Insolvency Standards: Experience and Lessons for Systemic Crises

1. CORPORATE RESTRUCTURING International Best Practices Insolvency Standards: Experience and Lessons for Systemic Crises Gordon Johnson Legal Vice Presidency The World Bank Washington, DC 22 March 2004

2. TOPICS COVERED Context – Global Standards Initiative Comparative Experience (ROSC) Corporate Restructuring – Lessons for Systemic Crises Ongoing Efforts

3. 1. Context Global Standards Initiative

4. GLOBAL FINANCIAL FRAMEWORK: CORE STANDARDS: ASSESSMENT AREAS - Data Dissemination (IMF) - Fiscal Transparency (IMF) - Monetary and Financial Policy (IMF) Transparency - Public Debt Management (IMF/WB) - Banking Supervision (BCP) - Payment and Settlement (CPSS) - Insurance Supervision (IAIS) - Security Regulation (IOSCO) Financial Sector - Anti-Money Laundering (FATF/IMF/WB) - Corporate Governance (OECD) - Accounting & Auditing (IAS/ISA) - Insolvency & Creditor Rights (WB) Market Integrity (Infrastructure) www.worldbank.org/ifa

5. FINANCIAL SECTOR ASSESSMENT PROGRAM and REPORTS on OBSERVANCE of STANDARDS and CODES (ROSCs) Bank-Fund Country Work Area of Assessment Type (Agency Resp.) Board Presentation Follow-up actions R O S C B I N D E R IMF Board Art. IV Country Dialogue Technical Assistance/ Lending Operation Capacity Building/ Policy Reform - Data Dissemination (IMF) - Fiscal Transparency (IMF) Stand Alone (Fund) - Monetary and Financial Policy - Banking Supervision (BCBS) - Insurance Supervision (IAIS) - Security Regulation (IOSCO) - Payment & Settlement (CPSS) - Anti-Money Laundering (IMF/WB) FSSA FSAP (Bank & Fund) World Bank Board CAS FSA - Corporate Governance (OECD) - Accounting and Auditing (IAS/ISA) - Insolvency/Creditor Rights(WB) Stand Alone (Bank) ESW 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 1/1/2004 – Completed 490 ROSCs in 99 economies

6. CONTEXT: LAW & JUSTICE SYSTEMS - LEGAL MAPPING EXERCISE - Trade Law Constitutional Credit Information Banking & Finance Public Administrative Financial Contracts Security & Collateral Systems Tax Law Negotiable Instruments International Registries Commercial Contracts Creditors Rights Insolvency Debt Resolution - Enforcement Commerce Companies Corporate Law Quasi Formal Restructurings Labor Competition Property Reorganizations Intellectual Property Environmental Liquidations Insurance Law Civil & Criminal The World Bank

7. CONTEXT: The Challenge today Develop effective and efficient credit and corporate recovery systems that enable stakeholders to take prompt corrective action to mitigate the downside impact of corporate financial distress and insolvency. These systems are vital to creating strong credit cultures and investment climates and must evolve to meet the needs of modern businesses in today’s rapidly changingglobal business environments.

8. CONTEXT: Role of enforcement systems • 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

9. PRINCIPLES: THE STARTING POINT • Credit is lifeblood of modern commerce • Depends on willing lenders and a range of lending options • Reasonable and manageable repayment risk • Increasing significance of collateral • Reliable creditor enforcement mechanisms essential • Increasing significance of collateral • Collateral provides greater assurance of recovery • Ineffective security laws leads to underutilized asset values • Broadest range of security (movable and immovable) • Commercial Confidence • Reliable and fair legal systems (legal, institutional, regulatory) • Provide a backdrop for negotiation and resolution $

10. RISK ASSESSMENT CONTINUUM Enforcement & Insolvency Credit Access Financial Distress • 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 The World Bank

