Gordon Johnson Legal Vice PresidencyThe World Bank

CORPORATE RESTRUCTURINGInternational Best Practices

Insolvency Standards: Insolvency Standards: Experience and Lessons for Systemic CrisesExperience and Lessons for Systemic Crises

Washington, DC 22 March 2004

TTOPICS OPICS CCOVEREDOVERED

1. Context – Global Standards Initiative

2. Comparative Experience (ROSC)

3. Corporate Restructuring – Lessons for Systemic Crises

4. Ongoing Efforts

1. Context1. Context

Global Standards InitiativeGlobal Standards Initiative

- Data Dissemination (IMF) - Fiscal Transparency (IMF) - Monetary and Financial Policy (IMF)

- Banking Supervision (BCP) - Payment and Settlement (CPSS) - Insurance Supervision (IAIS) - Security Regulation (IOSCO)

- Corporate Governance (OECD) - Accounting & Auditing (IAS/ISA) - Insolvency & Creditor Rights (WB)

GGLOBAL LOBAL FFINANCIAL INANCIAL FFRAMEWORK:RAMEWORK:CORE STANDARDS: ASSESSMENT AREASCORE STANDARDS: ASSESSMENT AREAS

- Anti-Money Laundering (FATF/IMF/WB)

www.worldbank.org/ifa

Transparency

Financial Sector

Market Integrity (Infrastructure)

- Public Debt Management (IMF/WB)

ROSC

BI NDER

FINANCIAL SECTOR ASSESSMENT PROGRAM and REPORTS on OBSERVANCE of STANDARDS and CODES (ROSCs)

Bank-Fund Country Work

Area of AssessmentType

(Agency Resp.)Board Presentation

Follow-up actions

- Data Dissemination (IMF) - Fiscal Transparency (IMF)

- Monetary and Financial Policy - Banking Supervision (BCBS) - Insurance Supervision (IAIS) - Security Regulation (IOSCO) - Payment & Settlement (CPSS) - Anti-Money Laundering (IMF/WB)

- Corporate Governance (OECD) - Accounting and Auditing (IAS/ISA) - Insolvency/Creditor Rights (WB)

Stand Alone(Fund)

Stand Alone(Bank)

IMFBoard

Art. IV

WorldBankBoard

CAS

FSSA

FSA

ESW

Country Dialogue

TechnicalAssistance/

LendingOperation

CapacityBuilding/

PolicyReform

Note: ROSCs = Reports on the Observance of Standards and Code; FSAP=Financial Sector Assessment Program FSSA = Financial Sector Stability Assessment; FSA = Financial Sector Assessment ESW = Economic and Sector Work; CAS = Country Assistance Strategy

FSAP(Bank & Fund)

1/1/2004 – Completed 490 ROSCs in 99 economies

Registries

Quasi Formal Restructurings

Reorganizations

Liquidations

Constitutional

Administrative

Tax Law

Commerce

Companies

Property

Civil & Criminal

Credit Information

Security & Collateral Systems

Trade Law

Commercial Contracts

Intellectual Property

Corporate Law

Negotiable Instruments

Financial Contracts

International

Banking & Finance

Insurance Law

Labor

Public

Environmental

Competition

CONTEXTCONTEXT: : LLAW & AW & JJUSTICE USTICE SSYSTEMS YSTEMS - - LEGAL MAPPING EXERCISE LEGAL MAPPING EXERCISE --

Creditors Rights Insolvency

Debt Resolution - Enforcement

The World Bank

Develop effective and efficient credit and corporate recovery systems that enable stakeholders to take prompt corrective action to mitigate the downside impact of corporate financial distress and insolvency.

These systems are vital to creating strong credit cultures and investment climates and must evolve to meet the needs of modern businesses in today’s rapidly changing global business environments.

