Principles And Guidelines For Effective Insolvency And Creditor Rights Systems

• Profession: Unupublished World BanK report, excerpts
• Pages: 627-649

Contenidos

• Introduction and Executive Summary.
• Role of Insolvency and Creditor Rights Systems.
• The Principles.
• The Principles.
• Legal Framework for Creditor Rights.
• Legal Framework for Insolvency.
• Features Pertaining to Corporate Rehabilitation.
• Informal Corporate Workouts and Restructuring.
• Implementation of the Insolvency System (Institutional & Regulatory Frameworks).
• The Principles.
• Legal Framework for Creditor Rights.
• Principle 1 - Compatible Enforcement Systems.
• Principle 2 - Enforcement of Unsecured Rights.
• Principle 3 - Security Interest Legislation.
• Principle 4 - Recording and Registration of Secured Rights.
• Principle 5 - Enforcement of Secured Rights.
• Legal Framework for Corporate Insolvency.
• Principle 6 - Key Objectives and Policies.
• Principle 7 - Director and Officer Liability.
• Principle 8 - Liquidation and Rehabilitation.
• Principle 9 - Commencement: Applicability and Accessibility.
• Principle 10 - Commencement: Moratoriums and Suspension of Proceedings.
• Principle 11 - Governance: Management.
• Principle 12 - Governance: Creditors and the Creditors' Committee.
• Principle 13 - Administration: Collection, Preservation, Disposition of Property.
• Principle 14 - Administration: Treatment of Contractual Obligations.
• Principle 15 - Administration: Fraudulent or Preferential Transactions.
• Principle 16 - Claims Resolution: Treatment of Stakeholder Rights and Priorities.
• Features Pertaining to Corporate Rehabilitation.
• Principle 17 - Design Features of Rehabilitation Statutes.
• Principle 18 - Administration: Stabilizing and Sustaining Business Operations.
• Principle 19 - Information: Access and Disclosure.
• Principle 20 - Plan: Formulation, Consideration and Voting.
• Principle 21 - Plan: Approval of Plan.
• Principle 22 - Plan: Implementation and Amendment.
• Principle 23 - Discharge and Binding Effects.
• Principle 24 - International Considerations.
• Informal Corporate Workouts and Restructurings.
• Principle 25 - Enabling Legislative Framework.
• Principle 26 - Informal Workout Procedures.
• Implementation of the Insolvency System.
• Principle 27 - Role of Courts.
• Principle 28 - Performance Standards of the Court, Qualification and Training of Judges.
• Principle 29 - Court Organization.
• Principle 30 - Transparency and Accountability.
• Principle 31 - Judicial Decision making and Enforcement.
• Principle 32 - Integrity of the Court.
• Principle 33 - Integrity of Participants.
• Principle 34 - Role of Regulatory or Supervisory Bodies.
• Principle 35 - Competence and Integrity of Insolvency Administrators.

Page 627

Introduction and Executive Summary

1. Since the 1997-98 financial crisis in emerging markets, considerable progress has been made in identifying the components of the global financial system and in articulating and applying standards and assessment methodologies for core system elements. The Principles and Guidelines for Effective Insolvency and Creditor Rights Systems contributes to that effort as an important milestone in promoting international consensus on a uniform framework to assess the effectiveness of insolvency and creditor rights systems, offering guidance to policymakers on the policy choices needed to strengthen them.

2. The principles in Principles and Guidelines were developed against the backdrop of earlier and ongoing initiatives to promote cross-border cooperation on multi-jurisdictional insolvencies, modernization of national insolvency and secured transactions laws, and development of principles for out-of-court corporate workouts.¹ The principles draw on common themes and policy choices of those initiatives and on the views of staff, insolvency experts and participants in regional workshops sponsored by the Bank and its partner organizations.² The consultative process on the Principles and Guidelines has been among the most extensive of its kind, involving more than 70 international experts as members of the Bank' Task Force and working groups, and with regional participation by more than 700 public and private sector specialists from approximately 75 mostly developing countries. The Bank also included papers and consultative drafts on its website to obtain feedback from the international community.³

Page 628

Role of Insolvency and Creditor Rights Systems

3. There are two dimensions to the global financial system. On the one hand, national financial systems operate autonomously and respond to domestic needs. On the other, national systems are tied to and interact daily with the systems of their trading partners. Insolvency and creditor rights systems lie at the juncture of this duality.

