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68 DOING BUSINESS IN 2006 Who is reforming? Bankruptcy laws were revamped in 9 countries during 2004. Seven of them—Brazil, Finland, Indonesia, Japan, Portugal, Serbia and Montenegro and Vietnam—passed new bankruptcy acts. But Madagascar and Thailand reduced efficiency with amendments making bankruptcy more complex. In Portugal a new insolvency code sped proceedings and enlarged creditors’ powers. The law provides for a single insolvency proceeding. The judge, administrator and creditors jointly examine the company’s prospects and decide whether to pursue liquidation or reorganization. In the old system liquidation and reorganization were pursued through separate channels. The new system expands the range of conditions that trigger proceedings, making it easier to file for bankruptcy. The changes cut 6 months off the time to go through insolvency. Recovery rates, calculated using the Doing Business methodology, jumped from 69 cents on the dollar to 75 (figure 11.2). In Serbia and Montenegro recovery rates are expected to jump by 45%—to 29 cents on the dollar— thanks to a new law adopted in August 2004. Under the old laws few private companies went through bankruptcy proceedings, because that could take up to 12 years. The new law sets strict time limits: parties have 5 days to raise objections to the resolution, appeals must be made within 8 days after the ruling, and the court has 30 days to issue a decision on an appeal. The changes will cut the time to an estimated 1.5 years. East Asia saw the most reform. Indonesia and Vietnam clarified and improved their bankruptcy laws. Indonesia’s new law gives more precise definitions and codifies case law. Creditors now have expanded powers to file and vote on reorganization plans. Doing Business respondents estimate that the time to resolve bankruptcy has fallen by 6 months, increasing recovery from 10 cents on the dollar to 13. Vietnam’s 1993 bankruptcy law had been rarely used in the past dozen years. Only 45 businesses were declared bankrupt, and many of those were state owned. The 2004 law makes it easier to file for bankruptcy. Only one condition is required: that a business be unable to pay a due debt on request. Before, the business also had to suffer losses for 2 years and attempt reorganization. Another change: secured creditors’ claims rank ahead of those of the tax office. The reforms are expected to cut 6 months off the process. And recovery rates have increased from 16 cents on the dollar to 19. Japan’s reforms sped bankruptcy by allowing more companies to file in the better-equipped Tokyo and Osaka courts and permitting the liquidator to sell assets free of other claims. Before, consent of all creditors was required to sell assets, delaying the process. Finland improved efficiency by abolishing a 3-stage appointment of the administrator. But costs rose slightly because powers were transferred from the court to the (more expensive) administrator. Both countries changed the priority order of claimants. Japan now favors the bankruptcy trustee, taxes and employees. Finland favors secured creditors. Some reforms were for the worse. A common tactic for delaying the bankruptcy process is to appeal: Thailand made it easier for debtors to use and abuse the appeals process. It abolished a 1999 provision that limited interlocutory appeals—appeals of decisions during the trial—as well as appeals on reorganization. On the bright side the reforms reduced asset collection fees, cutting costs by 2%. Madagascar—the only African reformer—also went backward, introducing complex reorganization provisions in a country that has had only a handful of bankruptcies. Delays increased. Another dozen countries made minor changes. FYR Macedonia streamlined asset auction procedures and will introduce a new bankruptcy law in 2006. Burkina Faso increased the number of judges and cut the backlog of bankruptcy cases. In Bosnia and Herzegovina only 8 months of salary now take priority over secured creditors. Before the reform all salaries owed had priority. Chile, Italy and Slovakia adopted changes that will come into effect in late 2005.
CLOSING A BUSINESS 69 What to reform? Bankruptcy is hopelessly inefficient in most countries. Claims are eroded by long delays, by high costs and by laws that either kill viable businesses or keep unviable ones alive. On average, only 32 cents of every dollar owed creditors, workers, tax agencies and other claimants are available for distribution. South Asian countries have the worst recovery rate, averaging 17 cents, followed by African countries with 27 cents. Only in the OECD and some middle-income economies can creditors recover half or more of overdue debt (table 11.1). Poor countries can most easily boost recovery rates by improving foreclosure processes. For middle-income countries, speeding liquidation should be the priority. Other helpful reforms: providing specialized expertise, limiting appeals, reducing court powers and paying administrators for maximizing the estate value. These were discussed in earlier editions of Doing Business. Reforms can also: • Encourage continuous operation of viable businesses. • Set up creditors’ committees. • Give entrepreneurs a chance for a fresh start. Encourage continuous operation of viable businesses Efficient bankruptcy laws break up unviable firms and save viable ones. In the hope of keeping viable firms alive, more than 60 countries have adopted reorganization laws in the past 25 years. But adopting reorganization is not the same thing as helping distressed businesses restructure their finances and operations. Albania’s reorganization procedure has not preserved a single viable business. And countries in which Doing Business respondents indicate that a firm will go through reorganization proceedings are no more likely to save viable firms (figure 11.3). Procedures such as Algeria’s, Ecuador’s and, until 2004, Vietnam’s—which require attempts at reorganization before liquidation—seldom keep a viable firm in operation. TABLE 11.1 Where is bankruptcy the most efficient—and where the least? Time (years) Least Most Ireland 0.4 Philippines 5.7 Japan 0.6 Belarus 5.8 Canada 0.8 Turkey 5.9 Singapore 0.8 Angola 6.2 Taiwan, China 0.8 Oman 7.0 Belgium 0.9 Mauritania 8.0 Finland 0.9 Czech Republic 9.2 Norway 0.9 Brazil 10.0 Spain 1.0 Chad 10.0 United Kingdom 1.0 India 10.0 Cost (% of estate) Least Most Colombia 1.0 Albania 38 Kuwait 1.0 Dominican Republic 38 Netherlands 1.0 Philippines 38 Norway 1.0 Venezuela 38 Singapore 1.0 Guyana 42 Belgium 3.5 Sierra Leone 42 Canada 3.5 Ukraine 42 Finland 3.5 Chad 63 Japan 3.5 Central African Republic 76 Taiwan, China 3.5 Lao PDR 76 Recovery rate (cents on the dollar) Highest Lowest Japan 92.6 Haiti 2.9 Singapore 91.3 Niger 2.6 Norway 91.1 Zimbabwe 2.1 Canada 90.1 Congo, Dem. Rep. 1.6 Taiwan, China 89.4 Angola 0.6 Finland 89.0 Brazil 0.5 Ireland 88.0 Timor-Leste 0.0 Netherlands 86.7 Lao PDR 0.0 Belgium 86.6 Central African Republic 0.0 United Kingdom 85.3 Chad 0.0 Source: Doing Business database.
