José Garrido Insolvency and Creditor Debtor Regimes Initiative. The World Bank

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1 José Garrido Insolvency and Creditor Debtor Regimes Initiative The World Bank

2 Overview The importance of SMEs in the Economy Small in Size, Big in Problems: Issues connected to the insolvency of SMEs. A Policy Agenda for the Insolvency of SMEs. Conclusion

3 The Importance of SMEs in the Economy SMEs are not only numerically important, but they are also important for the economic system in aggregate terms: In European countries, SMEs account for more than two thirds of jobs in the economy. This percentage can be even higher in other regions of the world. SMEs represent a very important part of the Economy, although they are very diverse from a legal point of view. More than 99% of companies are SMEs, worldwide.

4 The Importance of SMEs in the Economy SMEs contribute in many significant ways to national economies: Creation of jobs Innovation Competitiveness Proximity to local markets and local realities Market niches not covered by large business

5 Small in Size, Big in Problems The Importance of SMEs in the Economy is not matched with a specific set of insolvency rules devised for these businesses: In most modern insolvency there is a liquidation and reorganization procedure for corporate debtors (designed with large companies in mind) and a regime for consumer bankruptcy. SMEs fall between two stools.

6 Small in Size, Big in Problems The definition problem: It is difficult to define legally what a SME is: US Congressional Committee: more than 700 definitions of SME. Approaches to definition for insolvency purposes: Amount of debts Amount of sales Number of workers Combination of different criteria

7 Small in Size, Big in Problems SMEs adopt very different legal forms: Sole proprietorship or family-owned businesses Partnerships Small companies (typically, Limited Liability Companies). Legal differences complicate the search for a unified treatment of small business insolvencies.

8 Small in Size, Big in Problems Sole Proprietorship Personal Bankruptcy Variety of Legal Forms Partnerships Insolvency Commercial Bankruptcy Small companies Corporate Insolvency

9 A Policy agenda for the insolvency of SMEs The creation of a new regime for SMEs: Elements of a new regime: -Simplification of corporate insolvency frameworks: -Simplified structure (creditor participation) -Shorter delays -Reduced costs -Simplified liquidation: the moment of the liquidation decision.

10 A Policy agenda for the insolvency of SMEs The creation of a new regime for SMEs: -Addressing the special problems of SMEs -Debtor-in-Possession as an incentive, and as a wealth-maximizing option. -Plans: preservation of businesses, maximum return to creditors, satisfaction of claims with future income. -Post-commencement financing -Exemptions -Treatment of personal guarantees

11 A Policy agenda for the insolvency of SMEs The creation of a new regime for SMEs: -Reduction of repressive rules: -Allow procedure to distinguish between honest and fraudulent debtors -Provide incentives to debtors who file timely for insolvency -Include a comprehensive discharge, coupled with rules to effectively punish fraudulent conduct.

12 Conclusion -SMEs are the missing part in the insolvency reform efforts of numerous countries, including most of the Asian countries. -Although there are general themes, it is necessary to analyze the problems of every jurisdiction before a reform is proposed. -A reform of the insolvency framework for SMEs should be specific and functional: an insolvency regime that works in a given environment is the ultimate objective.

13 Conclusion ECONOMIC GROWTH Entrepreneurship Liquidation: Efficient Allocation of Resources Increased Consumption Access to Finance Modern Insolvency Framework for SMEs Preservation of Jobs Business Preservation