The World Bank and Emerging Market Insolvency Reform Mahesh Uttamchandani Senior Counsel -...

The World Bank and The World Bank and Emerging Market Emerging Market Insolvency ReformInsolvency Reform

Mahesh UttamchandaniMahesh UttamchandaniSenior Counsel - Insolvency and Creditor RightsSenior Counsel - Insolvency and Creditor RightsThe World BankThe World Bank

1997/98 financial crises drew attention to:1997/98 financial crises drew attention to:

– domestic and international impact of weak domestic and international impact of weak legal and institutional frameworkslegal and institutional frameworks

– lack of understanding by market participants lack of understanding by market participants of financial system vulnerabilitiesof financial system vulnerabilities

– linkages between speed of response and linkages between speed of response and speed of economic recoverspeed of economic recover

G7/G22/APEC/Financial Stability Forum G7/G22/APEC/Financial Stability Forum responseresponse

The World Bank and The World Bank and Insolvency - Financial Insolvency - Financial

Crises in Emerging Crises in Emerging MarketsMarkets

- Data Dissemination (IMF) - Fiscal Transparency (IMF) - Monetary and Financial Policy (IMF)

- Banking Supervision (BCP) - Payment and Settlement (CPSS) - Insurance Supervision (IAIS) - Security Regulation (IOSCO)

- Corporate Governance (OECD) - Accounting & Auditing (IAS/ISA) - Insolvency & Creditor Rights (IBRD)

GLOBAL FINANCIAL FRAMEWORK:GLOBAL FINANCIAL FRAMEWORK:CORE STANDARDS: ASSESSMENT AREASCORE STANDARDS: ASSESSMENT AREAS

- Anti-Money Laundering (IMF/WB)

www.worldbank.org/ifa

Transparency

Financial Sector

Market Infrastructure

CONTEXT: The Economics of CONTEXT: The Economics of Insolvency Reform in Insolvency Reform in

Emerging MarketsEmerging Markets1.1. Increasing the Breadth and Depth of Financial Increasing the Breadth and Depth of Financial

IntermediationIntermediation Emerging market countries are in a global Emerging market countries are in a global

competition for capital that flows where it is most competition for capital that flows where it is most welcome. welcome.

Willingness of lenders to lend turns on the type of Willingness of lenders to lend turns on the type of lending allowed and flexibility in creating security.lending allowed and flexibility in creating security.

Complex forms of financing (factoring, distressed-Complex forms of financing (factoring, distressed-debt investing) rely upon transparent and efficient debt investing) rely upon transparent and efficient legal systems.legal systems.

2.2. Fostering Commercial Confidence and PredictabilityFostering Commercial Confidence and Predictability When the insolvency system functions well, markets When the insolvency system functions well, markets

are more able to accurately prices, manage and are more able to accurately prices, manage and resolve risk issues.resolve risk issues.

CONTEXT: The Economics of CONTEXT: The Economics of Insolvency Reform in Insolvency Reform in

Emerging MarketsEmerging Markets3.3. Restoring Balance to Commercial RelationshipsRestoring Balance to Commercial Relationships

Well-functioning insolvency regimes encourage Well-functioning insolvency regimes encourage responsible corporate behavior and governance.responsible corporate behavior and governance.

4.4. Efficiently Allocating Assets and Preserving StabilityEfficiently Allocating Assets and Preserving Stability Ineffective or over-regulated collateral systems Ineffective or over-regulated collateral systems

lead to ‘under-leveraging’. lead to ‘under-leveraging’. Well-functioning liquidation regime allows for Well-functioning liquidation regime allows for

the orderly transfer of assets from inefficient the orderly transfer of assets from inefficient entities (i.e. the bankrupt company) to more entities (i.e. the bankrupt company) to more efficient ones. efficient ones.

Reasonable methods of restructuring provides a Reasonable methods of restructuring provides a safety valve for corporate distress that helps safety valve for corporate distress that helps preserve value and reduce job-loss (and, preserve value and reduce job-loss (and, therefore, state-dependency). therefore, state-dependency).

