The Middle East Gets Down to (Insolvency) Business

Ten Middle Eastern countries have just signed a joint declaration to work on improving their insolvency regimes. Egypt, Jordan, Lebanon, Libya, Oman, West Bank and Gaza, Qatar, Saudi Arabia, Sudan, and United Arab Emirates met in Abu Dhabi earlier in the week and agreed to (excerpt):

ENCOURAGE policy makers, legislators and regulators to acknowledge the benefits of a well-functioning insolvency regime and work towards building and addressing the legal, regulatory and institutional frameworks necessary for sound insolvency regimes in the region;

ENGAGE market practitioners such as accountants, lawyers, insolvency professionals to work with policy makers to build the suitable infrastructure necessary for a sound insolvency regime--including the necessary regulatory architecture of insolvency practitioners;

STRENGTHEN the institutional framework of regulators and judiciary, and enhance their capacities necessary for effective and efficient implementation of insolvency laws;

RECOGNIZE the specific assistance being provided by the World Bank in the form of direct technical assistance to: (1) Improve insolvency legislation; (2) Build frameworks for out of court resolution of insolvency cases; and (3) Increase domestic capacity to effectively regulate insolvency practitioners all of which has the aim of, inter alia, reducing the time and cost associated with insolvency proceedings; and

ESTABLISH a Regional Forum on insolvency and creditor rights which will aim to engage, educate, and inform more stakeholders into the reform process and will serve as a platform for sharing of international and regional best practices on both policy and infrastructure areas on insolvency and creditor rights.

This initiative is both timely and needed. Let's hope they will consider some of the recent analysis on what works and what doesn't in bankruptcy reform. See, for example, this survey article. Five reform suggestions are given for quick improvement: 

Minimize dependence on the courts

One quick solution is to minimize the involvement of judges. In some economies with efficient bankruptcy, courts play only a limited role, if any. In Australia, Hong Kong (China), Singapore and the United Kingdom secured creditors can appoint a receiver to take control of a distressed company. This happens without any court involvement. The receiver then manages the company in preparation for selling its assets. More often than not the business is sold as a whole unit. The recent reforms in Georgia and Mauritius are based on the same idea.

Establish specialized courts

Other economies—including the Dominican Republic, Georgia, Moldova, Tanzania, Thailand and Uganda—have made it easier to process bankruptcy cases by creating specialized commercial or even bankruptcy courts. Specialization increases efficiency. Judges can more easily gain expertise in bankruptcy and will be better equipped to deal with issues of insolvent businesses. Bosnia and Herzegovina, FYR Macedonia and Ghana have created bankruptcy sections within commercial courts, with specially trained judges and innovative management systems to deal with court backlogs. Visaria (forthcoming) studies the establishment of specialized debt courts in India and finds that the establishment of such courts reduced delinquency in loan repayment by between 3 and 10 percent. Furthermore, interest rates on loans sanctioned after the reform are lower by 1-2 percentage points.

Limit appeals

Another solution is to limit procedural appeals. In El Salvador the wait for a first-instance court to hand down its decision in a debt enforcement case can last up to 3 years. Appeals may drag the litigation out for another year or more. In both El Salvador and Slovenia, where the initial decision can be appealed to 2 higher levels of courts, restricting appeals to just 1 would speed bankruptcy proceedings. In Spain appeals no longer suspend debt recovery. Restricting the number of appeals, or allowing debt recovery to proceed even when there is an appeal, is a simple way to make bankruptcy more efficient. When used as a delay tactic, appeals reduce recovery rates, which depend on how quickly the business or its assets are sold.

Introduce time limits

FYR Macedonia, Poland, Portugal, Serbia, Slovakia, Spain and the United States have all either introduced or shortened statutory deadlines for bankruptcy proceedings. Imposing time limits also makes bankruptcy cheaper: reforms in Bulgaria, Estonia and the United Kingdom have halved bankruptcy costs. Colombia’s 2007 insolvency law tightens time limits for negotiating reorganization agreements. Before, the term allowed was 6 months, with a possible extension of 8 months. The new law limits the term to 4 months, and the extension to 2.

Use the Internet to post decisions and publicize auctions

Where court reform is difficult, reformers can take advantage of the Internet. Croatia has launched a website, called Judges Web, where the court posts information on decisions in bankruptcy cases and announcements of asset sales. Assets are more likely to fetch a higher price, because detailed descriptions and even pictures can be posted for long periods. Before, sales would typically draw few buyers because they were advertised only on a certain day and in a certain newspaper. FYR Macedonia and Serbia have introduced similar websites.