Legal Department report: Effective insolvency procedures can strengthen domestic enterprise and financial sector

• Pages: 394-395

Page 394

Over the years, the IMF has become increasingly involved in the promotion of orderly and effective insolvency systems among its members. Experience has demonstrated that reform in this area can play a major role in strengthening a country's economic and financial system. For example, an effective insolvency system provides an important pillar of support for the domestic banking system by enabling banks to curtail the deterioration of the quality of their claims, including claims on the corporate sector, whether through a court-approved restructuring or, where necessary, through an efficient liquidation.

Insolvency reform can be particularly relevant for economies in transition, where it can play a critical role in addressing the problems of insolvent state-owned enterprises. In the context of financial crises, an orderly and effective insolvency system can provide an important means of ensuring an adequate private sector contribution to the resolution of such crises. Finally, although insolvency procedures are implemented through the courts, the very existence of an orderly and effective insolvency system establishes incentives for negotiations between debtors and their creditors, which may lead to out-of-court agreements being reached "in the shadow" of the law.

Drawing on its experience in providing technical assistance in this area, the IMF's Legal Department has recently published a report entitled Orderly and Effective Insolvency Procedures: Key Issues. Although based on a comparative study of selected insolvency laws, the study is not intended to be a description of such laws. The approaches adopted by countries vary in a number of respects-these differences are attributable not only to divergent legal traditions but also to different policy choices. Because of these differences, international standards do not exist in this area, and the report does not attempt to propose such standards. However, in its discussion of the key issues in this area, the study weighs the advantages and disadvantages of possible solutions.

Overall objectives of an insolvency law

Although the insolvency laws of countries differ in important respects, most systems generally share two overall objectives.

Predictable, equitable, and transparent allocation of risk among participants in a market economy. Achievement of this objective plays a critical role in providing confidence...