World Developments in Insolvency Regulation

Transcription

1 World Developments in Insolvency Regulation Kiev, Ukraine February 2012 Mahesh Uttamchandani Global Product Leader Debt Resolution & Business Exit World Bank IFC MIGA

2 Outline 1. Problems and challenges NPLs and Value Destruction 2. Solutions and opportunities Debt Resolution & Business Exit Out of court workouts 3. Regulating insolvency practitioners 2

3 1. Problems and challenges NPLs and Value Destruction 2. Solutions and opportunities Debt Resolution & Business Exit Out of court workouts 3. Regulating insolvency practitioners 3

4 Problems and challenges Poor loan recovery Courts do not have capacity to deal with creditors recovery claims and business distress in a timely manner Lack of effective formal and out-of-court tools Negatively impacts: Entrepreneurship Access to credit Bank loan recovery Jobs 4

5 Value Destruction in ECA Country Aggregate value of NPLs (2008) Amount recovered under current recovery rates Value destruction Recovery rate * Time* Cost Total Total Total (cents on the dollar) (years) (% value of estate) Belarus 149,983,372 41,995, ,988, Macedonia 262,833,745 54,406, ,427, Moldova 132,301,824 37,309,114 94,992, Montenegro 184,135,325 79,914, ,220, Serbia 1,072,735, ,456, ,278, Ukraine 21,256,486,416 1,679,262,427 19,577,223, Total 23,058,476,088 2,209,345,146 20,849,130,941 * Doing Business

6 Business Exit in ECA Region Time (years) OECD 1.7 Eastern Europe & Central Asia 2.7 East Asia & Pacific 2.9 Latin America & Caribbean 3.3 Middle East & North Africa 3.4 South Asia 3.4 Sub-Saharan Africa 3.4 Time is the enemy for stakeholders who need returns on their loans 6

7 Business Exit in ECA (cont) 7

8 Doing Business Findings 8

9 Impact on the Ground: Malev Airline State-owned airline ceased flying on February 3, 2012 after withdrawal of government support Debts of $270m (60bn forint) 24.6bn forint deficit in bn forint of government support in August bn forint borrowed in December 2011 Inability to restructure debts will have implications for Malev stakeholders and investor perception of Hungarian investment climate 9

10 Impact on the Ground: Malev Airline (cont.) Insolvency regime in Hungary Less than 1% of companies that use insolvency continue to operate as a going concern Amendments have improved commencement (2007) and creditor rights (2009) mechanisms Unresolved issues No articulated principles to guide debtors and creditors through out-of-court negotiations to resolve business distress before debtor is technically insolvent Tax authorities lack the administrative power to compromise debt No provisions in the current law to allow for pre-packaged restructurings Insolvency framework for regulating and selecting insolvency administrators requires significant improvement 10

11 Function of Insolvency Reform Improves credit environment by creating more efficient regimes for: Banks and businesses to recover debts Businesses to leverage collateral Helps failed businesses to exit the market efficiently and effectively Returns assets and entrepreneurs to productive use as soon as possible Preserves jobs by improving the regulatory environment for rescuing viable businesses 11

12 Role of World Bank Debt Resolution & Business Exit Team Delivers technical assistance to governments through IFC and World Bank regional teams Possible intervention includes: Legislative reviews and reform Process mappings Advice on improving institutional framework that implements reform Capacity building, training and licensing of relevant stakeholders 12

13 1. Problems and challenges NPLs and Value Destruction 2. Solutions and opportunities Debt Resolution & Business Exit Out of court workouts 3. Regulating insolvency practitioners 13

14 Solution # 1 Bilateral/Informal without 3rd party assistance Considerations: Single or multiple creditors per borrower Demand for lenders Existing ADR platform Difficult to pass legislation 14

15 Solution # 2 Formal with/without 3rd party assistance Considerations: Multiple creditors per borrower Strong central bank Sophisticated lenders Weak judiciary 15

