Creating

70 DOING BUSINESS IN 2006
Foreclosures and liquidations, by contrast, can keep
businesses in operation. Foreclosure often leads to the
sale of the entire firm to new owners, who keep it running
as a going concern. And even in liquidation the
firm can keep operating, as in Botswana, Denmark, Poland
and Sweden. Creditors win, because saving viable
firms yields higher recovery. Workers win too, because
they keep their jobs.
There are better ways than reorganization to save
viable firms. First, don’t require interruption of business
operations. Twenty-five countries require firms to
discontinue operations once the bankruptcy petition is
approved. Second, keep the bankruptcy process moving.
By the time companies are in their third year of bankruptcy,
the chance of surviving is slim. Short processes
help maximize the value of the estate. Long ones often
lead to the stripping of enterprise assets.
Brazil’s new law encourages going-concern sales
at the beginning of liquidation and allows buyers to
take assets free of tax and labor liabilities. Previously
asset sales could start only after liquidation proceedings
ended, and they were subject to existing claims. Other
reforms also help. One is allowing the administrator to
rescind or compel performance on contracts. Another:
letting the business obtain fresh loans that have priority
for the lender—which could increase the chance of survival
from 22% to 38%. And yet another: allowing management
to dismiss employees during the bankruptcy
process to help keep the company going. Many jobs will
be saved if a viable business can continue operating. The
benefits are large. Countries that keep viable firms alive
have recovery averaging 59 cents on the dollar. Those
that don’t, 21 cents.
Set up creditors’ committees
Finland’s reforms gave creditors the right to set up a
creditors’ committee that advises the administrator. This
is obligatory for large estates. Six of the other 8 reformers
expanded the powers of creditors. Doing so is associated
with higher recovery rates (figure 11.4). The reason
is that such reforms align the incentives of creditors with
reorganizing viable firms and closing down unviable
ones. When creditors participate in decisions, proceedings
tend to maximize recovery. And when creditors
have the right to choose which bankruptcy procedure
to follow—reorganization or liquidation—they opt for
reorganization only when the chances of successful recovery
are high.
Other countries are recognizing the benefits
of involving creditors. Chile’s reforms in May 2005
authorized creditors—rather than the courts—to appoint
the trustee. Slovakia’s upcoming bankruptcy law
does the same. Indonesia’s reform gives secured creditors
the right to vote in reorganization. And Brazil’s also
brings secured creditors into the voting on reorganization
proceedings.
Give entrepreneurs a chance for a fresh start
In Greece bankrupt entrepreneurs lose their trading
license. A Lithuanian entrepreneur may face criminal
penalties even in the absence of fraud. Such measures are
common. In two-thirds of countries managers of bankrupt
firms can be punished for negligence even if there is
no fraud (figure 11.5). In 39% of countries managers can
be barred from taking corporate positions. The ban lasts
an average of 4 years. In Chad and Lebanon it lasts 10.