The World Bank and
Emerging Market
Insolvency Reform
Mahesh Uttamchandani
Senior Counsel - Insolvency and Creditor Rights
The World Bank
The World Bank and
Insolvency - Financial Crises
in Emerging Markets

1997/98 financial crises drew attention to:
– domestic and international impact of weak legal
and institutional frameworks
– lack of understanding by market participants of
financial system vulnerabilities
– linkages between speed of response and speed of
economic recover

G7/G22/APEC/Financial Stability Forum response
GLOBAL FINANCIAL FRAMEWORK:
CORE STANDARDS: ASSESSMENT AREAS
Transparency
Financial
Sector
Market
Infrastructure
- Data Dissemination (IMF)
- Fiscal Transparency (IMF)
- Monetary and Financial Policy (IMF)
- Banking Supervision (BCP)
- Payment and Settlement (CPSS)
- Insurance Supervision (IAIS)
- Security Regulation (IOSCO)
- Anti-Money Laundering (IMF/WB)
- Corporate Governance (OECD)
- Accounting & Auditing (IAS/ISA)
- Insolvency & Creditor Rights (IBRD)
www.worldbank.org/ifa
CONTEXT: The Economics of
Insolvency Reform in Emerging
Markets
1.
Increasing the Breadth and Depth of Financial
Intermediation

Emerging market countries are in a global
competition for capital that flows where it is most
welcome.

Willingness of lenders to lend turns on the type of
lending allowed and flexibility in creating security.

Complex forms of financing (factoring, distresseddebt investing) rely upon transparent and efficient
legal systems.
2.
Fostering Commercial Confidence and Predictability

When the insolvency system functions well,
markets are more able to accurately prices,
CONTEXT: The Economics of
Insolvency Reform in Emerging
Markets
3.
Restoring Balance to Commercial Relationships

Well-functioning insolvency regimes encourage
responsible corporate behavior and governance.
4.
Efficiently Allocating Assets and Preserving Stability

Ineffective or over-regulated collateral systems
lead to ‘under-leveraging’.

Well-functioning liquidation regime allows for the
orderly transfer of assets from inefficient entities
(i.e. the bankrupt company) to more efficient
ones.

Reasonable methods of restructuring provides a
safety valve for corporate distress that helps
preserve value and reduce job-loss (and,
therefore, state-dependency).
World Bank Principles - Scope
Credit Access / Protection
Credit Risk Management
IPG A1-5
Enforcement / Insolvency
IPG B1-5
IPG C1-D9

Compatibility of
Systems

Credit Information
systems

Corporate Exit
Mechanisms

Collateral Systems

D & O Liability

Liquidation
immovable /
movable

Risk Management
Practices

Rehabilitation
Registry Systems
(Transparency)

Workout Framework


Enabling Framework
(i.e. tax treatment of
bad debts, NPLs)
Quasi-formal
restructuring

AMCs & systemic
corrective measures

Implementation



Enforcement
Systems

Public Auction &
Collections


Institutional
Systems
Regulatory Systems
LESSONS LEARNED
Diagnostic Results in Emerging Markets
1. Creditor Rights Legislation


Secured Transactions on Real Estate: functional
Secured Transactions on Movable Assets: outdated
2. Registries



Need of Modernization (computerized systems)
Creation of Registries for Filing Security Interests on Movable Assets
Technical Assistance, IDF Projects, Policy Notes, Specific Strategies
3. Insolvency Legislation


Frequently Antiquated & Inefficient
Unsupportive of modern businesses, especially lacking rescue procedures
for financially distressed enterprises
LESSONS LEARNED
Diagnostic Results in Emerging Markets
4.
Weak and Inefficient Enforcement Proceedings



5.
Ineffective Court Systems





6.
For Both Unsecured and Secured Claims
Lack of Extrajudicial Enforcement Mechanisms
Outmoded Procedural Codes and Rules
For Both Enforcement and Insolvency Proceedings
Inadequate Selection and Training of Judges
Inefficient Case Administration Practices
Inconsistency in Decision-Making / Lack of Transparency
Corruption Issues / Abuses of the System
Weak Regulatory Systems

Absence of Procedures and Institutions to License, Qualify and Supervise
Insolvency Administrators
India: Focus on Implementation
Core Weaknesses of the Indian Insolvency System





Companies Act of 1956 governing liquidation has worked
far too slowly, taking, on average, ten years.
Sick Industrial Companies Act 1985 (SICA) governing
restructurings has been an abject failure as it has been
allowed to be completely abused by debtors seeking to
delay creditors.
Asset stripping in the Indian economy has been rampant.
Lack of adequate credit bureau information to track
delinquent debtors
Lack of sanctions against management has resulted in
poor corporate governance in insolvency situations.
India: Focus on Implementation
Improvements to the Regime Have Focused on
Implementation and Practical Solutions



Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest (SARFAESI)
Act, 2002 allows secured creditors to seize, manage
and sell collateral upon non-payment of debt after
simple notice.
Specialized debt recovery tribunals (DRT) created
for banks/financial institutions to recover loans
created in 1993 but modified to work more
effectively in 2000.
New Credit Information Companies Act of 2005
covers the rights and responsibilities of credit
India: Focus on Implementation
Improvements to the Regime Have Focused on
Implementation and Practical Solutions (Cont’d)

Companies Law currently being revamped pursuant to
proposals from the Irani Committee and expected to come
before Parliament soon:
 Creditor committees to supervise company
restructuring
 Restructuring managers and liquidators to be qualified
professionals
 Special courts of qualified judges to be created and to
be empowered for fast-track dispute resolution.
 Strict penalties being introduced for asset-stripping,
mismanagement and other offences.
Context for Insolvency
Systems
State
Governmental
& Political
Bank Regulators
Environmental,
Company, Tariff
& others
Tax & other laws
Mortgage laws
Secured
Creditors
Collateral laws
Creditors
Contract/Commercial
Employees
Labor laws
Enterprise
Company laws
Shareholders
Securities laws
Directors etc
Others laws
Professionals
Administrative
Insolvency
System
Institutional
Cultural
& Social
Economic &
Commercial
Courts
Bankruptcy
Commercial
& Civil
Agency
The World Bank and
Insolvency - Financial Crises

1997/98 financial crises drew attention to:
– domestic and international impact of weak legal
and institutional frameworks
– lack of understanding by market participants of
financial system vulnerabilities
– linkages between speed of response and speed of
economic recover

G7/G22/APEC/Financial Stability Forum response
FINANCIAL SECTOR ASSESSMENT PROGRAM and
REPORTS on STANDARDS and CODES (ROSCs)
Bank-Fund Country Work
Area of Assessment
- Data Dissemination (IMF)
- Fiscal Transparency (IMF)
- Monetary and Financial Policy
- Banking Supervision (BCBS)
- Insurance Supervision (IAIS)
- Security Regulation (IOSCO)
- Payment & Settlement (CPSS)
- Anti-Money Laundering
(IMF/WB)
- Corporate Governance (OECD)
- Accounting and Auditing (IAS/
ISA)
- Insolvency/Creditor Rights (WB)
Type
(Agency Resp.)
Stand Alone
(Fund)
Follow-up
actions
Board Presentation
IMF
Board
R
O
S
C
Art. IV
Technical
Assistance/
Lending
Operation
FSSA
FSAP
(Bank & Fund)
FSA
Stand Alone
(Bank)
B
I
N
D
E
R
Country
Dialogue
World
Bank
Board
CAS
ESW
Capacity
Building/
Policy
Reform
Note: ROSCs = Reports on the Observance of Standards and Code; FSAP=Financial Sector Assessment Program
FSSA = Financial Sector Stability Assessment; FSA = Financial Sector Assessment
ESW = Economic and Sector Work; CAS = Country Assistance Strategy
GLOBAL FINANCIAL FRAMEWORK:
CORE STANDARDS: ASSESSMENT AREAS
Transparency
Financial
Sector
Market
Infrastructure
- Data Dissemination (IMF)
- Fiscal Transparency (IMF)
- Monetary and Financial Policy (IMF)
- Banking Supervision (BCP)
- Payment and Settlement (CPSS)
- Insurance Supervision (IAIS)
- Security Regulation (IOSCO)
- Anti-Money Laundering (IMF/WB)
- Corporate Governance (OECD)
- Accounting & Auditing (IAS/ISA)
- Insolvency & Creditor Rights (IBRD)
www.worldbank.org/ifa
HISTORICAL
OVERVIEW
Historical
Overview


1999: Task Force & Working Groups (70+ experts)
1999-2000: Vetting Process / Regional Workshops
– Asia, Central Europe/Baltics, Latin America, Africa & Arab States
– 75 Countries; 700+ public/private sector specialists
– International Feedback through web-site

2001 (Apr): Board Meeting / DC Meeting
2001 (July): ICR ROSC Assessments / TA

2003-05: Principles review and revision

– International Forum on Insolvency Risk Management (FIRM) 1/03
– Sustained Dialogue: G-20, APEC, FAIR, FILA, Judges Forum,
IAIR
Historical Overview (cont’d)

