Business Removing

CLOSING A BUSINESS 71
operations in the next year. Time to go through bankruptcy
was cut by 15%.
Some reforms made matters worse, increasing delays
and reducing recovery rates. Exit became harder
in Turkey and Uzbekistan in 2003. Turkey adopted a
postponement procedure, which gives the creditor two
years to implement a plan before creditors can start liquidation.
This was done to alleviate the burden on businesses
during the latest financial crisis. Time for
insolvency jumped by a year, and recovery rates fell by
15 cents. Uzbekistan created a reorganization procedure
with a 3 month stay on creditors and an additional
level of appeals, increasing delays by 9 months and cutting
recovery rates from 17 to 12 cents on the dollar.
What to reform?
Doing Business in 2004 recommended three ways to improve
the closure of businesses. First, use simple exit
proceedings in poor countries and resist copying the
complex bankruptcy systems of OECD countries. Second,
involve creditors in decisions throughout the bankruptcy
process. Third, provide continuous training for
judges and bankruptcy administrators. This year five
more reforms have been identified:
• Improve foreclosure in poor countries.
• Speed up liquidation in middle income countries.
• Provide specialized expertise.
• Limit appeals.
• Pay administrators for maximizing the estate value.
Improve foreclosure in poor countries
Countries like Armenia, Ethiopia, Kenya, Nepal, Nigeria,
and Paraguay have focused on improving the efficiency
of their foreclosure procedures. Anything more complicated
would increase delays, reduce recovery rates, and
create opportunities for corruption.
Foreclosure can be improved by reforming secured
transactions law to allow summary proceedings, out of
court enforcement, and limited appeals. Poor countries
should also ensure that liquidation or reorganization
does not stop foreclosure. This can be achieved by having
creditor consent before the business enters bankruptcy,
as in China, Hungary and Kuwait. In the past,
many countries’ laws stopped businesses from entering
reorganization by mandating a large payment, say 30%
of the outstanding debt, as a condition for entry into reorganization.
This achieves the same outcome as creditors’
consent but is more cumbersome to enforce.
Some poor countries have introduced reorganization
in bankruptcy before there is the demand or capacity
to enforce it. If Belgium, Sweden and Switzerland
didn’t need modern reorganization until the late 1990s
(figure 9.4), why would Albania, Bosnia and Herzegovina,
and Uzbekistan need it now? 13 Benin surely doesn’t.
Its reorganization procedure has not been used once
since it was introduced in 1998. Nor is bankruptcy used
in many other OHADA countries—for example Central
African Republic, Chad, Mali and Niger—which adopted
a reorganization procedure at the same time.
Reorganization is a complex procedure, and it will
work well only with an effective judiciary, competent
bankruptcy administrators and a liquid market for the
assets of bankrupt firms. 14 Only rich countries have all
these features. In developing countries, complex solutions
make simple problems worse.
Speed up liquidation in middle income countries
Middle income countries, where businesses often have
more than one creditor, will find a high payoff from
making their liquidation procedures faster. If Botswana
can close down a business in 2 years, so can Brazil,
Egypt, Jordan, Slovakia, Slovenia, Syria and Venezuela.
Estonia allows no appeals for entry into liquidation and
has introduced a fast-track for liquidation proceedings.
In 2000 Slovakia made liquidation more efficient by allowing
the firm to operate as a going concern throughout
the process.
FIGURE 9.4
Rich countries waited to introduce reorganization
Income per capita in year of reform
20,000
15,000
10,000
5,000
0
Source: Doing Business database.
Canada 1992
Norway 1984
Ireland 1990
France 1985
Costa Rica 1989
Bulgaria 2000
Albania 1996
Georgia 2001
Cameroon 1998
Senegal 1998
India 1986
Uzbekistan 2003
Vietnam 1990