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Kirkland & Ellis LLP. Market Exit Rules - Principles Case Studies for Slovakia & Turkey. Why do Entrepreneurship Initiatives Fail Lessons from International Experience Cairo , Egypt 5 November 2006. Gordon W. Johnson Kirkland & Ellis LLP [email protected] Kirkland & Ellis LLP. 2.

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Market Exit Rules - Principles Case Studies for Slovakia & Turkey

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Market exit rules principles case studies for slovakia turkey l.jpg

Kirkland & Ellis LLP

Market Exit Rules - PrinciplesCase Studies for Slovakia & Turkey

Why do Entrepreneurship Initiatives Fail

Lessons from International Experience

Cairo, Egypt

5 November 2006

Gordon W. Johnson

Kirkland & Ellis LLP

[email protected]

Context credit environment systems l.jpg

Kirkland & Ellis LLP


Context: Credit Environment Systems

  • Foster Commercial Confidence & Reliability

    • Markets more accurately price, manage, resolve risk

    • Establish reliable backdrop for negotiations

    • Reduce asset deterioration & promote credit access

  • Safety valve for corporate distress

    • Salvage viable businesses and preserve jobs

    • 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

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Kirkland & Ellis LLP


Premise: The Starting Point

  • Credit is the lifeblood of modern commerce

    • Willing lenders & range of lending options

    • Reasonable, manageable repayment risk

    • Effective commercial and security laws

  • Increasing significance of collateral

    • Greater assurance of recovery

    • Requires broadest range of security (im) movable

    • Ineffective laws lead to underutilized assets

Linkage to Financial System

  • Properly assess, price and resolve default risk

  • Basel II: Capital requirements based on risk weighting / loss exposures and unexpected loss (tied to legal systems)

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Kirkland & Ellis LLP


Risk Assessment Continuum

Increasing risk of financial distress

Risk Evaluation Process

Credit Access

Risk Management

Resolution / Recovery

  • Credit Assessment

  • Information

  • Identify Security

  • Negotiation

    • pricing

  • Contracting

  • Registry

  • Monitoring

  • Risk Assessment

  • Information

  • Identify Options

  • Negotiation

    • pricing

  • Amend Contracts

  • Possible action

  • Monitoring

  • Enforcement

  • Formal Insolvency

    • Liquidation, Rescue

  • Security Rights

  • Information

  • Negotiation (Plan)

  • Implementation

  • Monitoring

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Kirkland & Ellis LLP


Scope: ICR Systems Reviewed

Legal Systems Governing Commercial Relationships

IPG A1-5

IPG B1-5


Credit Access / Protection

Credit Risk Management

Enforcement / Insolvency

  • Compatibility of Systems

  • Collateral Systems


  • Registry Systems (Transparency)

  • Enforcement Systems

  • Public Auction & Collections

  • Credit Information systems

  • D & O Liability

  • Risk Management Practices

  • Workout Framework

  • Enabling Framework (i.e. tax treatment of bad debts, NPLs)

  • AMCs & systemic corrective measures

  • Corporate Exit Mechanisms

  • Liquidation

  • Rehabilitation

  • Quasi-formal restructuring

  • Implementation

    • Institutional Systems

    • Regulatory Systems

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Kirkland & Ellis LLP


Systems in Action: Laws & Implementation

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Kirkland & Ellis LLP


Context for Insolvency

Fiscal & Monetary

Governmental & Political

Tax & other laws


Mortgage laws

Bank Regulators

Secured Creditors

Collateral laws

Environmental, Tariff & others




Labor laws





Company laws

Insolvency System

Securities laws



Directors etc

Others laws


Cultural & Social

Economic & Commercial

Bankr., Civil



Accounting & Auditing

Corporate Governance

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Kirkland & Ellis LLP


Overview of Insolvency Systems

Common Law countries

UK, Commonwealth (53) - Australia/NZ, HK, Malaysia, Singapore, South Asia, Sub-Saharan Africa, handful of Latin Am & Caribbean

Civil Law countries

Continental Europe, Asia, Francophone Africa (OHADA),

Latin America


Centrally Planned

FSU, China, Vietnam

Sharia law countries

Islamic & Arab nations

United States

DIP Reorganization model

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Kirkland & Ellis LLP


Recent Reform Revolution

  • 1979 to mid-80s: Major reforms: US, France, UK

  • 1990s to date: FSU Transition & EU integration

    • New Europe, CEE, and Central Asia (The Transplant Decade)

  • 1990s: Rescue culture driven reforms:

    • Australia, Canada, Germany

  • Post-1997: Financial Crisis / Related Reform

    • Asian 5: Indon, Kor, (Mal), Phil, Thai / Japan

    • Post-2000: Russia, Mexico, Turkey, Brazil, Argentina, Bolivia,

  • Post-2000: Progressive reforms

    • China, India / S. Asia

    • EU - Spain, Portugal, Italy, others

  • Post-2001/2004: Age of Standards / Harmonization

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Cameroon, Kenya, Mauritius, Morocco, South Africa, Uganda


India, Nepal, Philippines, Sri Lanka, Vietnam


Czech Republic, Kyrgyz Republic, Lithuania, Romania, Russia, Slovak Republic, Slovenia, Turkey, Ukraine


Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador , El Salvador , Honduras, Jamaica, Nicaragua, Paraguay

