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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 Kirkland & Ellis LLP. 2.

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market exit rules principles case studies for slovakia turkey

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

context credit environment systems

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
premise the starting point

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)
risk assessment continuum

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
scope icr systems reviewed

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
context for insolvency

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

overview of insolvency systems

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

recent reform revolution

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


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


lessons l egal framework registries

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
lessons court regulatory practices

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
case study slovakia

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)
background starting a new business

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)
background corporate governance

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
background security access to credit

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)
slovak key policies security credit access

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
background insolvency enforcement

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
slovak key policies insolvency

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
case study turkey background

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

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


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.

lessons and trends

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
lessons and trends24

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)