11. ICR Principles - ROSC Framework Risk Management Credit Access Resolution / Recovery IPG 1-5 IPG 30-32 IPG 6-29 • Credit Information • Collateral Systems • Registries (Notice) Transparency • [Enforcement Procedures] • [Public Auction & Collections] • Risk Management Practices • Asset Resolution Devices (AMCs) • Legal Framework for Workouts • Tax & Other Laws (i.e., tax treatment of bad debts, NPLs, etc. ) • Corporate Exit Mechanisms • Liquidation • Rehabilitation • Quasi-formal restructuring • Implementation • Institutional • Regulatory The World Bank

12. Comprehensive Dev. Framework LAW & JUSTICE SYSTEMS - MAPPING Trade Law Constitutional Credit Information Banking & Finance Public Financial Contracts Security & Collateral Systems Administrative Negotiable Instruments Tax Law Registries International Commercial Contracts Creditors Rights Insolvency Debt Resolution - Enforcement Commerce Companies Quasi Formal Restructurings Corporate Law Labor Competition Property Reorganizations Intellectual Property Environmental Insurance Law Civil & Criminal Liquidations The World Bank

13. Systems Focus: Laws & Implementation

14. CONTEXT FOR INSOLVENCY SYSTEMS Monetary & Fiscal Governmental & Political Tax & other laws State Mortgage laws Secured Creditors Bank Regulators Collateral laws Environmental, Company, Tariff & others Creditors Contract/Commercial Employees Labor laws Professionals Regulatory Enterprise Legal Company laws Insolvency System Shareholders Securities laws Administrative Directors etc Others laws Institutional Cultural & Social Economic & Commercial Courts Bankr., Civil Commercial Corporate Governance Agency Accounting & Auditing Source: The World Bank

15. 2. Comparative Experience Standards and Codes Initiative (FSAP/ROSC) Experience of using the World Bank’s Principles and Guidelines for Effective Insolvency and Creditor Rights Systems

16. ROSC ASSESSMENTS • AFR: Kenya, Mauritius, South Africa, [Ghana], [Nigeria], [OHADA] • EA: Philippines, Vietnam, [Indonesia], [Malaysia], [Singapore] • ECA: Croatia, Czech Republic, Kyrgyz, Lithuania, Romania, Russia, Slovakia, Slovenia, Turkey, Ukraine • LAC:Argentina, Bolivia, Brazil, Chile, Ecuador, El Salvador, Honduras, Nicaragua, [Mexico] • MNA: Morocco, (Algeria), [Egypt], [Lebanon], (Tunisia)* • SA:India, Sri Lanka, (Bangladesh), (Pakistan) • IND:United Kingdom* 27 completed/ongoing, [10-13 proposed/agreed] 13Technical Assistance

17. PILOT ROSCs: CREDITOR RIGHTS

18. PILOT vs. EU: CREDITOR RIGHTS Source: Philippe & Partners in consortium with Deloitte & Touche Corporate Finance (Belgium)

19. PILOT: Insolvency Legal Framework

20. EU: Insolvency Legal Framework Source: Philippe & Partners in consortium with Deloitte & Touche Corporate Finance (Belgium)

21. PILOT: Rehabilitation & Workouts

22. EU: Rehabilitation & Workouts Source: Philippe & Partners in consortium with Deloitte & Touche Corporate Finance (Belgium)

23. PILOT: Institutional & Regulatory

24. EU: Institutional & Regulatory Source: Philippe & Partners in consortium with Deloitte & Touche Corporate Finance (Belgium)

25. Comparative Experience: Lessons from Pilot Program • Laws: generally need to be improved & better integrated • Creditor rights: weak & slow enforcement • Insolvency: inefficient liquidation / lack of rescue • Courts: capacity of judges and courts remains weak • Regulation:lax, little or non-existing • Employee Rights: absence of viable social protection systems for labor impedes effective restructuring solutions • Workouts and risk management: plagued by laws that are not conducive (i.e., tax), inexperience and poor practices