2003-05: Principles review and revision (Cont’d)
– UNCITRAL Legislative Guide finalized in 2005
– UNCITRAL Guide and WB Principles express the same standard
in different formats.
– Joint effort with UNCITRAL and IMF to create unitary working
document: Revised Principles and ICR Standard.
– Revised document completed and posted for comment on WB
website between December 2005 and March 2006.
– Integrated document represents a single, unified standard for
ICR systems.
The World Bank
Insolvency Initiative
World Bank
Coordination Team
Advisory Panel
International Partners (10)
WB Task Force
Insolvency & Creditor Rights
(9 Int'l Experts)
(3 Working Groups)
Legal Framework
Institutional Framework
Regulatory Framework
(2 Working Groups -- Bank)
Economic Dimensions
State Owned Enterprises
Working Group
Rehabilitation & Workouts
(2 WGs -- Bank/IMF)
Bank Insolvency & Restr'g
Systemic Crises
(2 Working Groups)
Business & Financial Sector
Creditor Rights
Process on Principles

Task Force & Working Groups (70+ int’l experts)
– Working Group Reports
– Consultation Drafts

Regional Workshops (5)
–
–
–
–

Asia, Central Europe/Baltics, Latin America, Africa & Arab States
75 Countries (60 developing)
Over 700 participants (public and private sector specialists)
International Feedback through web-site
Final Principles Report
– World Bank Executive Directors
– Joint Bank/Fund Development Committee (Ministers of Finance)
Challenge for Today
Develop effective systems of enforcement and
insolvency that foster strong credit cultures
and enable economies to promptly respond to
default conditions & insolvency in a way that
promotes maximum economic growth and
competition domestically and internationally,
aligned with the commercial expectations of
today’s rapidly changing global business
environments.
Challenge for Today



Development of Effective Systems
– Elevate awareness and understanding
– Strengthen capacity
Systems that respond to domestic needs
– Redefining insolvency & viability
– Innovative rescue solutions (accelerated procedures)
– Financing vehicles & more flexible instruments
Promote participation in global markets
– Adopting international best practice
– Attracting foreign direct investment
Modern Credit Systems

Credit is lifeblood of modern commerce
– Depends on willing lenders
– In turn depends on types of lending allowed by law and
reasonable assurance of repayment to lenders
– Reasonable assurance often entails security

Increasing significance of collateral
– Collateral provides greater assurance of recovery
– Ineffective security systems lead to underutilized asset
values

Increasing role of foreign credit/capital
Emerging Market
Characteristics

Weak Financial Systems

Weak Capital Markets

Ineffective Corporate Governance

Corporate financial distress at high levels

Ineffective Legal & Institutional Systems

Accounting practices out-of-step with IAS

Illiquid markets for assets and investors

Inadequate social safety nets (political obstacles)
Emerging Market
Development
Lessons: Private Sector Growth
 Good structural policies and institutions
complement macroeconomic policies
 Basic infrastructure of a market economy calls
for effective legal framework and reliable
institutions to enforce the law
Linkage Between Credit and
Enforcement Systems
General Principle
Credit is the lifeblood of modern commerce. All
countries should adopt a regularized system of
credit supported by reliable enforcement
mechanisms that provide continuity in the
treatment of creditor rights. A countries credit
system should embrace the broadest range of credit
transactions, coupled with an efficient, inexpensive,
transparent, predictable and enforceable system of
taking a security interest in property. Creditor
rights regimes should be complemented by and
harmonized with a country’s insolvency laws.
Modern Credit Systems

Credit is lifeblood of modern commerce
– Depends on willing lenders
– In turn depends on types of lending allowed by law and
reasonable assurance of repayment to lenders
– Reasonable assurance often entails security

Increasing significance of collateral
– Collateral provides greater assurance of recovery
– Ineffective security systems lead to underutilized asset
values

Increasing role of foreign credit/capital
Security Devices &
Enforcement Mechanisms


Broadest range of security devices
– Movables, immovables, future property rights
Effective enforcement systems
– Reinforce and stimulate domestic credit practices
– Encourage foreign direct investment
– Serve as disciplinary mechanisms for incompetent
borrowers
– Foster consensual resolutions by providing more
predictable backdrop
Cornerstones of Confidence:
Transparency & Accountability
Principal Conclusions





Establish minimum standards of transparency
– Information fosters cooperation
Participants need sufficient information of:
– A borrower's operations and related financial criteria
– The enforcement process -- both judicial or non-judicial
Accounting & auditing practices
Corporate law and regulation should guide the conduct of the
borrower's shareholders, management and directors
Law imposed impartially & consistently
Cornerstones of Confidence:
Certainty & Predictability
Principal Conclusion