CONTEXT: The Challenge todayCONTEXT: The Challenge today

CONTEXT: CONTEXT: Role of enforcement systemsRole of enforcement systems

Foster commercial confidence and predictability Markets more accurately price, manage, resolve default risk Establish a predictable backdrop for negotiations Reduce asset deterioration and promote credit access

Safety valve for corporate distress Salvage viable businesses and preserve jobs (rescue) Efficient transfer of assets (bankruptcy)

Vital to balance in commercial relationships Encourage responsible corporate behavior & governance Penalize owners and managers who lack financial discipline or

behave irresponsibly

$

Credit is lifeblood of modern commerceCredit is lifeblood of modern commerce Depends on willing lenders and a range of lending options Reasonable and manageable repayment risk Increasing significance of collateral Reliable creditor enforcement mechanisms essential

Increasing significance of collateralIncreasing significance of collateral Collateral provides greater assurance of recovery Ineffective security laws leads to underutilized asset values Broadest range of security (movable and immovable)

Commercial ConfidenceCommercial Confidence Reliable and fair legal systems (legal, institutional, regulatory) Provide a backdrop for negotiation and resolution

PPRINCIPLESRINCIPLES: T: THE HE SSTARTING TARTING PPOINTOINT

Credit AssessmentCredit Assessment

InformationInformation

Identify SecurityIdentify Security

NegotiationNegotiation pricingpricing

ContractingContracting

RegistryRegistry

MonitoringMonitoring

Risk Assessment

Information

Identify Options

Negotiation pricingpricing

Amend Contracts

Possible action

Monitoring

Enforcement Formal Insolvency

Liquidation, Rescue

Security Rights

Information

Negotiation (Plan)

Implementation

Monitoring

Credit Access Financial Distress Enforcement & Insolvency

RISK ASSESSMENT CONTINUUMRISK ASSESSMENT CONTINUUM

The World Bank

Credit InformationCredit Information

Collateral SystemsCollateral Systems

Registries (Notice) Registries (Notice) TransparencyTransparency

[Enforcement [Enforcement Procedures]Procedures]

[Public Auction & [Public Auction & Collections]Collections]

Risk Management Practices

Asset Resolution Devices (AMCs)

Legal Framework for Workouts

Tax & Other Laws (i.e., tax treatment of bad

debts, NPLs, etc. )

Corporate Exit Mechanisms

Liquidation

Rehabilitation

Quasi-formal restructuring

Implementation Institutional Regulatory

Credit Access Resolution / Recovery

ICR Principles - ROSC Framework ICR Principles - ROSC Framework

Risk Management

The World Bank

IPG 1-5 IPG 30-32 IPG 6-29

Registries

Quasi Formal Restructurings

Reorganizations

Liquidations

Constitutional

Administrative

Tax Law

Commerce

Companies

Property

Civil & Criminal

Credit Information

Security & Collateral Systems

Trade Law

Commercial Contracts

Intellectual Property

Corporate Law

Negotiable Instruments

Financial Contracts

International

Banking & Finance

Insurance Law

Labor

Public

Environmental

Competition

Comprehensive Dev. FrameworkComprehensive Dev. FrameworkLLAW & AW & JJUSTICE USTICE SSYSTEMS - YSTEMS - MAPPINGMAPPING

Creditors Rights Insolvency

Debt Resolution - Enforcement

The World Bank

Systems Focus: Laws & ImplementationSystems Focus: Laws & Implementation

ROSC Areas Legal Framework

Institutional Framework

Regulatory Framework

Credit InformationCredit Referencing, Credit Information & Safeguard

Credit Bureaus, Agencies, Banks/Financial Institutions

Central Bank, Finance, Agencies & Self-Regulation

Security & Collateral

Guarantees & Setoffs

Mortgage & Pledge Laws

Title Transfers / Assignments

Notary Publics

Notice and Registry Systems

Ministries of Economy, Justice, Company Affairs, Trade & Industry

Registries

Company Registries

Land Records / Registries

Security Registries

Registry Institutions

Companies / Land Registrar

Regulation of Practices by Government Agency or Private Entities

Debt Resolution – Enforcement

Contract Laws

Civil/Commercial Proceedings

Auction Laws, AMCs

Internal Systems (Banks)

Courts

Central Bank

Bank Supervisors

Courts / Execution

Quasi Formal Restructurings

Alternative Dispute Resolution

Tax Laws

Out-of-court restructurings

Bus. / Commerce Chambers

Coordinating Institutions

Courts

ADR Network

Coordinating Institutions

Professional Associations

Reorganizations

Concordat, Schemes, etc.

