Business Removing

CLOSING A BUSINESS 69
BOX 9.1
Where is closing a business the most efficient—and where the least?
Recovery rate
(Cents on the dollar)
Most
Least
Japan 92 Haiti 2
Singapore 91 Angola 1
Finland 90 Brazil 0
Taiwan, China 90 Central African Republic 0
Canada 89 Lao PDR 0
Ireland 89 Chad 0
Norway 88 Cambodia 0
Netherlands 86 Bhutan 0
Belgium 86 Rwanda 0
United Kingdom 86 Madagascar 0
Time to go through insolvency
(Years)
Fastest
Slowest
Ireland 0.41 Philippines 5.64
Japan 0.54 Haiti 5.70
Canada 0.75 Belarus 5.75
Singapore 0.78 Indonesia 6.00
Taiwan, China 0.79 Oman 7.00
Norway 0.89 Mauritania 8.00
Belgium 0.90 Czech Republic 9.17
Finland 0.94 Brazil 10.00
United Kingdom 1.00 Chad 10.00
Spain 1.00 India 10.00
Cost to go through insolvency
(% of estate)
Least
Most
Finland 1 Congo, Rep. 38
Kuwait 1 Macedonia, FYR 38
Netherlands 1 Panama 38
Norway 1 Philippines 38
Belgium 4 Sierra Leone 38
Canada 4 United Arab Emirates 38
Georgia 4 Venezuela 38
Japan 4 Central African Republic 76
Latvia 4 Chad 76
New Zealand 4 Lao PDR 76
Source: Doing Business database.
Claimants—creditors, tax authorities, and employees—recover
92 cents on the dollar from an insolvent firm in Japan,
but only 7 cents in Romania. This is the result of three differences:
the time spent closing down, the cost, and whether the
firm survives as a going concern. In Japan the business is reorganized
as a going concern under new management, without
loss of value. 9 Official costs of the proceeding are 4%—reducing
the available money to 96 cents. The reorganization
takes 6 months, while the assets depreciate and claims are tied
up at lending rates of 1.8% a year. The recovery rate is the
present value of the proceeds—92 cents on the dollar. 10 The
secured creditor has first priority and receives the full amount.
In Romania the business starts rehabilitation proceedings but
is eventually liquidated in parts—cutting the estate value from
100 to 70. 11 This is reduced to 62 cents after paying 8% of the
initial value in official costs. Assets depreciate and the claims
are tied up for 4.6 years while the procedure is completed, at
rates of 45% a year. The result—claimants collect 7 cents on
the dollar. 12 The secured creditor is paid after taxes and labor
claims.
What drags the inefficient countries down? Delays. They account
for half of the difference in the average rich and poor
country’s recovery rates. Top performers resolve foreclosure
or bankruptcy within a year. In 2004 Spain joined this list
by introducing statutory time limits on procedures. Closing
down takes the longest in South Asia, at 4.8 years. Latin America
is second, at 3.6 years. Delays are 4 years in poor countries,
twice as long as in rich countries. But there are notable exceptions
in developing economies. Insolvency takes just over a
year in Jamaica, Latvia and Tunisia.
Whether the business keeps operating explains a third of the
difference between rich and poor countries. Thirty-four countries
typically keep the insolvent firm running. This includes
Australia, Belgium and the Netherlands, as well as Thailand
and Uganda. Over three quarters of OECD countries do. None
in South Asia manage to. And only 4% of poor countries do.
High administrative fees account for another 15% of the difference
between rich and poor country’s recovery rates. Sub-
Saharan African and East Asian countries have the highest
costs, at over 20% of the bankruptcy estate. Except Israel, no
rich economy has such high costs.
The recovery rate is calculated at the time of entry into bankruptcy
or foreclosure proceedings. In some countries—such
as the Nordics—management must announce insolvency.
Creditors can trigger insolvency proceedings immediately before
more value is lost. But in many others, the debtor can
hide insolvency, and creditors cannot initiate proceedings. In
such cases the value of the firm will shrink even before the
proceedings start.