cases or globally?
-
- Other questions…
Functions of the Debt Resolution Team:
GLOBAL LEVEL
Function #1 – Designing Product Work Streams
Insolvency regimes are commonly conceptualized as a “tool-box” with the
effective regulatory or legal tools being used to address the corresponding
level of financial distress that the business is experiencing
Figure 1: Insolvency Regimes Provide a Tool-Box of Responses
For short-term liquidity problems,
more “light-touch” regulatory tools,
such as mediation and negotiation
frameworks might be more suitable,
whereas in cases of severe financial
distress, court-driven frameworks are
most appropriate for assessing
business viability and maximizing
creditor recovery.
#1 Continued – DRBE Product Work Streams
Figure 2: Global DRBE Product Work-Streams
DRBE has developed technical
work-streams that seek to
achieve maximum impact on the
ground which can be replicated,
albeit tailored, in regional and
country projects to meet the
government’s needs.
Function #2 – Developing Global Partnerships
One of the primary objectives of the Global DRBE Product is to generate knowledge, learning
exchanges and further research in relation to the technical areas of insolvency.
This is done through collaboration with international standard-setting partners as well as
private and public sector actors, including:

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The American Bar Association
The European Bank of Reconstruction and Development
The IMF
INSOL International
UNCITRAL
Local Bar Associations
Local Accountants’ Associations
Multinational companies
Private law firms
Function #3 – Leading Knowledge Creation
The Global DRBE Product produces numerous toolkits and publications in relation to insolvency
and commercial dispute resolution, both internal and external publications, to show-case new
developments in the field, regional trends and lessons learned from operational work.
“Im-Mediate Resolution: The Role of the Lawyer in Out-of-Court
Dispute Resolution”
Presented in November 2013
Colleagues from offices in Asia, MENA and Africa participated
along with external speakers. Participants focused their
discussion around the publication regarding how the local legal
profession can be included more into the design stage of
mediation projects and how to utilize outreach tools to educate
local lawyers about the benefits of informal dispute resolution.
An informational pamphlet with the same title was published
earlier, in April 2013, jointly by the DRBE Product and the
Mediation Section of the American Bar Association (ABA) and
distributed broadly to staff, clients and external audience.
Functions of the Debt Resolution Team:
COUNTRY LEVEL
Summary: Insolvency Reform in Tunisia
Problem:
Lack of efficient restructuring and exit mechanisms stifling
access to credit.
Solution:
Insolvency law reform economy-wide, establishing out-ofcourt workout process and providing assistance in
establishing criteria for insolvency professionals.
Status:
Working with Ministry of Justice to finalize draft law. Draft
law finalized and submitted to the National Assembly.
• Spring revolution due to uneven regional development .
• Youth unemployment increased from 30% to 42% (highest in MENA)
• Economy contracted (-2%) in 2011 (social tensions, global financial crisis and
war in Libya)
• Pressure to improve the business environment & demonstrate impact
Financial Sector Weaknesses
• Weak governance, tight liquidity and poor regulation.
• Assess risk exposure and develop recapitalization plans for certain banks
• Reform and strengthen Central Bank prudential guidelines
• Modernize Insolvency Law to help restructure viable businesses and exit
non-viable ones
Tourism collapse
• Revenues in tourism contracted by 33% in 2011.
• Improve competition, particularly in transport (8.5% of GDP, 130,000 jobs)
• Address huge “bad debt” portfolio in tourism sector and mitigate spillover to
financial sector
• Catalyze shift toward higher-value tourism (future)
World Bank Development Policy Loan ($1.5 billion over 3
years) created a shared set of objectives: (i) competition and
private sector initiative, (ii) financial sector stability, (iii) quality and
accountability in social sectors and (iv) transparency, accountability
and public participation in policy making.
Political Instability and Unemployment
Integrated WBG response to support
implementation of complex reforms
WBG Governance and Opportunity
Development Policy Loan
Prior Actions (2012)
Indicative DPL Triggers
Participatory Review of (2013)
Business Formalities
New Investment Code
Liberalize International Revised Competition
Telecom Access
Law
Audit of State Banks
Prudential Regulations
Job Insertion Programs
Health Sector Audits
National Authority for
Higher Education
Accreditation
New Bankruptcy Law
Law on Asset
Management Company
for NPLs
New telecom operators
licensed
Shared Objectives:
•
Lower cost of
compliance with
red-tape
•
More level playing
field
Tunisia
Investment
Climate
Project
•
More rapid recovery
from NPLs
•
Reduced cost of g
international
telecoms
Tunisia Debt
Resolution
Project
(in prep)
•
Increase in
solvency of banking
system
IFC
Advisory
Services
Insolvency Reform in Lebanon
Objective :
Support the Government of Lebanon and banking sector to
increase loan recovery through increased return to creditors
Solution:
Enabling viable businesses to rehabilitate and efficiently
returning assets back into productive use, through improving
the framework for court reorganizations, out-of-court
workouts, and efficient liquidation.