Reorganization Laws

Fast Track Procedures

Courts

Company Registrar

Agencies

Ministry of Justice

Supreme Court

Regulatory Agency / Assoc

Liquidations

Bankruptcy Laws

Auction Laws

Company wind-up

Courts

Company Registrar

Insolvency Administrators

Auctioneers

Experts

Institutional

Enterprise

Creditors

Employees

Company laws

Shareholders

Directors etc

Labor laws

Secured Creditors

State

Collateral laws

Mortgage laws

Contract/Commercial

Tax & other laws

Securities laws

Others laws

Bank Regulators

Environmental, Company, Tariff & others

Professionals

Administrative

Courts Bankr., Civil Commercial

Agency

Reg

ulat

ory

Legal

Accounting & Auditing

Corporate Governance

Governmental & Political

Cultural & Social

Economic & Commercial

Insolvency System

Monetary & Fiscal

CONTEXT FOR INSOLVENCY SYSTEMS

Source: The World Bank

2. Comparative Experience2. Comparative Experience

Standards and Codes Initiative (FSAP/ROSC)

Experience of using the World Bank’s Principles and Guidelines for Effective Insolvency and Creditor Rights Systems

ROSC ASSESSMENTSROSC ASSESSMENTS

AFR: Kenya, Mauritius, South Africa, [Ghana], [Nigeria], [OHADA]

EA: Philippines, Vietnam, [Indonesia], [Malaysia], [Singapore]

ECA: Croatia, Czech Republic, Kyrgyz, Lithuania, Romania, Russia, Slovakia, Slovenia, Turkey, Ukraine

LAC: Argentina, Bolivia, Brazil, Chile, Ecuador, El Salvador, Honduras, Nicaragua, [Mexico]

MNA: Morocco, (Algeria), [Egypt], [Lebanon], (Tunisia)*

SA: India, Sri Lanka, (Bangladesh), (Pakistan)

IND: United Kingdom*

27 completed/ongoing, [10-13 proposed/agreed] 13 Technical Assistance

PPILOT ILOT ROSCsROSCs: : CCREDITOR REDITOR RRIGHTSIGHTS

WB Principles C1 C2 C3 C4 C5 C6 C7 C8

1. Compatibility of Systems

2. Unsecured Enforcement

3. Collateral Systems

4. Registration Systems

5. Secured Enforcement

LEGEND

Observed (Fully Adopted/Implemented)

Largely Observed

Materially Non-Observed

Non-observed

PPILOT vs. EU: ILOT vs. EU: CCREDITOR REDITOR RRIGHTSIGHTS

WB Principles C1 C2 C3 C4 C5 C6 C7 C8

1. Compatibility of Systems

2. Unsecured Enforcement

3. Collateral Systems

4. Registration Systems

5. Secured Enforcement

WB Principles Den Fr Ger GR Sp UK

1. Compatibility of Systems

2. Unsecured Enforcement

3. Collateral Systems

4. Registration Systems

5. Secured EnforcementSource: Philippe & Partners in consortium with Deloitte & Touche Corporate Finance (Belgium)

PPILOT: Insolvency Legal Framework ILOT: Insolvency Legal Framework

WB Principles C1 C2 C3 C4 C5 C6 C7 C8

6. Key Objectives

7. Director/Officer Liability

8. Liquidation/Rehabilitation

9A Commence: Applicability

9B/C Accessibility

10. Moratorium/Suspension

11. Governance: Management

12. Governance: Creditors

13. Administration of Estate

14. Contract Treatment

15. Avoidable Transactions

16. Creditor Priorities

EUEU: Insolvency Legal Framework : Insolvency Legal Framework

WB Principles Den Fr Ger GR Sp UK

6. Key Objectives7. Director/Officer Liability 8. Liquidation/Rehabilitation9A Commence: Applicability9B/C Accessibility 9C 9B 9C

10. Moratorium/Suspension 10A 10B 10A 10B

11. Governance: Management 11B 11A 11B 11A 11B

12. Governance: Creditors13. Administration of Estate14. Contract Treatment15. Avoidable Transactions16. Creditor Priorities

Source: Philippe & Partners in consortium with Deloitte & Touche Corporate Finance (Belgium)

