Training for Reform

Development Economics │Global Indicators

Resolving Insolvency

March 12, 2019

Klaus Koch-Saldarriaga

Regulatory Specialist

Doing Business unit

Development Economics │Global Indicators

I. Why does it matter?

II. What does it measure – and what does it not?

III. Methodology changes in the past 5 years

IV. What are the main findings in DB19?

V. Good practices

Why does Resolving Insolvency matter?

A good insolvency regime:

• Helps creditors achieve maximum value of assets.

• Allows to restructure viable businesses and have efficient closure of failedbusinesses.

• Enhances certainty in the market and promotes economic stability and growth.

• Encourages lenders to grant higher-risk loans.

• Results in more employees keeping their jobs.

• Helps preserve the network of suppliers and customers.

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Development Economics │Global Indicators

I. Why does it matter?

II. What does it measure – and what does it not?

III. Methodology changes in the past 5 years

IV. What are the main findings in DB19?

V. Good practices

What does Resolving Insolvency measure?

✓ Recovery rate is

recorded as cents on

the dollar recovered

by secured creditors

through reorganization,

liquidation or debt

enforcement

(foreclosure or

receivership)

proceedings.

✓ The calculation is

based on the time,

cost and outcome of

insolvency

proceedings involving

domestic entities under

a specific case study.

Recovery rate

✓ Measures the quality

of insolvency laws

applicable to liquidation

and reorganization

proceedings.

✓ Based on 4

components:

1. Commencement of

proceedings index

2. Management of

debtor’s assets index

3. Reorganization

proceedings index

4. Creditor participation

index

Strength of insolvency

framework index

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What does Resolving Insolvency not measure?

Bankruptcy of financial institutions or of natural persons

Sectors different from the one assumed in the case study

Recovery rate of unsecured creditors

Out-of-court insolvency proceedings

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What are the case study assumptions? Recovery rate

Case study focuses on a limited liability company that:

Operates in the economy’s largest business city.

Is 100% domestically owned with the founder (also the chairman of

the supervisory board) owning 51%.

Has a downtown real estate, where it runs a hotel, valued at 100times the income per capita or $200,000, whichever is greater.

Has 201 employees and 50 suppliers, each of which is owed

money for the last delivery.

Has a 10-year loan agreement with a domestic bank secured by

the hotel property and/or enterprise security interest.

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It had negative net worth in 2018 and is expected to incur losses in2019 and 2020.

The business is experiencing financial difficulties:

What are the case study assumptions? Recovery rate

As of January 1, 2019, there is no cash to pay the bank interest orprincipal, which are due on January 2, 2019.

Cash flow in 2019 is expected to cover all operating expenses, except

payments to the bank.

The amount outstanding under the loan agreement is exactly equal tothe market value of the hotel and represents 74% of the hotel’s totaloutstanding debt, the remaining 26% is held by unsecured creditors.

If the hotel is sold as going concern, it will fetch 100% of its current

market value; if it is sold piecemeal, it will fetch 70%.

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The recovery rate is a function of the time, cost and outcome

of an insolvency proceeding as well as the lending rate.

Recovery rate: How is it calculated?

The strength of insolvency framework index

measures whether each economy has

adopted internationally recognized good

practices in 4 areas:

Strength of insolvency framework index

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Development Economics │Global Indicators

I. Why does it matter?

II. What does it measure – and what does it not?

III. Methodology changes in the past 5 years

IV. What are the main findings in DB19?

V. Good practices

Methodology change in Doing Business 2015:

Combining quality and efficiency

1. What procedures are available to a DEBTOR when commencing insolvency proceedings?

• The Resolving Insolvency indicator initially focused on capturing the efficiency of

insolvency proceedings through the recovery rate indicator set (time, cost, outcome of

insolvency proceedings and how much creditors would recover at the end).

• The indicator was expanded in Doing Business 2015 to also include the strength of the

insolvency framework index, which measures the quality of the legal framework

applicable to insolvency proceedings.

Develop a more accurate ranking of economies

Evaluate both the quality of

the legal framework and the

efficiency of proceedings

Ensure that practice is

better captured

Promote collective

insolvency proceedings

Acknowledge efficiency of

individual recovery

proceedings

Provide clear guidelines for insolvency reforms

Based on good insolvency

practices as identified by the

World Bank principles and

UNCITRAL legislative guide

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Development Economics │Global Indicators

I. Why does it matter?

II. What does it measure – and what does it not?

III. Methodology changes in the past 5 years

IV. What are the main findings in DB19?

V. Good practices

Where was it easy to resolve insolvency in 2017/18?