Recognizing that individual countries make different policy choices
regarding their substantive and procedural laws and the allocation of
risk among all participants, these rules must be clearly specified and
consistently applied.
Well-defined and predictable risk allocation rules and consistent
application of laws should encourage investment
A procedure that is unfriendly to investors but consistently applied is
preferable to uncertainty because it provides a framework for
managing risk through price adjustment
Context for Insolvency Systems
State
Governmental
& Political
Bank Regulators
Environmental,
Company, Tariff
& others
Tax & other laws
Mortgage laws
Secured
Creditors
Collateral laws
Creditors
Contract/Commercial
Employees
Labor laws
Enterprise
Company laws
Shareholders
Securities laws
Directors etc
Others laws
Professionals
Administrative
Insolvency
System
Institutional
Cultural
& Social
Economic &
Commercial
Courts
Bankruptcy
Commercial
& Civil
Agency
Risk Assessment Continuum

Credit
Assessment

Information

Identify Security

Negotiation

pricing

Contracting

Registry

Monitoring
Source: The World Bank
Enforcement
& Insolvency
Financial
Distress
Credit Access

Risk Assessment

Enforcement

Information

Formal Insolvency

Identify Options

Negotiation

pricing

Liquidation, Rescue

Security Rights

Information

Amend Contracts

Negotiation (Plan)

Possible action

Implementation

Monitoring

Monitoring
Principles on Creditor Rights and
Enforcement (IPG 1-5)
General Principles



A modern, credit-based economy requires predictable,
transparent and affordable enforcement of both unsecured
and secured credit claims by efficient mechanisms outside
of insolvency, as well as a sound insolvency system. These
systems must be designed to work in harmony. (IPG 1)
Unsecured Debt (IPG 2)
Secured Debt: Creation, recognition, enforcement of (IPG
3-5)
Principles for Legal Framework:
(Design Considerations & Policy
Objectives)

Legal Framework (policy choices)
–
–
–
–

General principles (IPG 6-16)
Rehabilitation (IPG 17-23)
International Considerations (IPG 24)
Credit Culture and Corporate Workouts (IPG 25-26)
Design considerations
– Integration, Capacity, Operational integrity, Global outlook

Policy objectives
– Efficiency, Predictability, Transparency, Accountability
Implementation
(Institutional Framework)



Role of Governing/Judicial Authority (IPG 27)
Performance Standards/Qualifications (IPG 28)
Court Organization (IPG 29)
– Resourcing, operations, court procedures



Transparency and Accountability (IPG 30)
Judicial decision-making & Enforcement (IPG 31)
Integrity of Governing Authority (IPG 32)
– Rules to avoid conflicts and conduct that undermine public
confidence
Implementation
(Regulatory Framework)
The regulation of an insolvency system
is essential to assure the competence
of office holders and other
participants, to ensure the efficiency
and effectiveness of the system, and
to maintain the integrity of and public
confidence in the system.
Regulatory Framework

Hallmarks of a properly regulated system
– Clarity, transparency & fairness, predictability,
accountability
– Public confidence and credibility

Regulatory Elements
– Integrity of Participants (IPG 33 & 35)
– Role of Regulatory or Supervisory Bodies (IPG 34)
Obstacles To a Strong
Regulatory Framework

Economic: The state budget cannot support an
agency dedicated solely to regulating insolvency
administrators
– Technical assistance available from multi-lateral and bi-lateral
agencies to help set-up agencies.
– Levies can be used to fund the operating costs of the agency