Credit Information systems

D & O Liability

Risk Management Practices

Workout Framework

Enabling Framework (i.e. tax treatment of bad debts, NPLs)

AMCs & systemic corrective measures

Enforcement / InsolvencyCredit Risk ManagementCredit Access / Protection

World Bank Principles - World Bank Principles - ScopeScope

Compatibility of Systems

Collateral Systems immovable /

movable

Registry Systems (Transparency)

Enforcement Systems

Public Auction & Collections

IPG A1-5 IPG B1-5

Corporate Exit Mechanisms

Liquidation

Rehabilitation

Quasi-formal restructuring

IPG C1-D9

Implementation Institutional

Systems Regulatory Systems

LESSONS LEARNED Diagnostic Results in Emerging Markets

1. Creditor Rights Legislation Secured Transactions on Real Estate: functional Secured Transactions on Movable Assets: outdated

2. Registries Need of Modernization (computerized systems) Creation of Registries for Filing Security Interests on Movable Assets Technical Assistance, IDF Projects, Policy Notes, Specific Strategies

3. Insolvency Legislation Frequently Antiquated & Inefficient Unsupportive of modern businesses, especially lacking rescue procedures

for financially distressed enterprises

4.4. Weak and Inefficient Enforcement Weak and Inefficient Enforcement ProceedingsProceedings

For Both Unsecured and Secured ClaimsFor Both Unsecured and Secured Claims Lack of Extrajudicial Enforcement MechanismsLack of Extrajudicial Enforcement Mechanisms Outmoded Procedural Codes and Rules Outmoded Procedural Codes and Rules

5.5. Ineffective Court SystemsIneffective Court Systems For Both Enforcement and Insolvency Proceedings For Both Enforcement and Insolvency Proceedings Inadequate Selection and Training of JudgesInadequate Selection and Training of Judges Inefficient Case Administration PracticesInefficient Case Administration Practices Inconsistency in Decision-Making / Lack of TransparencyInconsistency in Decision-Making / Lack of Transparency Corruption Issues / Abuses of the System Corruption Issues / Abuses of the System

6.6. Weak Regulatory SystemsWeak Regulatory Systems Absence of Procedures and Institutions to License, Qualify and Absence of Procedures and Institutions to License, Qualify and

Supervise Insolvency AdministratorsSupervise Insolvency Administrators

LESSONS LEARNED LESSONS LEARNED Diagnostic Results in Emerging Markets

India: Focus on India: Focus on ImplementationImplementation

Core Weaknesses of the Indian Insolvency SystemCore Weaknesses of the Indian Insolvency System

Companies Act of 1956 governing liquidation has Companies Act of 1956 governing liquidation has worked far too slowly, taking, on average, ten years.worked far too slowly, taking, on average, ten years.

Sick Industrial Companies Act 1985 (SICA) governing Sick Industrial Companies Act 1985 (SICA) governing restructurings has been an abject failure as it has restructurings has been an abject failure as it has been allowed to be completely abused by debtors been allowed to be completely abused by debtors seeking to delay creditors.seeking to delay creditors.

Asset stripping in the Indian economy has been Asset stripping in the Indian economy has been rampant.rampant.

Lack of adequate credit bureau information to track Lack of adequate credit bureau information to track delinquent debtorsdelinquent debtors

Lack of sanctions against management has resulted in Lack of sanctions against management has resulted in poor corporate governance in insolvency situations.poor corporate governance in insolvency situations.


Improvements to the Regime Have Focused on Improvements to the Regime Have Focused on Implementation and Practical SolutionsImplementation and Practical Solutions

Securitization and Reconstruction of Financial Assets Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and Enforcement of Security Interest (SARFAESI) Act, 2002 allows secured creditors to seize, manage and 2002 allows secured creditors to seize, manage and sell collateral upon non-payment of debt after simple sell collateral upon non-payment of debt after simple notice.notice.

Specialized debt recovery tribunals (DRT) created for Specialized debt recovery tribunals (DRT) created for banks/financial institutions to recover loans created in banks/financial institutions to recover loans created in 1993 but modified to work more effectively in 2000. 1993 but modified to work more effectively in 2000.

New Credit Information Companies Act of 2005 covers New Credit Information Companies Act of 2005 covers the rights and responsibilities of credit bureaus to both the rights and responsibilities of credit bureaus to both maintain accurate credit reporting and safeguard maintain accurate credit reporting and safeguard customer confidence.customer confidence.


