Afghanistan's Agenda for Action - Economic Growth - usaid

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Afghanistan’s Agenda for Action: Developing the Trade & Business Environment – August 2007there are no statutory framework laws under which abankruptcy case can be filed. However, there appearsto have been at one time a law dealing expressly withbankruptcy--the Law of Insolvency and Bankruptcy inAfghanistan enacted on 15 Qaus 1321 (1942). Notsurprisingly, this law is no longer available in any formreadily accessible to the judiciary or public. 109 Thebankruptcy laws are not unique in being unavailable tothe public in general and the judiciary in particular. Thisis a recurring theme among those who have reviewedthe legal system of the country. 110The Civil Code of 1975 is available, however, and itdoes contain provisions dealing with the rights ofcreditors when the debtor is insolvent. Under theseprovisions, all property of the debtor is subject to theclaims of creditors. 111 However, the procedurescontained in the brief, 28 sections dealing with theliquidation of the debtor’s assets do not deal with suchconcepts as who is eligible for relief, appointment of atrustee, the stay of actions of creditors, the rights ofsecured creditors, the concept of a discharge, andreorganization as an alternative to liquidation.B. Proposed LegislationBankruptcy legislation has been under consideration inthe country in concept since 2004. However, in light ofmore pressing priorities with respect to otherframework laws as well as the general perception thatbankruptcy laws are generally not needed until credit10911011173 and 79 of the Afghanistan Law on State-OwnedEnterprises.For example, while a reference to this law was found inan “unofficial and incomplete” draft list of laws obtainedin the preparation of this Report, there is no referenceto the law in the most comprehensive public collectionof Afghanistan’s laws available, which is maintained bythe International Development Law Organization(“IDLO”)( http://www.idlo.int/Afghanlaws/). The IDLOwas founded in 1983 to give technical assistance,research and publications to governments, nongovernmentalorganizations, local communities andprofessional associations in developing countries,countries in economic transition and countries emergingfrom armed conflict. It has 18 member states includingthe United States and is headquartered in Italy.See, e.g., J. Alexander Their, Reestablishing the JudicialSystem in Afghanistan, Center on Democracy,Development and the Rule of Law (Stanford Institute forInt’l Studies 2004) at 9-10.Afghanistan Civil Code of 1975 (“1975 Code”), Art. 831.becomes available, there is currently no widespreadactive effort underway to pass a bankruptcy law in thenear future.The last draft of such legislation was circulated in 2005.It is taken from the U.S. Bankruptcy Code. 112 Whilesimplified, it nevertheless contains many of the complexconcepts central to the U.S. system to includingautomatic stay, provisions dealing with property of theestate, executory contracts, discharge of debts ofindividual debtors, appointment of a trustee, avoidancepowers, and reorganization.This proposed legislation has not been the subject ofwidespread discussion and input from variousstakeholders such as the lending community. This is notsurprising given that the lending community is currentlydealing with the complexities of much more pressingnew legislation in the areas of secured transactions,negotiable instruments, and mortgage law. At thispoint, bankruptcy legislation appropriately is asecondary concern in the context of an otherwise veryfull legislative agenda. There also does not appear to beany active support for continuing with the current draftas a model for a new Afghanistan law.At some point, however, work must begin in earnest ina deliberative, inclusive process to review the optionsavailable for an insolvency law suited to Afghanistan’sneeds. In order for an effective and efficient insolvencyregime to achieve acceptance in a country wherebankruptcy has historically been relatively nonexistent,the process should include observance of severalobjectives. These objectives recognize that bankruptcylaws must not produce results that are fundamentally inconflict with the premise upon which the general law isbased. These objectives include: 113• The laws should provide certainty in applicationand predictability of results in the context of amature credit industry. That is, the laws shouldpromote reorganization of viable businesses andthe closure of nonviable ones with the speedyliquidation of assets for the benefit of secured andunsecured creditors. This provides certainty to thecredit markets about the consequences of aborrower’s default.112 11 U.S.C. § 101 et seq.113 UNCITRAL Guide, at 11.59
Afghanistan’s Agenda for Action: Developing the Trade & Business Environment – August 2007• The law should aim to maximize on the value ofthe borrower’s assets. There is an inherent tensionbetween the speedy liquidation of collateral to paya secured creditor and the need to preserve assetvalue for the benefit of not only the securedcreditor but other secured creditors andunsecured creditors.• The laws should provide equality among similarcreditors. One of the purposes of a centralizedbankruptcy proceeding is to prevent the race tothe courthouse that would otherwise result ifcreditors were left to pursue the assets of thedebtor independently. In this regard, the lawsshould address preferences and fraudulentconveyances made to benefit favored creditors orto shield assets from the reach of creditorsgenerally.• The laws should provide a timely and efficientresolution and wind up of the debtor’s affairs.Procedures should be simple with the rights andduties of the participants -- the debtor, creditors,and trustee -- clearly delineated.• The process needs to be conducted transparentlyto ensure complete access to information by allparticipants. The debtor’s obligations to provideinformation about its financial affairs to the trusteeand other interested parties needs to be clearlydelineated, with participants able to obtain thedebtor’s compliance with those duties.• Priorities of certain creditors need to beestablished. This is a matter of local policy and willbe in large part culturally based.• The type of entity for which bankruptcy reliefshould be provided should be defined. Forexample, while consumer credit is generally notavailable in Afghanistan, personal liability based ona guarantee of a business obligation does exist. Adecision needs to be made as to the extent of thedischarge of debts to be granted to individuals andthe conditions for obtaining such a discharge.As part of the process of enacting legislation, laws thathave been used in other emerging countries should bereviewed both in terms of content and in terms of theirachievement of the objectives set forth above. A finaldraft should be the product of a deliberative effort byall stakeholders.Implementing InstitutionsThe primary implementing institution in the area ofbankruptcy is the court system. It is up to the courtsto administer, interpret, and enforce the rights andduties of the respective parties in a bankruptcy case.Unfortunately, Afghanistan’s court system is notperceived as capable of providing an efficient method toresolve commercial disputes generally. Rather, thecourts are considered to be corrupt, ineffective,unprofessional, and primitive.The judges are also not trained with respect tocommercial concepts and laws. Under these conditions,the legal system plays little or no role in adjudicatingcommercial disputes. Instead, businesses and lendersuse informal mechanisms to resolve disputes andenforce property rights. Consequently, the judicialsystem is not ready to administer the inherentlycomplex process of overseeing a bankruptcy case.There is a general view among the law reformcommunity that nations need bankruptcy laws toenforce creditor rights. However, providing debtorswith a set of bankruptcy laws that invoke an automaticstay against any creditor action – a necessary andtypical feature of any bankruptcy law - and that initiatea lengthy legal proceeding, may only make thecommercial lending system worse due to the legaluncertainties and delays which will inevitably occur in acountry without a legal system able to deal effectivelywith a bankruptcy case. This conclusion is consistentwith a view shared by many development professionalsthat countries with ill-functioning judiciaries are betteroff without sophisticated bankruptcy systems. 114For example, Albania adopted a bankruptcy law in 1994that was generally perceived to be well drafted andconsistent with international standards. Soon after thelaw’s enactment, much of the population's savings waslost in a massive Ponzi scheme. However, only onebankruptcy case was prosecuted in the years followingthese losses. In the Albanian case, the bankruptcy lawwas essentially irrelevant to the situation because it114Doing Business in 2006 -- South Asia Region (TheInternational Bank for Reconstruction andDevelopment/The World Bank, 2005) at 33.60
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Nicholas Klissas, USAID/EGATTel: 20
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