PPILOT: Rehabilitation & WorkoutsILOT: Rehabilitation & Workouts

WB Principles C1 C2 C3 C4 C5 C6 C7 C8

17. Design Features (overall)

18. Administration: Operations

19. Information: Access/Discl

20. Plan: Form, Consider, Vote

21. Plan: Approval

22. Plan: Implement & Amend

23. Binding & Discharge

24. Int’l Issues (UNCITRAL)

Workouts25. Enabling Framework

26. Informal Process (INSOL)

EUEU: Rehabilitation & Workouts: Rehabilitation & Workouts

WB Principles Den Fr Ger GR Sp UK

17. Design Features (overall)

18. Administration: Operations

19. Information: Access/Discl

20. Plan: Form, Consider, Vote

21. Plan: Approval

22. Plan: Implement & Amend

23. Binding & Discharge

24. Int’l Issues (UNCITRAL)

Workouts25. Enabling Framework

26. Informal Process (INSOL)

Source: Philippe & Partners in consortium with Deloitte & Touche Corporate Finance (Belgium)

PPILOT: Institutional & RegulatoryILOT: Institutional & Regulatory

WB Principles C1 C2 C3 C4 C5 C6 C7 C8

27. Role of Court

28. Performance Standards

29. Court Organization

30. Transparency/Accountability

31. Decision-Making/Enforce

32. Integrity: Court

33. Integrity: Participants

34. Regulatory Body

35. Competence: Administrators

EUEU: Institutional & Regulatory: Institutional & Regulatory

WB Principles Den Fr Ger GR Sp UK

27. Role of Court

28. Performance Standards

29. Court Organization

30. Transparency/Accountability

31. Decision-Making/Enforce

32. Integrity: Court

33. Integrity: Participants

34. Regulatory Body

35. Competence: Administrators

Source: Philippe & Partners in consortium with Deloitte & Touche Corporate Finance (Belgium)

Laws: generally need to be improved & better integrated Creditor rights: weak & slow enforcement Insolvency: inefficient liquidation / lack of rescue Courts: capacity of judges and courts remains weak Regulation: lax, little or non-existing Employee Rights: absence of viable social protection

systems for labor impedes effective restructuring solutions Workouts and risk management: plagued by laws that are

not conducive (i.e., tax), inexperience and poor practices

Comparative Experience: Comparative Experience: Lessons from Pilot ProgramLessons from Pilot Program

PPRO-CREDITOR vs RO-CREDITOR vs PPRO-DEBTORRO-DEBTOR

Creditor Rights Altered on Insolvency

UK Germany Japan WB ICRP

US Italy France

Security (10) 2 5 6 2 2 8 8

Title Finance (10) 1 1 1 2 2 5 7

Set-off (10) 1 2 2 3 3 2 9

Rehabilitation (10) 3 1 5 7 8 9 10

Trusts (5) 1 4 2 3 1 5 5

The Veil (5) 2 1 1 2 2 2 5

Preferences (5) 1 2 2 2 5 2 3

Rescission (5) 1 1 1 3 4 2 5

TOTAL (60) 12 17 19 24 27 35 52

Source: The World Bank & Philip Wood

Creditor Debtor

Trend

3. Corporate Restructuring3. Corporate Restructuring

Challenges and Lessons for Challenges and Lessons for Systemic CrisesSystemic Crises

Challenges of Corporate Restructuring:

Financing (Interim, Exit, Restructure Funds) Financing (Interim, Exit, Restructure Funds) Labor & Social Protection mechanisms (4 Models)Labor & Social Protection mechanisms (4 Models)

– Model 1: Pro-employee approach (China)Model 1: Pro-employee approach (China)– Model 2: Bankruptcy Priority / No Insurance (Mexico)Model 2: Bankruptcy Priority / No Insurance (Mexico)– Model 3: Bankruptcy Priority / Guarantee Fund (Denmark)Model 3: Bankruptcy Priority / Guarantee Fund (Denmark)– Model 4: No Priority (flat) / Guarantee Fund (Germany)Model 4: No Priority (flat) / Guarantee Fund (Germany)

Institutional Weakness: Institutional Weakness: FAST TRACK SolutionsFAST TRACK Solutions Tax RegimesTax Regimes

No Forum

Lead/Committee

Standstill

Cash flow / liquidity

Information

Evaluate Options

Plan: Negot/Agree

Binding effect limited (signatories) Non-binding on others

Application Court, etc.