Status:
Project completion anticipated for December 31, 2014
Insolvency Reform in Jordan
Objective :
Support Government of Jordan in increasing the efficiency and
effectiveness of insolvency proceedings both inside and
outside of the formal court system
Solution:
Phase 1: Assisted with the development of regulatory
environment for insolvency administrators contemplated in the
draft Commercial Insolvency Law
Phase 2: Assisted with review of Draft Law and
provided feedback for potential reform
Insolvency Reform in Albania
Problems:
Insolvency law relatively new: 2002, reformed in 2009.
Copy –paste from German law
High volume of NPL’s. Bad debt poses challenge to financial stability.
Obligation for directors to file when companies are insolvent
One “real” insolvency case since 2002 (excluding tax authority
collection cases).
Solution:
Beginning to set up BSA (trying to follow Serbia’s example)
Assisting in insolvency law reform.
Lessons learned so far
Lessons Learned
•Effective resolution of distressed assets is a key to the speedy recovery of
banks.
– Critical success factor: Increase capacity in bank NPL teams.
– Banks in emerging markets have weak processes and procedures for handling an
increase in distressed loans. In particular, they lack skills to manage and
restructure distressed corporate loans.
– Weak legal systems delayed finding solutions to dispose of or restructure these
loans in a timely manner, which lead to their further loss of value.
•Do away with the liquidation bias.
– Critical success factor: Ensure legislation strikes a balance.
– Developing-world insolvency systems disproportionately channel companies
toward liquidation, which repays some creditors but also results in job loss,
social disruption, and the wholesale destruction of economic value.
– Legislative repairs are necessary to provide for a comprehensive set of tools to
restructure a company, and often the idea of such an undertaking generates
concerns that it will delay hard-fought creditor rights.
Lessons Learned
•Time is the enemy of any insolvency proceeding
– Critical success factor: Identify the bottlenecks.
– Delays in insolvency proceedings reduces the available options (sale as a
going concern; operational restructuring) due to the loss of key employees
and customers of the business, and it hampers the success of those options.
– Improving the speed of insolvency proceedings in a crisis can be at least
mitigated by reassigning additional judges and court staff to handle the
increased volume of cases that a crisis brings.
•Think outside the (court) box.
– Critical success factor: Catalyze out-of-court workouts.
– Cultural and other stigmas prevent debtors from going into formal insolvency
proceedings (which are public) until it is too late to save the company.
Informal rules for negotiated workouts can provide an incentive for
debtors—often the first to notice signs of trouble in the business—to seek
solutions with creditors early enough to save the company.
Lessons Learned
•Implementation, implementation, implementation!
– Critical success factor: Continue reform after laws are enacted.
– Failure of the insolvency system in countries that have already modernized
their laws, such as many in Eastern Europe, is due to inadequate
implementation—in particular, failure to ensure the high quality of the
judges and insolvency administrators who facilitate insolvency
proceedings. Insolvency administrators need to be well regulated under
discipline codes that incentivize appropriate behavior.
– Judges, IP’s and other stakeholders need specialized training, including
basic business and accounting training.
Coffee break
Fourth Session:
Young Academics’ Network
Chair:
Dr Rolef de Weijs
(University of Amsterdam
and Houthoff Buruma)
Designing Insolvency Laws:
‘One Size fits All’ or
‘Tailored to Measure’
Wendy Akpareva
(Nottingham Law School)
What can the West learn
from China’s failed Insolvency
Law Reform?
Natalie Mrockova
(University of Oxford)