16 Formal Mechanisms Advantages Flexible compared to statutory procedures State influence: easier for state to support, less costly State does not need to set up institutions Public-private sector involvement/dialogue Disadvantages Market may be unsuitable (e.g. no strong Central Bank) Sustainable capacity in the market is required Less flexible than informal methods 16

17 Solution # 3 State-Assisted Debt Resolution Considerations: Lack of negotiation culture Preference for government implementing mechanisms Weak judiciary 17

18 State-assisted mechanisms Advantages Transparency due to statutory framework Certainty of who is regulating mechanism Pre-determined time frames Easiest for state to promote Disadvantages Longer implementation period because legislation needs to be passed Overly bureaucratic Time Cost 18

19 The same tools used in different ways State-assisted mechanisms Formal mechanisms (3 rd party assistance) Informal (3 rd party assistance) Private: Bilateral 19

20 1. Problems and challenges NPLs and Value Destruction 2. Solutions and opportunities Debt Resolution & Business Exit Out of court workouts 3. Regulating insolvency practitioners 20

21 Role of Insolvency Practitioners Translate policy choices made by the insolvency law into reality Key players in: Reorganization: preparation of reorganization plan and promoting the survival of viable companies Liquidation: efficient and prompt sale of assets, maximizing value Determination of estate, its administration and/or liquidation Information gathering, analyzing and sharing ( eyes of court ) Assisting court in procedural matters 21

22 Function of Insolvency Practitioners IP s main function is: To collect and realize the assets To distribute the proceeds among creditors by way of dividend To run business during restructuring What is it expected: Knowledge Relevant experience Personal qualities: integrity, impartiality, independence and good management skills 22

23 Leading Practice Examples Competence and Integrity of Insolvency Administrators [D8] System should ensure that: Eligibility criteria are objective, clearly established and publicly available IPs are competent to undertake the work to which they are appointed and to exercise the powers given to them IPs act with integrity, impartiality and independence IPs, where acting as managers, are held to director / officer standards of accountability and are subject to removal for incompetence, negligence, fraud or other wrongful conduct 23

24 Leading Practice Examples (cont) UNCITRAL Recommendations Qualifications (s 115): The insolvency law should specify the qualifications and qualities required for appointment as an insolvency representative, including integrity, independence, impartiality, requisite knowledge of relevant commercial law and experience in commercial and business matters. The insolvency law should also specify the grounds upon which a proposed insolvency representative may be disqualified from appointment. 24

25 Leading Practice Examples (cont) EBRD Principles Qualifications and Licensing Appointments Review of Appointments Removal and Resignation Replacement Standards of Conduct Reporting and Supervision Regulatory and Disciplinary Functions Remuneration Insurance Code of Ethics 25

26 Minimum Qualifications and Recovery Rates Capacity building of insolvency professionals is essential to efficient insolvency procedures Positive correlation between minimum qualification requirements and higher recovery rates Faster procedures and less costly 26 26

27 Policy questions What specific duties should be assigned to IPs? Transfer of duties from judges to trustees e.g. allow the trustee to review debtor financials and prepare asset inventory How should IPs be qualified? Prepare potential pools of future IPs with understanding of: Insolvency Logistics of asset sales Valuation mechanisms Who will regulate and supervise the IPs? Self regulation (UK); government body (Serbia); hybrid (Canada) 27

28 Policy questions (cont.) How should the regulator monitor the IPs to ensure maintenance of high standards of performance and ethical conduct? UK: periodic inspections every 3-6 years by professional associations How should IPs be compensated? Compensation structure Assignment of cases Liability and insurance Standards of liability 28

29 Regulating IPs Should profession be regulated in a different way? Why would regulation be beneficial for existing IPs? If profession is regulated, other policy issues arise: Should the new licensing system of insolvency representatives include an examination? If so, what body should assist the regulator in administering the exam? Should existing liquidators be exempt from all or part of any required examination on the basis of their experience? How should the regulator monitor the performance of IPs to ensure standards and ethics? 29