26. PRO-CREDITOR vs PRO-DEBTOR Creditor Debtor Trend Source: The World Bank & Philip Wood

27. 3. Corporate Restructuring Challenges and Lessons for Systemic Crises

28. Challenges of Corporate Restructuring: • Financing (Interim, Exit, Restructure Funds) • Labor & Social Protection mechanisms (4 Models) • Model 1: Pro-employee approach (China) • Model 2: Bankruptcy Priority / No Insurance (Mexico) • Model 3: Bankruptcy Priority / Guarantee Fund (Denmark) • Model 4: No Priority (flat) / Guarantee Fund (Germany) • Institutional Weakness: FAST TRACK Solutions • Tax Regimes

29. No Forum Lead/Committee Standstill Cash flow / liquidity Information Evaluate Options Plan: Negot/Agree Binding effect limited (signatories) Non-binding on others Corporate Rescue Continuum Informal Workouts Formal Workouts Formal Insolvency • Commence Insolvency • Committee nominated • Stay & moratorium • Cash flow / financing • Disclosure • Evaluate Options • Plan: Negot/Agree/Vote • Binding on all creditors • Application Court, etc. • Lead/Committee • Stay &/or Moratorium • Cash flow / liquidity • Information • Evaluate Options • Plan: Negot/Agree/Vote • Binding effect limited (class(es) of stakeholders or creditors)

30. Argentine Model (proposed): Bolsas de Commercio 1. Eligible Companies 2. Forum Bolsas de Comercio 7. Outcomes Liquidation No Agreement Court 3. Contractual Standstill (duration/terms agreed among signing parties) Concurso Preventivo 3. Statutory Standstill (45 days) Extension of Standstill (45 days) Court Affected Creditors * Affected Creditors* No Agreement All Creditors 4. Negotiation (45 days) 6. P L A N Contractual Agreement 4. Negotiation (45 days) Agreement Acuerdo Preventivo Extrajudical 5. New Money / Priority Financing * Affected Creditors are those whose debts are in default or to be restructured.

31. Turkey (Restructuring via Reconciliation) Istanbul Approach Out-of-court Restructuring BRSA Bank Restructuring Agency Bank Signatories Application < 75% but > 66% Approval by 75% Hearing on Plan Application Commercial Court 30 days Application Upon request Within 30 days Out-of-court Restructuring (prepackaged plan) Status conference Pretrial relief Court Judgment Affected Creditors * Approved Majority Approval 50+ number & 2/3 amt Injunction Interim Supervisor Dismissed Priority Financing Court Judgment Concordat Previously: 2-3 years Approved Amended: 3 months / 2 month extension = 5-6 months Denied Liquidation * Affected Creditors are those whose debts are in default or to be restructured.

32. Comparative Tax Consequences – Bad Debt Recognition (Incentives for Restructuring) NC = Not considered.

33. Principles – Methodologies – Practices International Financial Architecture WB ROSC Assessment Insolvency & Creditor Rights Risk Management, Resolution & Workouts Creditor Rights & Enforcement Commercial Insolvency Institutional Regulatory 1 3 4 2, 5 6-19 20 21-27 28-29 30 31-32 EBRD, OAS others Court Practices Guide UNCITRAL Insolvency Law Guide UNCITRAL X-Border Model Court Practices Guide INSOL Twilight Project INSOL Workout Principles Regulatory Framework Guide ADB RETA EU REG. UNCITRAL Sec/ Guide ADB RETA ALI NAFTA Comparative Practices & Developmental Experience (ADB, EBRD, OECD, WB, INSOL, IBA, etc.) Source: The World Bank

34. CORPORATE RESTRUCTURING International Best Practices Insolvency Standards: Experience and Lessons for Systemic Crises Gordon Johnson Legal Vice Presidency The World Bank Washington, DC 22 March 2004