Business Removing

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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 <strong>Business</strong> 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.
70 DOING BUSINESS IN 2005 Japan have instituted simplified reorganization procedures for small businesses. Italy has introduced a new rescue procedure for large businesses—with more than 1,000 employees and debts exceeding US$1 billion. Australia, Estonia, Finland and Sweden have instituted streamlined procedures for the liquidation of companies which lack sufficient assets to complete a regular procedure. A few other countries do well. Recovery rates in Jamaica, Mexico and Poland are over 60 cents on the dollar. In contrast, secured creditors in Brazil, Costa Rica, the Philippines, and Romania get close to nothing if their debtor enters bankruptcy. In all of these countries debtors can enter complex reorganization procedures, where they are protected from creditors. Reorganization lasts nearly 6 years in the Philippines and about 4 years in Costa Rica and Romania. Brazil takes the longest: creditors can start foreclosure but there are many opportunities for appeal, each time suspending the process. It typically takes 10 years. 8 Building an efficient reorganization procedure in bankruptcy is a luxury. Rich countries can afford it. Few others can. The differences in recovery rates in a reorganization procedure between rich and poor countries are large (figure 9.3). This explains why bankruptcy filings FIGURE 9.3 Poor countries have low recovery rates Recovery rate in reorganization Cents on the dollar 67 Rich countries 34 Middle income Source: Doing <strong>Business</strong> database. 21 Poor countries Difference between rich and poor 25 TIME 7 COST 14 BUSINESS KEEPS RUNNING More time, higher costs and keeping the business running account for the difference. are so rare outside the OECD, notwithstanding the reforms of bankruptcy law. Not all claimants get the full recovery rate. Fiftyeight countries give the secured creditor priority to the proceeds. But in Belarus, Burkina Faso, Ecuador and Oman, taxes and workers all have higher priority than secured creditors. Recovery rates for these claimants are 15 cents on average. For the secured creditor, only 7 cents. Who is reforming exit? In 2003–04 exit became easier in 9 countries: Bulgaria, Estonia, India, Lithuania, Poland, Romania, Spain, Tunisia and the United Kingdom. Two countries— Turkey and Uzbekistan—implemented reform that reduced efficiency. Those that succeeded in increasing recovery rates did so by simplifying existing law. Take Spain. The 2003 reforms featured three improvements. First, the court can now order debtors to pay, without entry into bankruptcy. This reform is estimated to have reduced the number of frivolous bankruptcy filings by 40%. Second, statutory deadlines on the duration of procedures are cut in half. Third, appeals do not suspend the recovery of debt. These improvements raise the efficiency of Spanish bankruptcy to that of Hong Kong (China), at 83 cents on the dollar. Bulgaria also amended its bankruptcy law by reducing statutory deadlines and cutting opportunities for appeal. Before, claimants were given 6 months to file claims once a business declared bankruptcy. Now the limit is 3 months. Before the reform, if the reorganization plan was rejected by the creditors’ committee, the debtor could appeal before a general court and then before a superior court. Now only one appeal is possible. Time to go through bankruptcy fell by 5 months, with further reduction expected. Cost was cut in half. Estonia, Lithuania and the United Kingdom implemented similar reforms with success. Poland reformed differently. A court-appointed administrator takes over the management of the business once bankruptcy is filed. At a preliminary meeting, the creditors’ committee decides whether the business should be reorganized or liquidated. This allows for bankruptcy to be avoided altogether in cases where the creditors can agree on foreclosure. It is now also easier to switch between the two proceedings if the prospects for recovery change. Time to go through bankruptcy was cut by a quarter. The recovery rate of bankruptcy in Poland is now on a par with Portugal’s, at 68 cents on the dollar. India started ambitious reforms. It repealed the Sick Industrial Companies Act, which prevented bankrupt companies from being liquidated. At the same time, it established specialized bankruptcy tribunals. Twelve are already in operation, with several dozen to commence
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Doing Business in 2005 Removing Obs
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Contents Doing Business in 2005 is
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2 DOING BUSINESS IN 2005 FIGURE 1.1
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4 DOING BUSINESS IN 2005 FIGURE 1.4
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6 DOING BUSINESS IN 2005 TABLE 1.3
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8 DOING BUSINESS IN 2005 Notes 1. P
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10 DOING BUSINESS IN 2005 eration w
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12 DOING BUSINESS IN 2005 Based on
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14 DOING BUSINESS IN 2005 FIGURE 2.