4. The country dimension. National systems depend on a range of structural, institutional, social and human foundations to make a modern market economy work. There are as many combinations of these variables as there are countries, though regional similarities have created common customs and legal traditions. The principles espoused in the report embody several underlying propositions:

   - Effective systems respond to national needs and problems. As such, these systems must be rooted in the country' broader cultural, economic, legal and social context.

   - Transparency, accountability and predictability are fundamental to sound credit relationships. Capital and credit, in their myriad forms, are the lifeblood of modern commerce. Investment and availability of credit are predicated on both perceptions and the reality of risks. Competition in credit delivery is handicapped by lack of access to accurate information on credit risk and by unpredictable legal mechanisms for debt enforcement.

   - Legal and institutional mechanisms must align incentives and disincentives across a broad spectrum of market-based systems - commercial, corporate, financial and social. This calls for an integrated approach to reform, taking into account a wide range of laws and policies in the design of insolvency and creditor rights systems.

5. The international dimension. New methods of commerce, communication and technology are constantly reshaping national markets and redefining notions of property rights. Businesses routinely transcend national boundaries and have access to new types of credit. Credit and investment risks are measured by complex formulas, and capital moves from one market to the next at the tap of a computer key. Capital flows are driven by public perceptions and investor confidence in local markets. Effective insolvency and creditor rights systems play an important role in creating and maintaining the confidence of both domestic and foreign investors.

   Page 629

The Principles

6. The Principles and Guidelines emphasize contextual, integrated solutions and the policy choices involved in developing those solutions.⁴ The principles are a distillation of international best practice in the design of insolvency and creditor rights systems. Adapting international best practices to the realities of developing countries, however, requires an understanding of the market environments in which these systems operate. The challenges include weak or unclear social protection mechanisms, weak financial institutions and capital markets, ineffective corporate governance and uncompetitive businesses, and ineffective laws and institutions. These obstacles pose enormous challenges to the adoption of systems that address the needs of developing countries while keeping pace with global trends and international best practices. The application of the principles in this paper at the country level will be influenced by domestic policy choices and by the comparative strengths (or weaknesses) of laws and institutions.

7. The Principles and Guidelines highlights the relationship between the cost and flow of credit (including secured credit) and the laws and institutions that recognize and enforce credit agreements (sections 1 and 2). It also outlines key features and policy choices relating to the legal framework for corporate insolvency and the informal framework for consensual debt workouts (section 3), which must be implemented within sound institutional and regulatory frameworks (section 4). The principles have broader application beyond creditor rights and corporate insolvency regimes, as well. The ability of financial institutions to adopt effective credit practices to resolve or liquidate non-performing loans depends on having reliable and predictable legal mechanisms that provide a means for more accurately pricing recovery and enforcement costs. Where non-performing assets or other factors jeopardize the viability of a bank, or where economic conditions create systemic crises, these conditions raise issues that deserve special consideration. Annexes I and II to the Principles and Guidelines contain a discussion of issues relevant to bank exit and restructuring strategies and management of systemic financial crises, areas in which the Bank will continue to collaborate with the Fund and the international community to develop principles. Page 630 Following is brief summary of the key elements of the Principles and Guidelines:

8. Role of enforcement systems. A modern, credit-based economy requires predictable, transparent and affordable enforcement of both unsecured and secured credit claims by efficient mechanisms outside of insolvency, as well as a sound insolvency system. These systems must be designed to work in harmony. Commerce is a system of commercial relationships predicated on express or implied contractual agreements between an enterprise and a wide range of creditors and constituencies. Although commercial transactions have become increasingly complex as more sophisticated techniques are developed for pricing and managing risks, the basic rights governing these relationships and the procedures for enforcing these rights have not changed much. These rights enable parties to...