Vol 18 (2021) - Issue 4

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The New World Bank Insolvency Principles: Informal Workouts and MSE Insolvency Processes as Key Pillars of Economic and Financial Stability

Synopsis
On 22 April 2021, the World Bank released the revised edition of its Principles for Effective Insolvency and Creditor/Debtor Regimes ('Principles').
The Principles are one of two components of the internationally-recognised standards for insolvency systems. They cover a broad range of themes, and are a result of close collaboration with INSOL International, UNCITRAL the International Association of Insolvency Regulators and a task force of experts drawn from both the public and private sectors around the world.
The Principles are intended to provide a policy framework that global governments can use to both support lending and credit transactions and structures (including an effective framework for the creation, registration and enforcement of security interests to provide an incentive for lenders to advance working capital as the lifeblood of any business), and create a best practice insolvency system.
In the latter regard, the Principles cover matters as diverse as the nature and scope of formal liquidation and reorganisation processes, voidable transactions, the administration and disposition of assets, claims resolution, the role of courts and judicial training, the insolvency of domestic and international enterprise groups and effective cross-border insolvency protocols. Two of the particular areas of concentration in the Principles are the promotion of informal (or 'out of court') workouts and flexible and efficient rescue and restructuring laws for micro and small enterprises ('MSEs').
These areas have indeed become a stronger focus point for developed and developing nations alike in the last few years, and the onset of COVID-19 has highlighted the deficiency in many of the existing processes that exist globally.
The particular dilemma at present is that most insolvency systems across the world are geared towards formal restructuring (and liquidation) outcomes, and the formal processes that have been adopted are designed primarily for larger companies. The result is that they are very often complex and costly, and there are also limited means for entities to access additional working capital. This leaves many distressed but viable MSEs with little option but to proceed to a potentially valuedestructive liquidation. On a macro level, this creates an adverse impact on broader economic and financial stability, employment and the preservation of socially important enterprises. There also comes to be a certain stigma about business 'failure', which becomes synonymous, in these systems, with liquidation and acts as a deterrent to responsible risk-taking, innovation and the generation of an entrepreneurial culture.
On the World Bank's estimate, small businesses represent over 95 per cent of enterprises and account for more than 60 per cent of employment worldwide. The magnitude of these adverse impacts is therefore particularly profound. While, before COVID-19, there had been important progress in a number of jurisdictions to create more flexible insolvency processes, including for MSEs, the pandemic has served as an important trigger which has catalysed the introduction of enduring reforms globally as a key pillar of recovery from the current economic and financial downturn.