Political: Such regulation is inconsistent with
modern capitalism and is a breeding ground for
corruption
– Even the most robust forms of capitalism require some state
regulation.
– Weigh the possibility of corruption within the agency against the
likelihood of corruption without it.
ROSC Assessment
(Table 1)
Region
Completed
Final
Stages
Ongoing
Projected
FY06
AFR /
MNA
Kenya, Mauritius,
Morocco, S Africa
Cameroon CEMAC (6)
, Uganda
EAP /
SA
India, Philippines,
Vietnam
Nepal,
Sri Lanka
ECA
Czech Rep, Kyrgyz
Rep, Lithuania,
Romania, Russia,
Slovakia, Slovenia,
Turkey, Ukraine
LAC
Argentina, Bolivia,
Brazil, Chile, Ecuador,
El Salvador, Honduras,
Nicaragua
2
Total
Nigeria
India v.2
[Hungary]
[Poland]
Colombia, Guatemala, Dominican Rep,
Jamaica,
Uruguay
Mexico,
Paraguay
6
2
1
Importance of Effective
Insolvency Systems
ECONOMIC GROWTH
Value Preservation
Private Sector
Growth
Efficient Allocation
of Resources
Insolvency
and
Cr. Rights
Financial
Stability
Improved
Access to Credit
Financial Sector
Development
Context for Insolvency
Systems
State
Governmental
& Political
Bank Regulators
Environmental,
Company, Tariff
& others
Tax & other laws
Mortgage laws
Secured
Creditors
Collateral laws
Creditors
Contract/Commercial
Employees
Labor laws
Enterprise
Company laws
Shareholders
Securities laws
Directors etc
Others laws
Professionals
Administrative
Insolvency
System
Institutional
Cultural
& Social
Economic &
Commercial
Courts
Bankruptcy
Commercial
& Civil
Agency
World Bank Principles Scope
Credit Access / Protection
Credit Risk Management
IPG A1-5
Enforcement / Insolvency
IPG B1-5
IPG C1-D9

Compatibility of
Systems

Credit Information
systems

Corporate Exit
Mechanisms

Collateral Systems

D & O Liability

Liquidation
immovable /
movable

Risk Management
Practices

Rehabilitation
Registry Systems
(Transparency)

Workout Framework


Enabling
Framework (i.e. tax
treatment of bad
debts, NPLs)
Quasi-formal
restructuring
AMCs & systemic
corrective
measures


Implementation



Enforcement
Systems

Public Auction &
Collections


Institutional
Systems
Regulatory Systems
RISK ASSESSMENT
CONTINUUM
Increasing financial distress
Credit Access
Risk Management
Risk Evaluation Process
Credit
Assessment


Information

Information

Identify Security

Identify Options

Negotiation
 pricing

Negotiation
 pricing

Contracting


Registry
Amend
Contracts

Monitoring

Risk
Assessment

Possible action

Monitoring
Resolution / Recovery

Enforcement

Formal Insolvency

Liquidation,
Rescue

Security Rights

Information

Negotiation (Plan)

Implementation

Monitoring
Nigeria: Goals for
Insolvency Reform

Foster commercial confidence and predictability
– Markets more accurately price, manage, resolve default risk
– Establish a predictable backdrop for negotiations
– Reduce asset deterioration and promote credit access

Safety valve for corporate distress
– Salvage viable businesses and preserve jobs (rescue)
– Efficient transfer of assets (bankruptcy)

Vital to balance in commercial relationships
– Encourage responsible corporate behavior & governance
– Penalize owners and managers who lack financial discipline or
behave irresponsibly
World Bank Insolvency
Reform: Lessons Learned
(1)
“Not so special after all?”

Virtually no correlation between having a
specialized bankruptcy court and a system
that is perceived by users as being more
predictable and transparent.
Lesson: Courts that are specialized in
name only, do not add value.
World Bank Insolvency
Reform: Lessons Learned
(2)
“Time is money”
Strong correlation between systems that
work quickly and those that are costeffective.
Lesson: If we can remove
inefficiencies from the system that
cause delays, we can increase the
returns of all creditors.

World Bank Insolvency
Reform: Lessons Learned
(3)
“Great minds think alike”

Strong correlation between judicial
competence and trustee/administrator
competence.
Lesson: Insolvency administrators and
insolvency judges can mutually
reinforce competence.
Nigeria ICR ROSC –
Preliminary Findings

Legislative Drafting is not the Cure-All
The regulatory and judicial institutions
designed to implement the Companies
and Allied Matters Act do not work.
Nigeria ICR ROSC –
Preliminary Findings

Large Disconnect Between Perceptions
of Providers and Clients.
Corporate Affairs Commission
Registry
Courts
Nigeria ICR ROSC –
Preliminary Findings

Law is Only Part of the Solution
Basic structural problems within
Nigeria often act as an obstacle
to improving the lending
environment.
The Way Forward




Finalize draft recommendations
Convene Stakeholders’ Committee
Work with Stakeholders’ Committee to
finalize recommendations for delivery
to government.
Work with government to implement
recommendations.
Financial Reporting Infrastructure
Importance of the financial reporting
infrastructure not just accounting and
auditing standards
Accounting
Standards
Statutory
Framework
Monitoring &
Enforcement
Education &
Training
Accounting
Profession &
Ethics
Auditing
Standards
Financial Reporting Infrastructure
All supporting pillars
need to be strengthened
Accounting
Standards
Statutory
Framework
Monitoring &
Enforcement
Education &
Training
Accounting
Profession &
Ethics
Auditing
Standards