law, justice and development week 2011 innovation and empowerment for development november 14-17,...
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LAW, JUSTICE AND DEVELOPMENT WEEK 2011
INNOVATION AND EMPOWERMENTFOR DEVELOPMENT
November 14-17, 2011 Washington DC
LJD LAWJUSTICE andDEVELOPMENT
Innovative Approaches to Insolvency & Restructuring
Non-performing loans, debt enforcement
and the impact of the legal framework
Frederique DahanEBRD, Office of the General Counsel
Financial crisis in the ECA region
NPL level in the region is high (but differs from country to country)
First time since transition began
Creditors (mostly banks) trying to deal with the problem (with various success and mixed motivation)
Feedback is invaluable to: get a sense of problems that creditors face
analyse impact (or lack of) legal systems
suggest revised agenda for reform in more ‘mature’ jurisdictions
1. Problems faced by creditors/banks
NPLs require organisation changes: new work-out units, policies, distinction between large corporate and SME/consumer lending
Difficult to recruit right staff – lawyers biased towards liquidation of collateral
Recognition that under-writing standards had been lax – contract drafting, borrower information and collateral
Collateral over-evaluated and some markets now very depressed
1. Problems faced by creditors (cont.)
Out of court enforcement is not used by banks
Assumption that they require debtor collaboration, difficult to obtain in distressed times
Court procedures lengthy and costly
Sales at auctions generate low proceeds
Opening of insolvency proceedings against corporates avoided if at all possible
Statutory moratorium of mortgage loans in some cases
2. Impact of legal framework
Premises which underpinned reform:
Enforcement should enable prompt realisation of assets at market value
Out of court enforcement clauses in contract
Courts need not be involved - can be replaced by quasi-public institutions, such as notaries
Security right effective and enforceable after debtor insolvency
2. Impact of legal framework (Cont.)
Start of enforcement should be formal but straightforward
Debtor should be allowed to object but not to derail or unduly delay the process
Realisation means should be flexible – sale at auctions remains inefficient, especially when market is inactive
Ultimately, legal framework is backdrop of bargaining between creditor and debtor
3. Agenda for reform
Revised agenda Out of court enforcement should not require debtor
collaboration – needs to function unless debtor actively obstructs
Outsource legal services to qualified professionals (receivers, insolvency practitioners)
Creditors need to be actively involved in all stages (including insolvency proceedings)
Creditworthiness is key : credit information reporting system
3. Agenda for reform (cont.)
New agenda
Debt collection agencies
Distressed debt market
Appraisal / evaluators
Tax issues
Debt equity swaps
Private work-outs
EBRD committed to provide support (technical assistance and investment)
Financial Law Unit within the Legal Transition Programme, OGC