Improvements to the Regime Have Focused on Improvements to the Regime Have Focused on Implementation and Practical Solutions (Cont’d)Implementation and Practical Solutions (Cont’d)

Companies Law currently being revamped pursuant Companies Law currently being revamped pursuant to proposals from the Irani Committee and expected to proposals from the Irani Committee and expected to come before Parliament soon:to come before Parliament soon:

Creditor committees to supervise company Creditor committees to supervise company restructuringrestructuring

Restructuring managers and liquidators to be Restructuring managers and liquidators to be qualified professionalsqualified professionals

Special courts of qualified judges to be created and Special courts of qualified judges to be created and to be empowered for fast-track dispute resolution.to be empowered for fast-track dispute resolution.

Strict penalties being introduced for asset-Strict penalties being introduced for asset-stripping, mismanagement and other offences.stripping, mismanagement and other offences.

Bank Regulators

Environmental, Company, Tariff

& others

Professionals

Administrative

Courts Bankruptcy Commercial

& Civil

Agency

Reg

ulat

ory

Legal

Governmental & Political

Cultural & Social

Economic & Commercial

Enterprise

Creditors

Employees

Company laws

Shareholders

Directors etc

Labor laws

Secured Creditors

State

Collateral laws

Mortgage laws

Contract/Commercial

Tax & other laws

Securities laws

Others laws

Institutional

Insolvency System

Context for Insolvency Context for Insolvency SystemsSystems

The World Bank and The World Bank and Insolvency - Financial Insolvency - Financial CrisesCrises

1997/98 financial crises drew attention to:1997/98 financial crises drew attention to:

– domestic and international impact of weak domestic and international impact of weak legal and institutional frameworkslegal and institutional frameworks

– lack of understanding by market participants lack of understanding by market participants of financial system vulnerabilitiesof financial system vulnerabilities

– linkages between speed of response and linkages between speed of response and speed of economic recoverspeed of economic recover

G7/G22/APEC/Financial Stability Forum G7/G22/APEC/Financial Stability Forum responseresponse

ROSC

BI NDER

FINANCIAL SECTOR ASSESSMENT PROGRAM and REPORTS on STANDARDS and CODES (ROSCs)

Bank-Fund Country Work

Area of AssessmentType

(Agency Resp.)Board Presentation

Follow-up actions

- Data Dissemination (IMF) - Fiscal Transparency (IMF)

- Monetary and Financial Policy - Banking Supervision (BCBS) - Insurance Supervision (IAIS) - Security Regulation (IOSCO) - Payment & Settlement (CPSS) - Anti-Money Laundering (IMF/WB)

- Corporate Governance (OECD) - Accounting and Auditing (IAS/ ISA) - Insolvency/Creditor Rights (WB)

Stand Alone(Fund)

Stand Alone(Bank)

IMFBoard

Art. IV

WorldBankBoard

CAS

FSSA

FSA

ESW

Country Dialogue

TechnicalAssistance/

LendingOperation

CapacityBuilding/

PolicyReform

Note: ROSCs = Reports on the Observance of Standards and Code; FSAP=Financial Sector Assessment Program FSSA = Financial Sector Stability Assessment; FSA = Financial Sector Assessment ESW = Economic and Sector Work; CAS = Country Assistance Strategy

FSAP(Bank & Fund)

- Data Dissemination (IMF) - Fiscal Transparency (IMF) - Monetary and Financial Policy (IMF)

- Banking Supervision (BCP) - Payment and Settlement (CPSS) - Insurance Supervision (IAIS) - Security Regulation (IOSCO)

- Corporate Governance (OECD) - Accounting & Auditing (IAS/ISA) - Insolvency & Creditor Rights (IBRD)

GGLOBAL LOBAL FFINANCIAL INANCIAL FFRAMEWORK:RAMEWORK:CORE STANDARDS: ASSESSMENT AREASCORE STANDARDS: ASSESSMENT AREAS

- Anti-Money Laundering (IMF/WB)

www.worldbank.org/ifa

Transparency

Financial Sector

Market Infrastructure

HISTORICAL OVERVIEWHISTORICAL OVERVIEW

1999: Task Force & Working Groups (70+ experts) 1999-2000: Vetting Process / Regional Workshops

– Asia, Central Europe/Baltics, Latin America, Africa & Arab States

– 75 Countries; 700+ public/private sector specialists

– International Feedback through web-site 2001 (Apr): Board Meeting / DC Meeting 2001 (July): ICR ROSC Assessments / TA 2003-05: Principles review and revision

– International Forum on Insolvency Risk Management (FIRM) - 1/03

– Sustained Dialogue: G-20, APEC, FAIR, FILA, Judges Forum, IAIR

Historical OverviewHistorical Overview

Historical Overview (cont’d)Historical Overview (cont’d)

2003-05: Principles review and revision (Cont’d)– UNCITRAL Legislative Guide finalized in 2005

– UNCITRAL Guide and WB Principles express the same standard in different formats.