Lead/Committee

Stay &/or Moratorium

Cash flow / liquidity

Information

Evaluate Options

Plan: Negot/Agree/Vote

Binding effect limited (class(es) of stakeholders or creditors)

Commence Insolvency

Committee nominated

Stay & moratorium

Cash flow / financing

Disclosure

Evaluate Options

Plan: Negot/Agree/Vote

Binding on all creditors

Informal Workouts Formal Workouts Formal Insolvency

Corporate Rescue ContinuumCorporate Rescue Continuum

Argentine Model (proposed): Bolsas de Commercio

1. Eligible Companies

2. Forum Bolsas de Comercio

Court

3. Statutory Standstill (45 days)

Extension of Standstill (45 days)

Affected Creditors *

All Creditors

4. Negotiation (45 days)

Affected Creditors*

4. Negotiation (45 days)

No Agreemen

t

3. Contractual Standstill(duration/terms agreed among signing parties)

No

Agreement

Agreement

Liquidation

Concurso Preventivo

Contractual Agreement

Acuerdo Preventivo

Extrajudical

6.

PLAN

Court

5. New Money / Priority Financing

7. Outcomes

* Affected Creditors are those whose debts are in default or to be restructured.

Turkey (Restructuring via Reconciliation)

Court Judgment

Affected Creditors *

Injunction

* Affected Creditors are those whose debts are in default or to be restructured.

Out-of-court Restructuring

(prepackaged plan) Status conference Pretrial relief

Interim Supervisor

Priority Financing

Application

Upon request

Hearing on Plan ApplicationCommercial Court

30 days

Dismissed

Approved

Amended: 3 months / 2 month extension = 5-6 months

Istanbul ApproachOut-of-court Restructuring Application

< 75% but > 66%

Bank Signatories

Approval by 75%

Majority Approval 50+ number & 2/3 amt

Court Judgment

Approved

Denied Liquidation

Concordat

Within 30 days

Previously: 2-3 years

BRSABank Restructuring

Agency

AUS UK US FR GER JAPAN

Deduction for bad debts for the creditor

Disposal of a debt at a loss – deduction or capital loss availability

NC NC NC

Debt forgiveness/debt for debt swaps – deduction or capital loss availability

NC NC NC

Debt equity swaps – deduction for losses

NC NC NC

Availability of capital gains rollover for corporate reorganizations such as statutory mergers and/or takeovers

NC

Application of taxation consequences for debtors regarding debt forgiveness arrangements

Yes, through reduction/

Less extensive than Aus and US

Yes, through recognition of cancellation of debt income

NC NC NC

Application of bankruptcy considerations and consequences

Elimination of “reducible amounts” of debtor

NC NC

Modification of debt agreements and tax consequences

NC Application by treasury regulations

NC NC Application is through NTA guidelines

NC = Not considered.

Comparative Tax Consequences – Bad Debt Recognition (Incentives for Restructuring)

1

Principles – Methodologies – Practices Principles – Methodologies – Practices

3 2, 5 306-19 28-29 31-32

WB ROSC AssessmentInsolvency & Creditor Rights

International Financial Architecture

CourtPractices

Guide

Court Practices

Guide

UNCITRAL

X-BorderModel INSOL

Workout Principles

INSOLTwilightProject

RegulatoryFramework

GuideUNCITRAL

Sec/ Guide

UNCITRAL

InsolvencyLaw Guide

EBRD, OASothers

Comparative Practices & Developmental Experience (ADB, EBRD, OECD, WB, INSOL, IBA, etc.)

Source: The World Bank

Creditor Rights & Enforcement

Risk Management, Resolution &

WorkoutsCommercial Insolvency Institutional Regulatory

20 21-27

EU REG.

ALI NAFTA

4

ADB RETA

ADB RETA

Gordon Johnson Legal Vice PresidencyThe World Bank

CORPORATE RESTRUCTURINGInternational Best Practices

Insolvency Standards: Insolvency Standards: Experience and Lessons for Systemic CrisesExperience and Lessons for Systemic Crises

Washington, DC 22 March 2004