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Academic Forum Sponsors: www.edwincoe.com 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: 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)