– Joint effort with UNCITRAL and IMF to create unitary working document: Revised Principles and ICR Standard.

– Revised document completed and posted for comment on WB website between December 2005 and March 2006.

– Integrated document represents a single, unified standard for ICR systems.

The World Bank The World Bank Insolvency InitiativeInsolvency Initiative

(3 W o rk in g G ro u p s )Legal Fram ew ork

Institutional Fram ew orkRegulatory Fram ew ork

W o rk in g G ro u pRehabilitation & W orkouts

(2 W o rk in g G ro u p s )Business & Financial Sector

Creditor Rights

(2 W o rk in g G ro u p s -- B a n k )Econom ic Dim ensions

State Ow ned Enterprises

(2 W G s -- B a n k /IM F )Bank Insolvency & Restr'g

System ic Crises

W B Task ForceInsolvency & Creditor Rights

(9 In t 'l E xp erts )

W orld BankC oord in a tion Team

Advisory PanelIn te rn a tion a l P artn ers (1 0 )

Task Force & Working Groups (70+ int’l experts)Task Force & Working Groups (70+ int’l experts)– Working Group ReportsWorking Group Reports– Consultation DraftsConsultation Drafts

Regional Workshops (5) Regional Workshops (5) – Asia, Central Europe/Baltics, Latin America, Africa & Arab Asia, Central Europe/Baltics, Latin America, Africa & Arab

StatesStates– 75 Countries (60 developing)75 Countries (60 developing)– Over 700 participants (public and private sector specialists)Over 700 participants (public and private sector specialists)– International Feedback through web-siteInternational Feedback through web-site

Final Principles ReportFinal Principles Report– World Bank Executive DirectorsWorld Bank Executive Directors– Joint Bank/Fund Development Committee (Ministers of Joint Bank/Fund Development Committee (Ministers of

Finance)Finance)

Process on PrinciplesProcess on Principles

Develop effective systems of enforcement Develop effective systems of enforcement and insolvency thatand insolvency that foster strong credit foster strong credit culturescultures and enable economies toand enable economies to promptly promptly respondrespond to default conditions & insolvency to default conditions & insolvency in a way thatin a way that promotespromotes maximum economic maximum economic growthgrowth andand competitioncompetition domestically and domestically and internationally, aligned with the commercial internationally, aligned with the commercial expectations of today’s rapidly changingexpectations of today’s rapidly changing global business environmentsglobal business environments..

Challenge for TodayChallenge for Today

Development of Effective SystemsDevelopment of Effective Systems– Elevate awareness and understandingElevate awareness and understanding– Strengthen capacity Strengthen capacity

Systems that respond to domestic needsSystems that respond to domestic needs– Redefining insolvency & viabilityRedefining insolvency & viability– Innovative rescue solutions (accelerated Innovative rescue solutions (accelerated

procedures)procedures)– Financing vehicles & more flexible instrumentsFinancing vehicles & more flexible instruments

Promote participation in global markets Promote participation in global markets – Adopting international best practiceAdopting international best practice– Attracting foreign direct investmentAttracting foreign direct investment

Challenge for TodayChallenge for Today

Credit is lifeblood of modern commerceCredit is lifeblood of modern commerce– Depends on willing lendersDepends on willing lenders– In turn depends on types of lending allowed by In turn depends on types of lending allowed by

law and reasonable assurance of repayment to law and reasonable assurance of repayment to lenderslenders

– Reasonable assurance often entails securityReasonable assurance often entails security Increasing significance of collateralIncreasing significance of collateral

– Collateral provides greater assurance of recoveryCollateral provides greater assurance of recovery– Ineffective security systems lead to underutilized Ineffective security systems lead to underutilized

asset valuesasset values Increasing role of foreign credit/capitalIncreasing role of foreign credit/capital

