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

DATA NOTES 77CostCost is recorded as a percentage of theclaim, assumed to be equivalent to 200%of income per capita. No bribes are recorded.Three types of costs are recorded:court costs, enforcement costs and averageattorney fees. Court costs include allcosts Seller must advance to the court orto the expert regardless of the final costto Seller. Expert fees, if required by lawor necessary in practice, are includedin court costs. Enforcement costs are allcosts Seller must advance to enforce thejudgment through a public sale of Buyer’smovable assets, regardless of the finalcost to Seller. Average attorney fees arethe fees Seller must advance to a localattorney to represent Seller in the standardizedcase.The data details on enforcing contractscan be found for each economy at http://www.doingbusiness.org. This methodologywas developed in Djankov and others(2003) and is adopted here with minorchanges.Closing a businessDoing Business studies the time, costand outcomes of bankruptcy proceedingsinvolving domestic entities (table12.12). The data are derived from surveyresponses by local insolvency practitionersand verified through a study of lawsand regulations as well as public informationon bankruptcy systems.To make the data comparable acrosseconomies, several assumptions aboutthe business and the case are used.Assumptions about the businessThe business:• Is a limited liability company.• Operates in the economy’s largestbusiness city.• Is 100% domestically owned, with thefounder, who is also the chairman ofthe supervisory board, owning 51%(no other shareholder holds morethan 5% of shares).• Has downtown real estate, where itruns a hotel, as its major asset.• Has a professional general manager.• Has had average annual revenue of1,000 times income per capita overthe past 3 years.• Has 201 employees and 50 suppliers,each of which is owed money for thelast delivery.• Borrowed from a domestic bank5 years ago (the loan has 10 yearsto full repayment) and bought realestate (the hotel building), using it assecurity for the bank loan.• Has observed the payment scheduleand all other conditions of the loanup to now.• Has a floating charge or mortgage,with the value of its principal beingexactly equal to the market value ofthe hotel.Assumptions about the caseThe business is experiencing liquidityproblems. The company’s loss in 2007reduced its net worth to a negative figure.There is no cash to pay the bank interestor principal in full, due tomorrow. Thebusiness therefore defaults on its loan.Management believes that losses will beincurred in 2008 and 2009 as well.The bank holds a floating chargeagainst the hotel in economies wherefloating charges are possible. If the lawdoes not permit a floating charge butcontracts commonly use some other provisionto that effect, this provision isspecified in the lending contract.The business has too many creditorsto negotiate an informal out-of-courtworkout. It has the following options: ajudicial procedure aimed at the rehabilitationor reorganization of the business topermit its continued operation; a judicialprocedure aimed at the liquidation orwinding-up of the company; or a debt enforcementor foreclosure procedure aimedat selling the hotel either piecemeal or asa going concern, enforced either in court(or through a government authority like adebt collection agency) or out of court (forexample, by appointing a receiver).If an economy has had fewer than 5cases a year over the past 5 years involvinga judicial reorganization, judicial liquidationor debt enforcement procedure,the economy receives a “no practice”mark. This means that creditors are unlikelyto recover their debt through thelegal process (in or out of court).TimeTime for creditors to recover their debt isrecorded in calendar years. Informationis collected on the sequence of proceduresand on whether any procedurescan be carried out simultaneously. Potentialdelay tactics by the parties, such asthe filing of dilatory appeals or requestsfor extension, are taken into consideration.CostThe cost of the proceedings is recordedas a percentage of the estate’s value. Thecost is calculated on the basis of surveyresponses by insolvency practitionersand includes court fees as well as feesof insolvency practitioners, independentassessors, lawyers and accountants. Respondentsprovide cost estimates fromamong the following options: a specificpercentage or less than 2%, 2–5%, 5–8%,8–11%, 11–18%, 18–25%, 25–33%,33–50%, 50–75% and more than 75% ofthe value of the business estate.Table 12.12What does closing a business measure?Time required to recover debt (years)• Measured in calendar years• Appeals and requests for extension are includedCost required to recover debt (% of estate)• Measured as percentage of estate value• Court fees• Lawyers’ fees• Independent assessors’ fees• Accountants’ feesRecovery rate for creditors (cents on the dollar)• Measures the cents on the dollar recovered bycreditors• Present value of debt recovered• Official costs of the insolvency proceedings arededucted• Depreciation of assets is taken into account• Outcome for the business affects the maximumvalue that can be recoveredSource: Doing Business database.(c) The International Bank for Reconstruction and Development / The World Bank