Kirkland & Ellis LLP


Lessons: ICR ROSCs


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Kirkland & Ellis LLP


Lessons: Legal Framework & Registries

  • Creditor Rights Legislation

    • Secured Transactions on Real Estate: functional

    • Secured Transactions on Movable Assets: outdated

  • Registries

    • Inefficient & unreliable - Need to modernize and computerize

    • Need for registries for recording interests in movable assets

  • Insolvency Legislation

    • Frequently Antiquated & Inefficient

    • Unsupportive of modern businesses, especially lacking rescue procedures for financially distressed enterprises

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Kirkland & Ellis LLP


Lessons: Court & Regulatory Practices

  • Weak / Inefficient Enforcement Proceedings

    • True of unsecured and secured claims

    • Lack of extra-judicial enforcement mechanisms

    • Outmoded procedural codes and regulations

  • Ineffective Court Systems

    • For enforcement and insolvency proceedings

    • Inadequate training among judges / inefficient case administration

    • Inconsistency in decision making / lack of transparency

    • System abuse and influence

  • Weak Regulatory Frameworks

    • Lax or absent procedures to qualify, license and supervise and discipline administrators and practitioners

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Kirkland & Ellis LLP


Case Study - Slovakia

  • Privatization of Banks (2000-01)

  • Starting a new business (2002)

  • Corporate governance (2002)

  • Security/access to credit (2003)

  • Insolvency & Enforcement (2006)

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Kirkland & Ellis LLP


Background – Starting a new business

  • Business unfriendly environment incompatible with economical reforms and their aims

  • Potential for corruption

  • Contrary to the idea of free and smooth entry into the market

  • Need to harmonise the law with the acquis communautaire in some aspects (e.g. publicity)

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Kirkland & Ellis LLP


Background – Corporate governance

  • Unclear and hardly enforceable directors’ duties

  • Unclear rules for the protection of minorities often abused by both majorities and minorities

  • Lack of suitable capital protection rules (incl. financial assistance and related parties transactions)

  • Need to harmonise the law with the acquis communautaire

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Kirkland & Ellis LLP


Background – Security/access to credit

  • Difficult to create security over a number of classes of assets (e.g. movables, receivables)

  • Difficult to enforce security

  • Access to credit stifled by most enterprises, but mostly SMEs

  • Unjustified priorities (state related claims)

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Kirkland & Ellis LLP


Slovak: Key policies - Security/Credit Access

  • Wide definition of collateral (incl.future assets)

  • Non-possessory charges

  • Public register of charges

  • Out-of-court enforcement (private or auctions)

  • Removal of unjustified priorities

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Kirkland & Ellis LLP


Background - Insolvency / Enforcement

  • Inefficient - 6-12 mos. to open, 3+ yrs to complete

  • Ineffective - low recovery rates (affecting both secured and unsecured creditors)

  • Lack of modern restructuring

  • No rules fostering responsible behaviour by stakeholders

  • No regulated profession of trustees

  • Enforcement - protracted and unpredictable

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Kirkland & Ellis LLP


Slovak: Key policies - Insolvency

  • Consistent with World Bank Principles

  • Clearer rules governing stakeholders

  • Management of process transferred to trustees

  • New regulated profession of trustees created

  • More control shifted to creditors (secured creditors in particular) over realization of assets

  • New moratorium and restructuring concepts to give troubled businesses a chance

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Kirkland & Ellis LLP


Case Study - Turkey (Background)

  • Financial Crisis 2000

  • 13-18 failed banks (USD billions NPLs)

  • 90% lending secured - unconditional mortgage (by pass courts)

  • No security in moveable assets

  • Contested foreclosures (2-3 yrs or longer)

  • 99.5% of cases (est. 500,000) execution;

  • 0.5% insolvency cases; stigma; 3-5 years

  • No workout or modern company rescue law

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Kirkland & Ellis LLP

Kirkland & Ellis LLP


Turkey - Debt Recovery Procedures

1 yr

2 yr

3 yr

Unconditional Mortgage (90% lending)




2-3 mos

Contested Public Auction

2-3 years



Order 4-8 mos

Contested Judgment/Exec.

2-3 years

Liquidation (4-8 yrs) (Ave. 6 yrs)

Declaration of Bankr (1 yr)

Contested Decl. (2-3 yrs)

Claims Resolution (3-5 yrs)

Appeals from Declaration of Bankruptcy (2-3 yr)

Secured Creditor Actions Exempt

No creditors are stayed


Procedure is rarely used

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Kirkland & Ellis LLP


Turkey (Restructuring via Reconciliation)

Istanbul Approach




Bank Restructuring


Bank Signatories


< 75% but > 66%

Approval by 75%

Hearing on Plan


Commercial Court

30 days


Upon request

Within 30 days



(prepackaged plan)

Status conference Pretrial relief



Affected Creditors *


Majority Approval

50+ number

& 2/3 amt



Interim Supervisor

Priority Financing




Previously: 2-3 years


Amended: 3 months / 2 month extension = 5-6 months



* Affected Creditors are those whose debts are in default or to be restructured.

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Kirkland & Ellis LLP


Lessons and Trends

  • Today’s reality: Increasing convergence in practices and laws driven by changes in business, technology and the int’l factor

  • Vacuum tube issue: laws cannot be developed without reference to the culture and broader legal framework, nor without input from key stakeholders

  • Transplant issue: no ideal laws, only those that serve the needs of a country; models and transplants are difficult

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Kirkland & Ellis LLP


Lessons and Trends

  • Old-wine-new-wineskin: laws easily change, practices do not

  • Implementation gap: good laws, weak capacity, lax regulation

  • Other challenges: labor, taxes, governance, accounting

  • Risk Management: Increased need for better risk management tools and models / across the board (Basel II)

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