Modern Credit SystemsModern Credit Systems

Emerging Market Emerging Market CharacteristicsCharacteristics

Weak Financial SystemsWeak Financial Systems Weak Capital MarketsWeak Capital Markets Ineffective Corporate GovernanceIneffective Corporate Governance Corporate financial distress at high levels Corporate financial distress at high levels Ineffective Legal & Institutional SystemsIneffective Legal & Institutional Systems Accounting practices out-of-step with IASAccounting practices out-of-step with IAS Illiquid markets for assets and investorsIlliquid markets for assets and investors Inadequate social safety nets (political Inadequate social safety nets (political

obstacles)obstacles)

Emerging Market Emerging Market DevelopmentDevelopment

Lessons: Private Sector Growth Lessons: Private Sector Growth Good structural policies and institutions Good structural policies and institutions

complement macroeconomic policiescomplement macroeconomic policies Basic infrastructure of a market economy Basic infrastructure of a market economy

calls for effective legal framework and calls for effective legal framework and reliable institutions to enforce the lawreliable institutions to enforce the law

General PrincipleGeneral Principle

Credit is the lifeblood of modern commerce.Credit is the lifeblood of modern commerce. All All countries should adopt a regularized system of countries should adopt a regularized system of credit supported by reliable enforcement credit supported by reliable enforcement mechanisms that provide continuity in the mechanisms that provide continuity in the treatment of creditor rights. A countries credit treatment of creditor rights. A countries credit system should embrace the broadest range of system should embrace the broadest range of credit transactions, coupled with ancredit transactions, coupled with an efficient, efficient, inexpensive, transparent, predictableinexpensive, transparent, predictable andand enforceableenforceable system of taking a security interest system of taking a security interest in property. Creditor rights regimes should be in property. Creditor rights regimes should be complemented bycomplemented by andand harmonized withharmonized with a a country’s insolvency laws.country’s insolvency laws.

Linkage Between Credit and Linkage Between Credit and Enforcement SystemsEnforcement Systems

Credit is lifeblood of modern commerceCredit is lifeblood of modern commerce– Depends on willing lendersDepends on willing lenders– In turn depends on types of lending allowed by law In turn depends on types of lending allowed by law

and reasonable assurance of repayment to lendersand reasonable assurance of repayment to lenders– Reasonable assurance often entails securityReasonable assurance often entails security

Increasing significance of collateralIncreasing significance of collateral– Collateral provides greater assurance of recoveryCollateral provides greater assurance of recovery– Ineffective security systems lead to underutilized Ineffective security systems lead to underutilized

asset valuesasset values Increasing role of foreign credit/capitalIncreasing role of foreign credit/capital

Modern Credit SystemsModern Credit Systems

Security Devices & Security Devices & Enforcement MechanismsEnforcement Mechanisms

Broadest range of security devices Broadest range of security devices – Movables, immovables, future property rightsMovables, immovables, future property rights

Effective enforcement systemsEffective enforcement systems– Reinforce and stimulate domestic credit Reinforce and stimulate domestic credit

practicespractices– Encourage foreign direct investmentEncourage foreign direct investment– Serve as disciplinary mechanisms for Serve as disciplinary mechanisms for

incompetent borrowersincompetent borrowers– Foster consensual resolutions by providing Foster consensual resolutions by providing

more predictable backdropmore predictable backdrop

Establish minimum standards of transparencyEstablish minimum standards of transparency– Information fosters cooperationInformation fosters cooperation

Participants need Participants need sufficient informationsufficient information of: of:– A borrower's operations and related financial criteriaA borrower's operations and related financial criteria– The enforcement process -- both judicial or non-The enforcement process -- both judicial or non-

judicial judicial

Accounting & auditing practicesAccounting & auditing practices

Corporate law and regulation should guide the conduct of Corporate law and regulation should guide the conduct of the borrower's shareholders, management and directorsthe borrower's shareholders, management and directors

Law imposed impartially & consistentlyLaw imposed impartially & consistently

Principal Conclusions

Cornerstones of Confidence: Cornerstones of Confidence: Transparency & AccountabilityTransparency & Accountability

Recognizing that individual countries make different policy Recognizing that individual countries make different policy choices regarding their substantive and procedural laws and choices regarding their substantive and procedural laws and the allocation of risk among all participants,the allocation of risk among all participants, these rules must these rules must be clearly specified and consistently appliedbe clearly specified and consistently applied..