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17 Starting a business Who is refor
Page 24 and 25: STARTING A BUSINESS 19 BOX 3.1 Who
Page 26 and 27: FIGURE 3.4 “More difficult” can
Page 28 and 29: STARTING A BUSINESS 23 Introduce te
Page 30 and 31: HIRING AND FIRING WORKERS 25 Hiring
Page 32 and 33: HIRING AND FIRING WORKERS 27 TABLE
Page 34 and 35: HIRING AND FIRING WORKERS 29 FIGURE
Page 36 and 37: HIRING AND FIRING WORKERS 31 FIGURE
Page 38 and 39: 33 Registering property Who makes r
Page 40 and 41: REGISTERING PROPERTY 35 BOX 5.1 Who
Page 42 and 43: REGISTERING PROPERTY 37 FIGURE 5.4
Page 44 and 45: REGISTERING PROPERTY 39 Others are
Page 46 and 47: 41 Getting credit Who is increasing
Page 48 and 49: GETTING CREDIT 43 TABLE 6.1 Coverag
Page 50 and 51: GETTING CREDIT 45 ment only takes t
Page 52 and 53: GETTING CREDIT 47 losing possession
Page 54 and 55: 49 Protecting investors Who uses eq
Page 56 and 57: PROTECTING INVESTORS 51 FIGURE 7.1
Page 58 and 59: PROTECTING INVESTORS 53 FIGURE 7.4
Page 60 and 61: PROTECTING INVESTORS 55 national in
Page 62: PROTECTING INVESTORS 57 With langui
Page 65 and 66: 60 DOING BUSINESS IN 2005 FIGURE 8.
Page 67 and 68: 62 DOING BUSINESS IN 2005 In Lithua
Page 69 and 70: 64 DOING BUSINESS IN 2005 FIGURE 8.
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Page 73: 68 DOING BUSINESS IN 2005 tion and
Page 77 and 78: 72 DOING BUSINESS IN 2005 Provide s
Page 80 and 81: 75 References Acemoglu, Daron. 2003
Page 82 and 83: REFERENCES 77 ———. forthcomin
Page 84 and 85: 79 Data notes Economy characteristi
Page 86 and 87: DATA NOTES 81 Cost measure The text
Page 88 and 89: DATA NOTES 83 Assumptions about the
Page 90 and 91: DATA NOTES 85 such as government or
Page 92: DATA NOTES 87 Assumptions about the
Page 95 and 96: 90 DOING BUSINESS IN 2005 Starting
Page 97 and 98: 92 DOING BUSINESS IN 2005 Registeri
Page 99 and 100: 94 DOING BUSINESS IN 2005 Registeri
Page 101 and 102: 96 DOING BUSINESS IN 2005 Protectin
Page 103 and 104: 98 DOING BUSINESS IN 2005 ALBANIA G
Page 105 and 106: 100 DOING BUSINESS IN 2005 BANGLADE
Page 107 and 108: 102 DOING BUSINESS IN 2005 BRAZIL G
Page 109 and 110: 104 DOING BUSINESS IN 2005 CHAD GNI
Page 111 and 112: 106 DOING BUSINESS IN 2005 CROATIA
Page 113 and 114: 108 DOING BUSINESS IN 2005 ETHIOPIA
Page 115 and 116: 110 DOING BUSINESS IN 2005 GUINEA G
Page 117 and 118: 112 DOING BUSINESS IN 2005 IRELAND
Page 119 and 120: 114 DOING BUSINESS IN 2005 KOREA, R
Page 121 and 122: 116 DOING BUSINESS IN 2005 MACEDONI
Page 123 and 124: 118 DOING BUSINESS IN 2005 MONGOLIA
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120 DOING BUSINESS IN 2005 NIGER GN
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122 DOING BUSINESS IN 2005 PERU GNI
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124 DOING BUSINESS IN 2005 SAUDI AR
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126 DOING BUSINESS IN 2005 SPAIN GN
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128 DOING BUSINESS IN 2005 TOGO GNI
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130 DOING BUSINESS IN 2005 URUGUAY
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ACKNOWLEDGMENTS 133 Acknowledgments
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ACKNOWLEDGMENTS 135 Angela Zaffalon
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ACKNOWLEDGMENTS 137 Nolan Stringfie
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ACKNOWLEDGMENTS 139 Thomas Bang LVP
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ACKNOWLEDGMENTS 141 Günter Schneid
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ACKNOWLEDGMENTS 143 Gavin Doherty E
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ACKNOWLEDGMENTS 145 Indrikis Liepa
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ACKNOWLEDGMENTS 147 Phillip Mwangal
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ACKNOWLEDGMENTS 149 Nestor Espenill
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ACKNOWLEDGMENTS 151 Beng Hong Ong W
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ACKNOWLEDGMENTS 153 Leopold Thomas
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ACKNOWLEDGMENTS 155 Marcela Hughes
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