DOING BUSINESS 2009 - JOHN J. HADDAD, Ph.D.

Note: Time and cost do not count separately for the ranking.See Data notes for details.CLOSING A BUSINESs 5791921FIGURE 11.5Top 5 reform features inclosing a businessReforms including feature since DB2005 (%)Granted power to creditors28%Introduced or tightened statutory time limitsand streamlined appealsEstablished or promotedreorganization procedure22%16%Developed the trustee profession7%Established a first bankruptcy lawNote: A reform may include several reform features.Source: Doing Business database.29%creditors have been most concentratedamong OECD high-income economies.Finland gave creditors the right to setup a creditors’ committee to advise theadministrator. France and Korea nowallow the creditors’ committee to vote onthe reorganization plan. Denmark encouragedcreditors to report to the courtany trustee actions that appear to delaythe process. The court can then replacethe trustee if it decides—based on thecreditors’ reports—that the trustee isincompetent.Several economies, including Finlandand France, granted higher priorityto creditors in bankruptcy claims.France gave a “supersecured” position tocreditors that lend money to distressedcompanies, giving them priority overprevious secured creditors. That makes iteasier for such companies to obtain newloans and continue operating.OECD high-income economies havealso promoted reorganization. Finland,France, Italy and Korea made reorganizationmore accessible to troubled companies.Italy now allows distressed companiesto seek an agreement with creditorsbefore entering formal bankruptcy andwith no prerequisites. That permits thecompanies to continue operating. 3Besides OECD high-income economies,several in East Asia and Pacificalso empowered creditors. Indonesiaexpanded the powers of creditors’ committeesso they can file and vote on reorganizationplans. China adopted a newbankruptcy law in 2007, its first since1949, significantly strengthening creditors’rights. Secured creditors now rankfirst in payment priority. 4 Vietnam alsogave higher priority to secured creditors,and removed priority for tax claims,when it changed its 1993 bankruptcylaw in 2004.Speeding bankruptcy proceedingsThe second most popular reform featurein closing a business has been introducingor tightening deadlines in courtprocedures and streamlining appeals.Sixteen economies have undertaken suchreforms: Armenia, Bulgaria, Colombia,Estonia, Georgia, Lithuania, Portugal,Puerto Rico, Romania, Saudi Arabia, Serbia,Slovakia, Spain, Tunisia, the UnitedKingdom and the United States. Imposingtime limits facilitates fast resolutionof bankruptcy, avoiding deterioration ina company’s value over time.This type of reform has been mostpopular in Eastern Europe and CentralAsia, where no fewer than 8 economieshave reformed in this direction in thepast 5 years. Romania, Bulgaria andEstonia restricted procedural appeals.In 2004 Romania reduced the time allowedfor each appeal from 30 days to10, shortening the total duration of thebankruptcy procedure from 55 monthsto 40. Bulgaria restricted opportunitiesfor procedural appeals. Before thereform, the initial decision could be appealedto 2 higher levels of courts. Nowonly 1 appeal is possible. Estonia allowsdebt recovery to continue even whenthere is an appeal, avoiding disruptionof the process.Armenia, Bulgaria, Estonia, Georgia,Lithuania, Serbia and Slovakia introducedor tightened procedural timelimits. Armenia passed a new law incorporatingtime limits into the reorganizationprocedure. Serbia set stricttime limits: claimants have 5 days toraise objections to the resolution, appealsmust be made within 8 days after the ruling,and the court has 30 days to issue adecision on an appeal. Slovakia tightenedtime limits, speeding bankruptcy by atleast 9 months in 2006.Getting the focus rightWhen it comes to reforming bankruptcyregulations, it is often assumed that reorganizationis always the best courseof action. But in low-income economiesreorganization does not always lead tothe highest return for creditors.Mandatory reorganization proceduresin some African economies oftenmake matters worse. Take for exampleBenin, the Republic of Congo and Côted’Ivoire. All have mandatory reorganizationprovisions, but their judicial systemslack the capacity to handle these types ofcases. Among the main problems: frequentadjournments and courts that failto hand down timely decisions.In such systems, reorganizationusually ends in liquidation. The timespent in reorganization only delays theprocess and increases the cost. Reformsthat focus on debt enforcement or foreclosureare more likely to show results inthose countries. And reforms that ensureproperly resourced and well-functioningcourts can help a larger number of viablebusinesses to reorganize successfully.Overall, economies around theworld are reforming toward more efficientbankruptcy systems. In the yearssince Doing Business started collectingdata on the topic, the average time tocomplete bankruptcy proceedings hasdeclined by 4%.Notes1. Djankov and others (2006).2. Davydenko and Franks (2008) andde Jong and Couwenberg (2007).3. Beye and Nasr (2008).4. Only wage claims made before the newlaw came into effect have priority oversecured creditors.(c) The International Bank for Reconstruction and Development / The World Bank