Well-defined and predictable risk allocation rulesWell-defined and predictable risk allocation rules and and consistent application of laws should encourage investmentconsistent application of laws should encourage investment

A procedure that is unfriendly to investors but consistently A procedure that is unfriendly to investors but consistently applied is preferable to uncertainty because it provides a applied is preferable to uncertainty because it provides a framework for managing risk throughframework for managing risk through price adjustmentprice adjustment

Principal Conclusion

Cornerstones of Confidence: Cornerstones of Confidence: Certainty & PredictabilityCertainty & Predictability

Bank Regulators


& others

Professionals

Administrative


& Civil

Agency

Reg

ulat

ory

Legal


Cultural & Social



Enterprise

Creditors

Employees

Company laws

Shareholders

Directors etc

Labor laws

Secured Creditors

State

Collateral laws

Mortgage laws

Contract/Commercial

Tax & other laws

Securities laws

Others laws

Institutional

Insolvency System

Credit Credit AssessmentAssessment

InformationInformation

Identify SecurityIdentify Security

NegotiationNegotiation pricingpricing

ContractingContracting

RegistryRegistry

MonitoringMonitoring

Risk Assessment

Information

Identify Options

Negotiation pricingpricing

Amend Contracts

Possible action

Monitoring

Enforcement Formal Insolvency

Liquidation, Rescue

Security Rights

Information

Negotiation (Plan)

Implementation

Monitoring

Credit Access Financial Distress

Enforcement & Insolvency

Risk Assessment ContinuumRisk Assessment Continuum

Source: The World Bank

A modern, credit-based economy requiresA modern, credit-based economy requires predictablepredictable, , transparent and affordable transparent and affordable enforcementenforcement of both unsecured and secured credit of both unsecured and secured credit claims by efficient mechanisms outside of claims by efficient mechanisms outside of insolvency, as well as a sound insolvency systeminsolvency, as well as a sound insolvency system. . These systems must be designed to work in These systems must be designed to work in harmonyharmony. . ((IPG 1IPG 1))

Unsecured DebtUnsecured Debt ((IPG 2IPG 2)) Secured DebtSecured Debt:: Creation, recognition, enforcement Creation, recognition, enforcement

ofof ((IPG 3-5IPG 3-5))

Principles on Creditor Rights Principles on Creditor Rights and Enforcement (IPG 1-5)and Enforcement (IPG 1-5)

General Principles

Legal Framework (Legal Framework (policy choicespolicy choices))– General principles (General principles (IPG 6-16IPG 6-16))– Rehabilitation (Rehabilitation (IPG 17-23IPG 17-23) ) – International Considerations (International Considerations (IPG 24IPG 24))– Credit Culture and Corporate Workouts (Credit Culture and Corporate Workouts (IPG 25-26IPG 25-26))

Design considerationsDesign considerations– Integration, Capacity, Operational integrity, Global outlookIntegration, Capacity, Operational integrity, Global outlook

Policy objectivesPolicy objectives– Efficiency, Predictability, Transparency, AccountabilityEfficiency, Predictability, Transparency, Accountability

Principles for Legal Framework:Principles for Legal Framework:(Design Considerations & Policy (Design Considerations & Policy Objectives)Objectives)

Role of Governing/Judicial Authority (Role of Governing/Judicial Authority (IPG 27IPG 27) ) Performance Standards/Qualifications (Performance Standards/Qualifications (IPG 28IPG 28)) Court Organization (Court Organization (IPG 29IPG 29))

– Resourcing, operations, court proceduresResourcing, operations, court procedures Transparency and Accountability (Transparency and Accountability (IPG 30IPG 30) ) Judicial decision-making & Enforcement (Judicial decision-making & Enforcement (IPG 31IPG 31)) Integrity of Governing Authority (Integrity of Governing Authority (IPG 32)IPG 32)

– Rules to avoid conflicts and conduct that undermine public Rules to avoid conflicts and conduct that undermine public confidenceconfidence

Implementation Implementation (Institutional Framework)(Institutional Framework)

The regulation of an insolvency system is The regulation of an insolvency system is essential to assure theessential to assure the competencecompetence of of office holders and other participants, to office holders and other participants, to ensure theensure the efficiency and effectivenessefficiency and effectiveness of of the system, and to maintain thethe system, and to maintain the integrityintegrity of of andand public confidencepublic confidence in the in the system.system.