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Top ten performers Score

1. Japan 93.45

2. Finland 92.81

3. United States 90.91

4. Germany 90.12

5. Norway 85.44

6. Denmark 85.13

7. Netherlands 84.28

8. Belgium 83.88

9. Slovenia 83.66

10. Puerto Rico (U.S.) 83.32

Recovery rate

(cents on the dollar)Strength of insolvency

framework index (0-16)

92.4 14

88.3 14.5

81.8 15

80.4 15

92.0 11.5

88.5 12

89.8 11.5

89.1 11.5

88.7 11.5

67.7 15

Regions with high recovery rates also perform well on the strength

of insolvency framework index

0

10

20

30

40

50

60

70

80

90

100

0

2

4

6

8

10

12

14

16

OECD highincome

Europe & CentralAsia

Latin America &Caribbean

East Asia &Pacific

South Asia Sub-SaharanAfrica

Middle East &North Africa

Recovery rate (cents on the dollar)Index score (0-16)

Strength of Insolvency Framework Index Recovery rate

Source: Doing Business 2019.

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Economies can make resolving insolvency easier by strengthening

reorganization provisions and improving creditor participation

0

10

20

30

40

50

60

70

80

90

100

OECD highincome

Europe & CentralAsia

Latin America &Caribbean

Sub-SaharanAfrica

East Asia &Pacific

Middle East &North Africa

South Asia

Index score as % of best score

Commencement of proceedings index Management of debtor's assets index Reorganization proceedings index Creditor participation index

Source: Doing Business database.Source: Doing Business dat.

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14 economies made resolving insolvency easier in 2017/18

Feature Economies Some highlights

Improved the

likelihood of

successful

reorganization

Afghanistan; Djibouti; Egypt, Arab.

Rep.; Kenya; Morocco; Pakistan;

Rwanda; Turkey

Morocco established the possibility for the debtor to receive new

financing after the commencement of insolvency proceedings and

introduced corresponding priority rules.

Introduced a new

restructuring

procedure

Afghanistan; Egypt, Arab. Rep.;

Malaysia; Pakistan

Pakistan introduced the option of reorganization for commercial

entities as an alternative to previously available option of

liquidation.

Strengthened

creditors’ rights

Afghanistan; Djibouti; Kenya;

Kyrgyz Republic; Morocco;

Rwanda; Sudan; Turkey

Kyrgyz Republic granted an individual creditor the right to access

information about the debtor’s business and financial affairs.

Improved provisions

on treatment

of contracts during

insolvency

Afghanistan; Azerbaijan; Kenya;

Kyrgyz Republic; Pakistan; Sudan

Kenya allowed for the continuation of contracts supplying

essential goods and services to the debtor, giving the

administrator the power to continue or disclaim contracts of the

debtor.

Streamlined

insolvency

procedures

Belgium; Burundi Belgium unified its insolvency legal framework and streamlined

provisions related to liquidation and reorganization procedures.

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Previous framework New framework

Can a debtor initiate liquidation or reorganization procedures?

• Yes, but liquidation only. • Yes, both procedure.

Does the insolvency framework explicitly provide for the continuation

of existing contracts supplying essential goods and services to the debtor?

• No provisions.

• Yes. The administrator may, with the prior approval of the

Court, assume or reject any executory contract or

unexpired lease of the debtor.

Can a debtor obtain credit after commencement of insolvency proceedings?

• No provisions.

• Yes. The debtor or the administrator may obtain new

financing after the commencement of insolvency

proceedings and the priorities of the new financing are

clearly established.

Can creditors participate in important decisions?

• No provisions.

• Yes. All creditors can vote on the proposed reorganization

plan. They are divided into classes according to their

respective rights and each class votes separately.

Creditors of the same class receive the same treatment

under the reorganization plan.

Reform highlights in 2017/18: Pakistan

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Development Economics │Global Indicators

I. Why does it matter?

II. What does it measure – and what does it not?

III. Methodology changes in the past 5 years

IV. What are the main findings in DB19?

V. Good practices

Resolving Insolvency

Good practices

Global good practices

✓ Establishing or promoting reorganization and

liquidation procedures

✓ Eliminating formalities and

introducing/tightening time limits

✓ Strengthening creditor participation

✓ Clarifying rules for commencing insolvency

proceedings

✓ Improving provisions applicable to treatment

of contracts and voidable transactions

✓ Introducing provisions on post-

commencement financing

✓ Regulating the profession of insolvency

administrators

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Doing Business

www.doingbusiness.org

Development Economics │Global Indicators

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