Transcript Debt Enforcement around the World - British Institute of International

Law and Economics of
Insolvency
Oliver Hart
Law and Economics of Insolvency
• Most firms do not provide their own insolvency
procedures, but rely on the state to do so. How good are
these procedures? Do they achieve efficient outcomes,
i.e., are “good” firms saved and “bad” firms closed
down? Are creditors paid according to the priority of
their claims (absolute priority)?
• I will describe an empirical study, “Debt Enforcement
Around the World,” carried out with Simeon Djankov and
Caralee McLiesh (World Bank), and Andrei Shleifer
(Harvard), which investigates these questions by
presenting insolvency practitioners in different countries
with a hypothetical case.
2
Setup
Hypothetical Case
Respondents: Insolvency Practioners from
International Bar Association Committee on
Bankruptcy
Date: January 2006 (several rounds before)
Total: 344 lawyers
All countries with: GDP per capita > $1000
Population > 1.5 million
Total: 88 countries
3
Case Facts
Insolvent Firm called “Mirage”
Limited liability, domestically owned, mediumsized hotel
Located in most populous city
201 employees
50 suppliers (each owed money)
Five years ago, borrowed from Bizbank
Loan has collateral, i.e., is secured
Loan has 10 year term
Mirage has met all obligations until now
Loan has seniority
4
Case Facts (cont’d)
Mirage owned 51% by Mr. Douglas
No other shareholder has > 5%
Mirage has a manager, with no special human capital
Mirage has 136 units of debt
Suppliers, Tax Authorities, employees each owed 12
These are unsecured creditors
Bizbank is owed 100
All normalized to country’s GDP per capita
5
Case Facts (cont’d)
Mirage has been losing money and
is about to default due to industry shock
Assume going forward can cover costs
But cannot cover debt payments
Version A: Going concern worth 100
Piecemeal liquidation worth 70
Version B: Going concern worth 70
Piecemeal liquidation worth 100
6
Data
Time = T
Cost = C
Whether get the efficient outcome: EO = 1
100
*
EO

70
*
(
1

EO
)

C
*
100
Efficiency =
(1  r )T
Assume zero net revenue during procedure and costs
incurred at end (but robust)
Also get structural features of procedure
7
3 Procedures
2 Outcomes
Foreclosure
Going Concern
Reorganization
first
Piecemeal sale
Liquidation
Figure 1: Options for Mirage
8
Limitations of the Case
1. No informal workouts allowed
2. Capital structure does not adjust to law
3. Only one secured creditor
Complex conflicts minimized
(Indeed, foreclosure has correct incentives)
4. Respondents know what is efficient from the start
5. Do not need new financing
6. No public interest, politics involved
7. No tunneling (looting)
9
10
11
12
13
14
15
16
17
(Tentative) Conclusions
• Lots of inefficiency in a very simple case: wrong
outcome, slow, high administrative costs
• How to do better?
–
–
–
–
Encourage foreclosure and floating charge
Circumscribe Appeals
Discourage automatic cessation of operations
Don’t allow suppliers/customers to rescind contracts
• Reorganization seems a bad idea in poor
countries, where, arguably, institutions are not
good enough to support complex procedures.
18