ImplementationImplementation(Regulatory Framework)(Regulatory Framework)

Hallmarks of a properly regulated systemHallmarks of a properly regulated system– Clarity, transparency & fairness, predictability, Clarity, transparency & fairness, predictability,

accountability accountability – Public confidence and credibilityPublic confidence and credibility

Regulatory ElementsRegulatory Elements– Integrity of Participants (Integrity of Participants (IPG 33 & 35IPG 33 & 35))– Role of Regulatory or Supervisory Bodies (Role of Regulatory or Supervisory Bodies (IPG IPG

3434))

Regulatory FrameworkRegulatory Framework

Obstacles To a Strong Obstacles To a Strong Regulatory FrameworkRegulatory Framework

Economic: The state budget cannot support an agency dedicated solely to regulating insolvency administrators– Technical assistance available from multi-lateral and bi-Technical assistance available from multi-lateral and bi-

lateral agencies to help set-up agencies.lateral agencies to help set-up agencies.

– Levies can be used to fund the operating costs of the Levies can be used to fund the operating costs of the agencyagency

Political: Such regulation is inconsistent with Political: Such regulation is inconsistent with modern capitalism and is a breeding ground modern capitalism and is a breeding ground for corruptionfor corruption– Even the most robust forms of capitalism require Even the most robust forms of capitalism require some some

state regulation.state regulation.

– Weigh the possibility of corruption within the agency Weigh the possibility of corruption within the agency against the likelihood of corruptionagainst the likelihood of corruption without it. without it.

ROSC AssessmentROSC Assessment(Table 1)(Table 1)

Region Completed Final Stages

Ongoing Projected FY06

AFR / MNA

Kenya, Mauritius, Morocco, S Africa

Cameroon, Uganda

CEMAC (6) Nigeria

EAP / SA

India, Philippines, Vietnam

Nepal, Sri Lanka

India v.2

ECA Czech Rep, Kyrgyz Rep, Lithuania, Romania, Russia, Slovakia, Slovenia, Turkey, Ukraine

[Hungary][Poland]

LAC Argentina, Bolivia, Brazil, Chile, Ecuador, El Salvador, Honduras, Nicaragua

Colombia, Jamaica, Paraguay

Guatemala, Uruguay

Dominican Rep, Mexico,

24

Total 6 2 10

Importance of Effective Importance of Effective Insolvency SystemsInsolvency Systems

Financial Stability

Insolvency and

Cr. Rights

Efficient Allocation of ResourcesValue Preservation

Private Sector Growth

Financial Sector Development

Improved Access to Credit

ECONOMIC GROWTH

Bank Regulators


& others

Professionals

Administrative


& Civil

Agency

Reg

ulat

ory

Legal


Cultural & Social


Enterprise

Creditors

Employees

Company laws

Shareholders

Directors etc

Labor laws

Secured Creditors

State

Collateral laws

Mortgage laws

Contract/Commercial

Tax & other laws

Securities laws

Others laws

Institutional

Insolvency System


World Bank Principles World Bank Principles - Scope- Scope

Credit Information systems

D & O Liability

Risk Management Practices

Workout Framework

Enabling Framework (i.e. tax treatment of bad debts, NPLs)

AMCs & systemic corrective measures

Enforcement / InsolvencyCredit Risk ManagementCredit Access / Protection

Compatibility of Systems

Collateral Systems immovable /

movable

Registry Systems (Transparency)

Enforcement Systems

Public Auction & Collections

IPG A1-5 IPG B1-5

Corporate Exit Mechanisms

Liquidation

Rehabilitation

Quasi-formal restructuring

IPG C1-D9

Implementation Institutional

Systems Regulatory Systems

RISK ASSESSMENT RISK ASSESSMENT CONTINUUMCONTINUUM

Credit Assessment

Information

Identify Security

Negotiation pricing

Contracting

Registry

Monitoring

Risk Assessment

Information

Identify Options

Negotiation pricing

Amend Contracts

Possible action

Monitoring

Enforcement Formal Insolvency

Liquidation, Rescue

Security Rights

Information

Negotiation (Plan)

