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LJD

LJD. LAW, JUSTICE and Development week 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT November 14-17, 2011 Washington DC. LAW JUSTICE and DEVELOPMENT. Non-performing loans, debt enforcement and the impact of the legal framework. Frederique Dahan EBRD, Office of the General Counsel.

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LJD

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  1. LJD LAW, JUSTICE and Development week 2011INNOVATION AND EMPOWERMENTFOR DEVELOPMENTNovember 14-17, 2011 Washington DC LAW JUSTICE and DEVELOPMENT Innovative Approaches to Insolvency & Restructuring

  2. Non-performing loans, debt enforcement and the impact of the legal framework Frederique Dahan EBRD, Office of the General Counsel

  3. Financial crisis in the ECA region • NPL level in the region is high (but differs from country to country) • First time since transition began • Creditors (mostly banks) trying to deal with the problem (with various success and mixed motivation) • Feedback is invaluable to: • get a sense of problems that creditors face • analyse impact (or lack of) legal systems • suggest revised agenda for reform in more ‘mature’ jurisdictions

  4. 1. Problems faced by creditors/banks • NPLs require organisation changes: new work-out units, policies, distinction between large corporate and SME/consumer lending • Difficult to recruit right staff – lawyers biased towards liquidation of collateral • Recognition that under-writing standards had been lax – contract drafting, borrower information and collateral • Collateral over-evaluated and some markets now very depressed

  5. 1. Problems faced by creditors (cont.) • Out of court enforcement is not used by banks • Assumption that they require debtor collaboration, difficult to obtain in distressed times • Court procedures lengthy and costly • Sales at auctions generate low proceeds • Opening of insolvency proceedings against corporates avoided if at all possible • Statutory moratorium of mortgage loans in some cases

  6. 2. Impact of legal framework Premises which underpinned reform: • Enforcement should enable prompt realisation of assets at market value • Out of court enforcement clauses in contract • Courts need not be involved - can be replaced by quasi-public institutions, such as notaries • Security right effective and enforceable after debtor insolvency

  7. 2. Impact of legal framework (Cont.) • Start of enforcement should be formal but straightforward • Debtor should be allowed to object but not to derail or unduly delay the process • Realisation means should be flexible – sale at auctions remains inefficient, especially when market is inactive • Ultimately, legal framework is backdrop of bargaining between creditor and debtor

  8. 3. Agenda for reform Revised agenda • Out of court enforcement should not require debtor collaboration – needs to function unless debtor actively obstructs • Outsource legal services to qualified professionals (receivers, insolvency practitioners) • Creditors need to be actively involved in all stages (including insolvency proceedings) • Creditworthiness is key : credit information reporting system

  9. 3. Agenda for reform (cont.) New agenda • Debt collection agencies • Distressed debt market • Appraisal / evaluators • Tax issues • Debt equity swaps • Private work-outs

  10. EBRD committed to provide support (technical assistance and investment) • Financial Law Unit within the Legal Transition Programme, OGC

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