Overview
1. Introduction
2. Key functions of well-functioning IL
3. To reform or Not to reform IL?
1. Cost-benefit analysis
2. China’s failed reform
4. Lessons
1. Introduction
• IL as a useful market tool
• China v the West
• Contribution from China case study
– Further evidence that transplants/global solutions don’t work equally
well in various environments
– Why transplants don’t work
– Circumstances that determine whether IL reform can be successful
2. Key functions
• (1) Raising finance
• (2) Deployment of resources
• (3) Fresh start
3. To reform or Not to reform
Cost-benefit analysis
• Environment
–
–
–
–
–
Role of rules
Influence of social norms on relevant key concepts
Political system
Other (relevant) laws
Enforcement
• Existing alternatives
– Substitutes
– Substitutes v IL
3. To reform or Not to reform
China’s failed IL reform
• Law written in accordance with best principles
• Low usage
• Reasons for low usage:
– Environment
• Absolute rules v harmony
• Face, reputation, common good
• ‘Market with Chinese characteristics’
• Other relevant laws insufficient
• Problems with judicial enforcement
– Existing alternatives
• Social norms
• Political control
4. Lessons
• (1) no one-size-fits-all solution
• (2) need to determine the improvement
potential
• (3) need to look at the environment
Fresh-Start Policy as an Integral
Part of Bankruptcy Laws and
Its Implementation
Petr Sprinz
(University of Palacky in Olomouc)
Outline
• Concept of fresh-start policy
• Positive and negative aspects of fresh-start
policy
• Implementation of fresh-start policy
• Data
Concept of Fresh-Start Policy
• Outside of bankruptcy law: debts ought to be paid
• A fresh start essentially provides the “debtor … a new
opportunity in life and a clear field for future effort,
unhampered by the pressure and discouragement of
pre-existing debt”
Local Loan Co. v. Hunt, 294 U.S. 234, 244 (1934)
• Discharge of debts implies that unpaid debts are
consequently not enforceable
 Departure from non-bankruptcy law
Positive Aspects (1)
• Enhanced cooperation: to ensure cooperation
between a debtor and his creditors
• Reduction of enforcement costs: discharge saves
public as well as private spending
• Inclusion of debtors to economy as productive
members: reversal of preference of leisure over
work
Positive Aspects (2)
• Elimination of shadow economy: incentives
to refrain from engaging in shadow economy
• Elimination of externalities: a fresh start
brings a debtor back to society
• Entrepreneurship encouragement: wealth
insurance and incentives to run own business
Negative Aspects
• Reduced satisfaction of debts
• Moral hazard: erosion of debtor’s
responsibility
Impact on credit market: availability of credit
and redistribution
Prevention of Abuse
• Inability to pay versus unwillingness to pay
• The more available discharge of debts is, the
higher risk of abuse
Implementation in EU
• Vast majority of EU states enacted rules on the overindebtedness of private individuals and self-employed
persons
• Majority thereof provides for some sort of debt reliefs
to individuals
• Considerable differences exist between objectives and
content of such rules (repayment x relief)
• Real impact differs
Implementation in CZ (1)
• Until 2014: Czech Insolvency Act did not effectively
allow discharge of debts of entrepreneurs
• In this respect Czech Insolvency Act failed to
encourage entrepreneurship and preferred
consumption over business encouragement
• Today: under certain circumstances, entrepreneurs
may achieve discharge of their business-related
debts, although it is generally burdersome
Implementation in CZ (2)
• Safeguards against abuse:
• Ability to pay at least one third of
unsecured debts
• Honesty of debtors
Implementation in CZ (3)
• Courts have recognized the complexity of the
debtor’s situation and tended to take rather
pro-debtor approach
• Their rulings take into account the
alternatives to the discharge of debts which
often do not bring about any benefits
Implementation in CZ (4)
• Obvious abuses of discharge of debts are not tolerated
• Statement mentioned on the debtor’s facebook profile:
“Well, you must learn to be a bankrupt, take unpaid leave
from work and eat salmon, sushi and exclusive cheese …”
• High Court of Prague noted in its decision: “Debtor’s vision
of enjoying fully his life with support of his elderly
grandmother while leaving his debt issues to insolvency
administrator contravenes morality as well as principles
and aims of discharge of debts proceedings …”
Petitions and Approvals in CZ
Source: http://insolvencni-zakon.justice.cz/
Data: Czech Republic and Slovakia
Sources: http://insolvencni-zakon.justice.cz/
and http://www.justice.gov.sk/
Conclusions
• Fresh-start policy has become an integral part of
bankruptcy laws in the majority of EU member states
• There are good reasons why it should be implemented
• So far, considerable differences exist between national
laws as well as practice
• Question that follows is whether the rules on discharge
of debts proceedings should be harmonized?
Publicly Offered Debt – Challenges
and the Private Ordering Contractual
Solutions in UK, US, and Germany
David Ehmke
(Humboldt-University Berlin)
The Challenge
A Cloudy Body of Creditors
Bargaining About Insolvency
Goal: Win-Win-Situation
The Interplay between
Private and Public Ordering
The UK
Contract, Creditors, and Bargain
The US
Judge, Second Chance,
and Back Door
Germany
Stigma, State, and Reform
Rescue Corporate Rescue...
Anthon Verweij and Tim Verdoes
(Leiden Law School)
Lunch
Fifth Session:
Designing Insolvency Systems III.
Chair:
Professor Paul Omar
(Nottingham Law School)
Torpedoes, Ancillaries and Mixed
Doubles - The EIR goes Brussels I
Professor Gerald Mäsch
(University of Münster)
Bankruptcy Revenue Stamps
and The Costs of Access to
Modern Personal Insolvency
Dr John Tribe
(Kingston Law School)
Edwin Coe Prize Winners
(Travel Grants/Book Prizes)
Introduction of Guest Speaker
Marc Udink
(INSOL Europe Honorary Chairman)
Edwin Coe Lecture:
“Insolvency Specialists and their
Contribution to Government Enquiries”
Professor Rosalind Mason
(Queensland University of Technology)
Insolvency Scholarship and Reform:
An Australian Perspective
• A Spirit of Inquiry
• Insolvency Law and its Intersections
• Insolvency Reform and the Public Interest
Closing Address and Handover
Professor Paul Omar
(Nottingham Law School)