Implementation

Monitoring

Increasing financial distress

Risk E

valuatio

n P

rocess

Credit Access Risk Management Resolution / Recovery

Nigeria: Goals for Nigeria: Goals for Insolvency ReformInsolvency Reform

Foster commercial confidence and predictabilityFoster commercial confidence and predictability – Markets more accurately price, manage, resolve default Markets more accurately price, manage, resolve default

riskrisk

– Establish a predictable backdrop for negotiationsEstablish a predictable backdrop for negotiations

– Reduce asset deterioration and promote credit access Reduce asset deterioration and promote credit access

Safety valve for corporate distress Safety valve for corporate distress – Salvage viable businesses and preserve jobs (rescue) Salvage viable businesses and preserve jobs (rescue)

– Efficient transfer ofEfficient transfer of assets (bankruptcy)assets (bankruptcy)

Vital to balance in commercial relationshipsVital to balance in commercial relationships– Encourage responsible corporate behavior & governanceEncourage responsible corporate behavior & governance

– Penalize owners and managers who lack financial Penalize owners and managers who lack financial discipline or behave irresponsiblydiscipline or behave irresponsibly

World Bank Insolvency World Bank Insolvency Reform: Lessons Reform: Lessons Learned (1)Learned (1)

““Not so special after all?”Not so special after all?” Virtually no correlation between having Virtually no correlation between having

a specialized bankruptcy court and a a specialized bankruptcy court and a system that is perceived by users as system that is perceived by users as being more predictable and being more predictable and transparent.transparent.

Lesson: Courts that are specialized Lesson: Courts that are specialized in name only, do not add value.in name only, do not add value.


““Time is money”Time is money”

Strong correlation between systems Strong correlation between systems that work quickly and those that are that work quickly and those that are cost-effective.cost-effective.

Lesson: If we can remove Lesson: If we can remove inefficiencies from the system inefficiencies from the system that cause delays, we can that cause delays, we can increase the returns of all increase the returns of all creditors.creditors.


““Great minds think alike”Great minds think alike” Strong correlation between judicial Strong correlation between judicial

competence and trustee/administrator competence and trustee/administrator competence. competence.

Lesson: Insolvency administrators Lesson: Insolvency administrators and insolvency judges can mutually and insolvency judges can mutually reinforce competence.reinforce competence.

Nigeria ICR ROSC – Nigeria ICR ROSC – Preliminary FindingsPreliminary Findings Legislative Drafting is not the Legislative Drafting is not the

Cure-AllCure-All

The regulatory and judicial The regulatory and judicial institutions designed to institutions designed to implement the implement the Companies and Companies and Allied Matters ActAllied Matters Act do not work. do not work.

Nigeria ICR ROSC – Nigeria ICR ROSC – Preliminary FindingsPreliminary Findings Large Disconnect Between Large Disconnect Between

Perceptions of Providers and Perceptions of Providers and Clients.Clients.

Corporate Affairs Commission Corporate Affairs Commission RegistryRegistry

CourtsCourts

Nigeria ICR ROSC – Nigeria ICR ROSC – Preliminary FindingsPreliminary Findings Law is Only Part of the SolutionLaw is Only Part of the Solution

Basic structural problems within Basic structural problems within

Nigeria often act as an obstacleNigeria often act as an obstacle

to improving the lending to improving the lending

environment.environment.

The Way ForwardThe Way Forward

Finalize draft recommendationsFinalize draft recommendations Convene Stakeholders’ CommitteeConvene Stakeholders’ Committee Work with Stakeholders’ Committee Work with Stakeholders’ Committee

to finalize recommendations for to finalize recommendations for delivery to government.delivery to government.

Work with government to implement Work with government to implement recommendations.recommendations.

Importance of the Importance of the financial reporting financial reporting infrastructureinfrastructure not just accounting and not just accounting and

auditing standardsauditing standards

Statutory Framework

Monitoring & Enforcement

Education & Training

Accounting Profession &

Ethics

Accounting Standards

Auditing Standards

Financial Reporting Infrastructure

All supporting pillars All supporting pillars need to need to be strengthenedbe strengthened

Statutory Framework

Monitoring & Enforcement

Education & Training

Accounting Profession &

Ethics

Accounting Standards

Auditing Standards

Financial Reporting Infrastructure

The World Bank and Emerging Market Insolvency Reform Mahesh Uttamchandani Senior Counsel -...

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Transcript of The World Bank and Emerging Market Insolvency Reform Mahesh Uttamchandani Senior Counsel -...