Business Removing

72 DOING BUSINESS IN 2005
Provide specialized expertise
Whether in Burundi, Bulgaria or Belgium, the judiciary
can be organized to provide specialization for the judges
who deal with foreclosure or bankruptcy cases. This has
large benefits in increasing recovery rates (figure 9.5). In
poor countries, specialization can be achieved by establishing
a specialized commercial section in the general
court. Its clerks and judges deal only with bankruptcy
and debt recovery issues and not with divorce or criminal
cases. Ghana has done this, as has Bosnia and Herzegovina
more recently.
Where the flow of contract enforcement and bankruptcy
cases is larger, specialized commercial courts
or bankruptcy authorities can be considered. Colombia,
Ecuador, India, Latvia, Moldova, Peru and Tanzania have
implemented such reforms in the last few years. Countries
with a high volume of cases can establish specialized
bankruptcy courts, as in Japan and the United States. The
volume of cases and the complexity of the legal matters
ensures that only experienced judges, at advanced stages
in their careers, are selected for these courts.
Countries can also build specialized expertise by
mandating that judges have business experience. Bankruptcy
judges in most rich countries have such experience,
acquired by running their own firms as in France,
by being legal counsel in corporations or private law
firms, as in the United States, or by going through a business
training program, as in Germany. With few exceptions,
like Peru, judges in developing countries have no
business experience and typically no training in business
and accounting matters either. This needs change because
countries that value business experience of judges
have 10% higher recovery rates.
Beyond training and requirements for business experience,
scarce expertise can be pooled by allowing legal
entities and not only physical persons to administer the
bankruptcy estate. The Czech Republic did this in 2000
with great success. But many countries don’t permit it.
Limit appeals
Appeals are needed to resolve legitimate disputes. But
too often they are abused—invoked for frivolous reasons
and delaying an efficient outcome. Limiting appeals,
both at the outset and during the procedure, increases
recovery rates (figure 9.6). In foreclosure proceedings,
the creditor in Australia, New Zealand or the United
Kingdom need only prove that a payment is overdue.
Appeal is not possible. In contrast, in El Salvador the
debtor can appeal foreclosure and delay its start by up to
16 months. In Angola, Haiti, and Honduras the appeals
last so long—often years—that employees or the tax authority
can initiate bankruptcy and stop the foreclosure
process altogether. Secured creditors get next to nothing.
As a result, banks are only willing to lend to businesses
whose owners put up personal assets as collateral. Few
can afford such terms.
Appeals delay liquidation or reorganization proceedings
even more. In Bolivia, appeals take a year. In Chile
and Bosnia and Herzegovina, appeals last several years.
What to do? Cut the period of appeals. Romania just
did so, reducing each appeal from 30 to 10 days. Or limit
appeals only to those on legal grounds, not on the case
facts, which are already established and accepted by the
judge at the start of the case. Or allow the case to continue
during appeal, as in Estonia. This avoids disruption
while providing for disputes to be resolved. Allowing the
FIGURE 9.5
Specialization pays off on all dimensions
Time, cost, recovery
and survival rate in insolvency
50
FIGURE 9.6
Limiting appeals increases recovery rates
Percentage increase in recovery rate
32%
48
Case
continues
25%
General
Court 3.4
Specialized
court
2.6
16
10
29
20
17%
Time
(years)
Cost
(percentage
of estate)
Recovery
rate
(cents per dollar)
Probability
of survival
(percent)
Case is
delayed
Order initiating
insolvency
appealed
Liquidation
appealed
Claim amount
disputed
Source: Doing Business database.
Source: Doing Business database.