Business Removing

68 DOING BUSINESS IN 2005
tion and the even simpler foreclosure procedure. They
don’t use the fancy reorganization procedure either.
In developing countries, business exit works best in
direct negotiations between the creditor and debtor. In
Ethiopia, Jamaica, Namibia and Thailand, secured creditors
can seize the assets of defaulted companies without
the complex court procedures associated with bankruptcy.
As a result, they can recover 50 cents for every
dollar loaned. 4 Contrast this with 15 cents on the dollar
for liquidation and reorganization bankruptcy proceedings
in other poor countries.
Several countries got reforms right. In 2003, Bulgaria,
Estonia, India, Lithuania, Poland, Romania, Spain,
Tunisia, and the United Kingdom streamlined their
bankruptcy procedures—and some achieved immediate
results. In Bulgaria, the creditors now typically collect 34
cents on a dollar. In Estonia, 40 cents. In Tunisia, 50
cents. In India, where the reform has just started, creditors
now collect 13 cents on the dollar, a third more than
they did a year ago. The reforms share similar features.
They reduce appeals that suspend the bankruptcy
process. They introduce or tighten time limits of procedures.
They establish specialization in dealing with bankruptcy
cases. And they set incentives for the administrator
to get the most from the estate.
Where is exit easy?
When a business closes, creditors and other claimants in
Finland, Japan, Singapore and Taiwan (China) typically
recover 90 cents on the dollar. In Belgium, Canada, Ireland,
the Netherlands, Norway and the United Kingdom,
more than 85 cents on the dollar. These are the 10 economies
with most efficient foreclosure or bankruptcy procedures.
Surveys of business executives agree (figure 9.2).
How do these economies do it? Through a combination
of speed, low cost, and continuity of business operations
(box 9.1). It takes less than a year to resolve
foreclosure or bankruptcy. 5 The cost of closing a business
is just a small percentage of the value of the troubled
business: 1% in Finland, the Netherlands, Norway,
and Singapore; and about 4% in Belgium, Canada, Japan,
and Latvia. And in all of the most efficient ten, the
business is sold or reorganized as a going concern and
management is replaced. 6 No value is lost by stopping
operations. 7
Getting that efficient takes time. Consider Finland, a
leader. It adopted the first bankruptcy law in 1734, when
it was still part of Sweden. More than a century passed
before the law was amended in 1868, now in independent
Finland, to clarify the priority of claims in liquidation.
Another century passed without reforms. In 1970,
the law was reformed to give the bankruptcy administrator
the right to terminate labor contracts on a short
notice. Then in 1978, a new regulation was adopted on
group dismissals in large companies undergoing bankruptcy.
A 1986 amendment enhanced the priority of
floating charge holders. In 1991, the rules for recovery
were elaborated in a separate legislative act. Several other
reforms followed, prompted by the economic stagnation
after the collapse of the Soviet Union—Finland’s most
FIGURE 9.2
Higher recovery rate leads to more usage
Perceived usefulness of bankruptcy law
MORE
USAGE
AVERAGE
RECOVERY
RATE
8 21 32 50 82
Countries ranked by recovery rate, quintiles
Note: Relationships are significant at the 1% level.
Source: Doing Business database, WEF (2004).
important trading partner. In 1992, unsecured creditors
were given priority over tax and labor claims. In 1993
a reorganization procedure was introduced. In 1995, a
bankruptcy ombudsman was established to supervise the
administration of bankruptcy estates. Finally in 2004,
an amendment was adopted to prevent frivolous bankruptcy
filings.
Several other countries provide claimants with a
high return when a business closes. In Australia, Austria,
Hong Kong (China), Korea, Latvia, New Zealand, Spain
and Sweden, recovery rates are more than 70 cents. Rich
countries can afford to have a spectrum of exit options—
from foreclosure, which is still the prevalent exit mechanism
in Australia and the United Kingdom, to liquidation,
most often used in Austria, Denmark, Germany, the
Netherlands and Sweden, to reorganization, much used
in Canada, France and the United States. Recent reform
has focused on providing different bankruptcy tracks for
different types of businesses. For example, Finland and