30 Regulating IPs (cont) What happens when access to profession is not restricted? Profession devalued, increasing reputational risk for good IPs If administrators or liquidators are not well equipped to handle insolvency cases, they may not realize the highest value or may reduce remaining value in a hopeless search for the ideal buyer When mechanisms for appointment are unclear, transparency concerns may be raised Increase in time and cost of the procedures, leading to diminished recovery rates 30

31 Additional Policy Questions If profession is not regulated, other aspects can still be improved: Development of a database of known IPs whose training and experience are recognized by an authorized body Requirement that all IPs be selected from this database Promulgation of guidelines to be followed by the court when making IP appointments Should mala praxis insurance be contemplated? (e.g. Canada). 31

32 Annex

33 Impact on the Ground: Montenegro Helped create legal framework and sustainable mediation centers to provide alternatives to slow court settlements Worked with Government to amend insolvency law to include special provision for mediation and formal recognition of mediation decisions Possibility of preventive action during bankruptcy Reforms will: Improve business rescue culture (roughly 96% of insolvency cases result in liquidation) Improve recovery rates (43.3% in 2012; 43.4% in 2011; 43.7% in 2010 according to Doing Business) Improve access to credit Preserve businesses and jobs Reduce overall cost to recover disputed claims 33

34 Resolving NPLs out of court Estimation Model $23.0bn $20.8bn Valued destroyed Estimated impact = $9.1bn x 4% = $364m 5 $9.1bn 0 Total non-performing loans (NPLs) $2.2bn Return to stakeholders without ref orm Potential return to stakeholders with reform 34

35 Impact on the Ground: Latvia Assisted with the creation of CDRGs Conducted workshop to train stakeholders on out-of-court workouts Inclusion of private and public sector in roll-out Guidelines promulgated in August 2009 Non-binding set of principles for multi-creditor workouts One year later: Top 4 banks (holding 62.9% of loan market shares in Latvia) report that CDRGs are a useful tool that provide a framework to address widespread debt distress in the corporate sector 35

36 Impact on the Ground: Latvia (cont.) Version 1 Valmiermuizas Alus 2006: brewing company founded 2009: as economics crisis escalated, building costs rose and cash flow problems emerged once operations began Understanding financial challenges, Swedbank began discussions resulting in restructuring plan using OCW guidelines Year 1: interest-only payments Year 2: principal payment schedule adjusted to the seasonality of business 2010: demand exceeding supply and firm in negotiations with lenders to finance doubling of production capacity 36

37 Impact on the Ground: Latvia (cont.) Version 2 Valmiermuizas Alus 2006 Brewing company founded Funded by Latvian Investment Agency, European Union Funds, Swedbank and owners 2009 As economics crisis escalates, building costs rise and cash flow problems emerge once operations begin Understanding financial challenges, lenders begin discussions resulting in a restructuring plan using OCW guidelines: Year 1: interest-only payments Year 2: principal payment schedule adjusted to the seasonality of business 2010 Demand exceeding supply Company in negotiations with lenders to finance doubling of production capacity Without bank cooperation, the business would have failed 37

38 Informal Mechanisms Advantages Most flexible typology: minimal structure required Market-driven Process designed by stakeholders 3rd party is neutral, encouraging compromise Disadvantages Harder to coordinate/convene parties Difficult to reach consensus Enforceability is more difficult More difficult for the Central Bank to promote 38

39 Impact on the Ground: Romania New out-of-court guidelines introduced in November 2010 Project: to provide training to sample of SME borrowers and test whether: Out-of-court debt restructuring has causal impact on borrower loan repayment rates Out-of-court debt restructuring has a causal impact on new borrower loan requests Measuring the real impact of insolvency reform on the SME sector 39