José Garrido Insolvency and Creditor Debtor Regimes Initiative The World Bank
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
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.
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
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.
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
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.
Small in Size, Big in Problems Sole Proprietorship Personal Bankruptcy Variety of Legal Forms Partnerships Insolvency Commercial Bankruptcy Small companies Corporate Insolvency
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.
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
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.
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.
Conclusion ECONOMIC GROWTH Entrepreneurship Liquidation: Efficient Allocation of Resources Increased Consumption Access to Finance Modern Insolvency Framework for SMEs Preservation of Jobs Business Preservation