Source: Doing Business database.
FIGURE 11.4
OECD high-income economies reformed the most since 2004 Share of economies in region making it easier to close a business (%) OECD high income
59
Eastern Europe & Central Asia
56
East Asia & Pacific
33
Latin America & Caribbean
22
Middle East & North Africa
16
Sub-Saharan Africa
13
South Asia
13
Source: Doing Business database.
nies suffering financial problems can file for reorganization. The law should allow debtors to file for reorganization when facing financial distress rather than requiring that they wait for the much worse situation of insolvency. Of the 18 economies that reformed in 2008/09, 5 implemented rescue statutes introducing or promoting the use of preinsolvency procedures: Estonia, France, Kuwait, the Philippines and Poland. The Slovak Republic did so in its Bankruptcy and Restructuring Act that went into effect in 2006. Requiring debtors to file for insolvency as soon as they default or as soon as default is imminent is another way to encourage companies to face reality before it is too late. In Poland and Spain, filing for bankruptcy too late can subject a company’s management to penalties. In 2008 Uruguay’s new bankruptcy law introduced an obligation for management to file within 30 days of learning of the company’s insolvency. If implemented well, this provision will reduce delays. Creating a framework for prepackaged reorganizations can help keep companies operating as a going concern. Italy and Korea introduced prepackaged reorganizations in 2006/07. Now a firm can negotiate a reorganization plan with its creditors before filing for bankruptcy. Once it reaches an agreement with the required majority of creditors, the firm files for bankruptcy and asks the court to approve its reorganization plan. Once the court approves, it imposes the agree-
ment on the creditors still holding out. The advance negotiations with creditors clear the way for quickly scheduling a court hearing, allowing a rapid exit from bankruptcy.10 Speeding up court procedures
Once an insolvency case is brought before the court, a timely resolution becomes essential, especially if the aim is to save the company. Proceedings that end with an efficient outcome—the firm continuing to operate or being sold as a going concern—go through the insolvency process in less than 2 years. In the OECD high-income group 77% of economies achieve such an outcome. Japan’s rehabilitation procedure is one example of a well-functioning system of in-court restructuring. Economies in South Asia have the longest insolvency proceedings, averaging 4.5 years. They also have the longest average time to enforce a contract through the courts: 1,053 days. The length of these procedures reduces the value of firms, making it unlikely that they will continue as a going concern after insolvency proceedings. The court systems in many economies lack the infrastructure, training and technical expertise to resolve commercial disputes in a timely way.11 In the coming years growth in the number of bankruptcy filings could further strain the capacity of courts, increasing their risk of becoming overwhelmed. But some economies in recent years have in-
63
CLOSING A BUSINESs Note: Time and cost do not count separately for the ranking. See Data notes for details.
troduced specialized bankruptcy courts to deal more efficiently with insolvency procedures. One country that has increased court efficiency is the United States. Thanks to an online case management system, anyone can consult any document in a bankruptcy case. Bankruptcy judges can work from anywhere, signing orders with the click of a mouse. Developed at the end of the 1990s and rolled out in all states by 2005, the system provides one level of information to the general public, another to lawyers with an account and a third level to bankruptcy judges. Training administrators
Receivers and liquidators play essential roles insolvency procedures. Receivers FIGUREin 11.3 Higher recovery rates associated take part in managing debtor with compagreater business density nies—either replacing management or Business density (%) coadministering with it. Liquidators are 75 in charge of selling the assets of nonviable companies. Many economies have 50 launched reforms to ensure that both professions have adequate business and edu25 cational qualifications and are being well supervised. In recent years such econo0 Lowest Highest mies as Bulgaria, Canada, Chile, China, Economies ranked by recovery rate, quintiles Poland, Romania, the United Kingdom Note: Business density is the number of registered corporations and the United population. States Relationships have introduced divided by the working-age are significant at the 1% level and remain significant when controlling for income qualification standards (figure 11.5). per capita. The data include 76 economies. Source: Doing Business database; World BankColombia Group In 2008/09 Albania, and Entrepreneurship Survey, 2008. Russia adopted regulations imposing licensing requirements for receivers. In June 2006 FYR Macedonia created a chamber of bankruptcy trustees and implemented a licensing regime. In 2005 FIGURE 11.5
Economies with specialized bankruptcy courts have higher recovery rates Recovery rate (cents on the dollar) 40 35
YES
YES NO
NO
30 25
Are there specialized bankruptcy courts? Source: Doing Business database.
Are there minimum qualifications for trustees?
FIGURE
In OEC after b
Share o
O h in
Note: Sal Source: D