Doing Business reforms
Promoting efficient and quality-based banktruptcy regimes
Efficient regulation of corporate insolvency is associated with increased access to credit for firms and on better terms.1 Creditors are more willing to lend because they are more likely to recover their loans. Additionally, economies that reform their insolvency law to provide a mechanism for business rescue may reduce the failure rate among firms, help maintain a higher overall level of entrepreneurship in the economy and preserve jobs.2 By facilitating the efficient business exit and liquidation of nonviable companies, an insolvency framework supports the efficient reallocation of resources across the economy.3 4 5
Doing Business 2020 recorded 15 reforms making it easier to resolve insolvency. A common feature shared by these reforms is the introduction of a reorganization procedure as an alternative to already available liquidation procedures. Keeping viable businesses afloat is one of the most important objectives of bankruptcy systems. Insolvency reforms establishing reorganization procedures are of paramount importance as they reduce liquidation of profitable businesses. The highest recovery rates are recorded in economies where reorganization is the most common insolvency proceeding for solvent businesses undergoing financial distress.
Bahrain, Jordan and Saudi Arabia all adopted new laws overhauling their insolvency frameworks and introducing reorganization proceedings for the first time, as an alternative to previously existing liquidation proceedings. This follows a trend that started in previous years in the Middle East & North Africa which comprises a huge milestone, considering that insolvency systems in the region have been underdeveloped and were debtor-creditor unbalanced.
An additional common feature of the insolvency reforms has been the improvement in management of debtors’ assets during insolvency proceedings. Zimbabwe, for example, allowed a debtor, or an insolvency representative, to obtain new financing upon commencement of insolvency proceedings. It also established clear priorities of new financing.
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1 Cirmizi, Elena, Leora Klapper, and Mahesh Uttamchandani. 2010. “The Challenges of Bankruptcy Reform.” Policy Research Working Paper 5448, World Bank, Washington, DC.
2 Klapper, Leora, and Inessa Love. 2011. “The Impact of Business Environment Reforms on New Firm Registration.” Policy Research Working Paper 5493, World Bank, Washington, DC.
3 For more on how insolvency frameworks support the efficient reallocation of resources across the economy, see: Djankov, Simeon. 2009. “Bankruptcy Regimes during Financial Distress.” Working Paper 50332, World Bank, Washington, DC.
4 Klapper, Leora. 2011. “Saving Viable Businesses.” Public Policy Journal Note 328, World Bank Group, Washington DC.
5 Visaria, Sujata. 2009. “Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India.” American Economic Journal: Applied Economics 1(3): 59–81.
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Reforms implemented in 2018/19 are available here.