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Creating Jobs
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Contents Doing Business in 2006: Cr
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2 DOING BUSINESS IN 2006 to registe
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4 DOING BUSINESS IN 2006 Less costl
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6 DOING BUSINESS IN 2006
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9 Starting a business Who is reform
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STARTING A BUSINESS 11 duced the mi
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STARTING A BUSINESS 13 Introduce st
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15 Dealing with licenses Who is ref
Page 23 and 24: DEALING WITH LICENSES 17 plain that
Page 25 and 26: DEALING WITH LICENSES 19 Not in Sie
Page 27 and 28: 21 Hiring and firing workers Who is
Page 29 and 30: HIRING AND FIRING WORKERS 23 TABLE
Page 31 and 32: HIRING AND FIRING WORKERS 25 raised
Page 33 and 34: 27 Registering property Who is refo
Page 35 and 36: REGISTERING PROPERTY 29 In Latin Am
Page 37 and 38: REGISTERING PROPERTY 31
Page 39 and 40: 33 Getting credit Who is reforming?
Page 41 and 42: GETTING CREDIT 35
Page 43 and 44: GETTING CREDIT 37 But public regist
Page 45 and 46: 39 Protecting investors Who is refo
Page 47 and 48: PROTECTING INVESTORS 41 TABLE 7.2 I
Page 49 and 50: PROTECTING INVESTORS 43 TABLE 7.6 W
Page 51 and 52: 45 Paying taxes Who is reforming? W
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Page 55 and 56: PAYING TAXES 49 What to reform? Tax
Page 57 and 58: PAYING TAXES 51 2004, despite the n
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Page 61 and 62: TRADING ACROSS BORDERS 55 Who is re
Page 63 and 64: TRADING ACROSS BORDERS 57 documents
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Page 73: 67 Closing a business Who is reform
Page 77: CLOSING A BUSINESS 71 Such measures
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Page 97 and 98: 91 Ease of doing business: an appen
Page 99: APPENDIX 93 countries all rank in t
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118 DOING BUSINESS IN 2006 CENTRAL
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120 DOING BUSINESS IN 2006 CONGO, R
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122 DOING BUSINESS IN 2006 DOMINICA
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124 DOING BUSINESS IN 2006 ETHIOPIA
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126 DOING BUSINESS IN 2006 GHANA Su
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128 DOING BUSINESS IN 2006 HONDURAS
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130 DOING BUSINESS IN 2006 IRAN Mid
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132 DOING BUSINESS IN 2006 JAPAN OE
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134 DOING BUSINESS IN 2006 KUWAIT M
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136 DOING BUSINESS IN 2006 LITHUANI
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138 DOING BUSINESS IN 2006 MALI Sub
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140 DOING BUSINESS IN 2006 MOLDOVA
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142 DOING BUSINESS IN 2006 NETHERLA
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144 DOING BUSINESS IN 2006 OMAN Mid
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146 DOING BUSINESS IN 2006 PERU Lat
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148 DOING BUSINESS IN 2006 RUSSIA E
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150 DOING BUSINESS IN 2006 SERBIA A
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156 DOING BUSINESS IN 2006 TONGA Ea
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158 DOING BUSINESS IN 2006 UNITED K
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160 DOING BUSINESS IN 2006 VIETNAM
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163 Acknowledgments Contact details
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ACKNOWLEDGMENTS 165 Tibor Fabian BI
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ACKNOWLEDGMENTS 167 Barthélémy Ke
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ACKNOWLEDGMENTS 169 Ghislane Moise
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ACKNOWLEDGMENTS 171 Bernt Juthstrom
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ACKNOWLEDGMENTS 173 Kari Hrafn Kjar
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ACKNOWLEDGMENTS 175 Ivan A. Zaitsev
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ACKNOWLEDGMENTS 177 Samuel Tembenu
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ACKNOWLEDGMENTS 179 Russell Lawn BU
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ACKNOWLEDGMENTS 181 Jazmin Banal RO
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ACKNOWLEDGMENTS 183 Ivan Petrovic L
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ACKNOWLEDGMENTS 185 Wen-Horng Kao P
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ACKNOWLEDGMENTS 187 Katherine Stone
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Doing Business in 2006: Creating Jo
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