Written by IMF's Legal Department, this book outlines the key issues involved in designing and implementing orderly and effective insolvency procedures, which play a critical role in fostering growth and competitiveness and may also assist in the prevention and resolution of financial crises. The book draws on lessons learned from firsthand experience by some of the IMF's 182 member countries. It includes an analysis of the major policy choices that countries need to address when designing an insolvency system, a discussion of the advantages and disadvantages of these choices, and a number of specific recommendations.

© 1999 International Monetary Fund

Cover design: In-Ok Yoon

Composition: Jack Federici

Editor: Marina Primorac

Cataloging-in-Publication Data

Orderly and effective insolvency procedures: key issues / Legal Department, International Monetary Fund

p. cm.

ISBN 1-55775-820-4

1. Bankruptcy. I. International Monetary Fund. Legal Dept.

K1375.073 1999

346. 07’8—dc21

Price: $22.00

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  • Foreword

  • Introduction

  • General Objectives and Features of Insolvency Procedures

    • General Objectives

    • General Features

      • Common Issues

      • Liquidation and Rehabilitation

  • Liquidation Procedures

    • Objectives of an Orderly and Effective Liquidation Procedure

    • Commencement Requirements

      • Qualification of the Debtor

      • Conditions for Commencement

    • Consequences of Commencement: Establishing and Protecting the Estate

      • Assets of the Estate

      • Protecting the Estate

    • Proceedings: Specific Issues

      • Treatment of Encumbered Assets and Secured Creditors

      • Avoidance of Pre-Commencement Transactions and Transfers

      • Treatment of Contracts

      • Set-Off

      • Financial Contracts and Netting

    • Liquidation and Distribution

      • Liquidation Procedure

      • Priority of Distribution

      • Discharge

  • Rehabilitation Procedures

    • Objectives of Rehabilitation

    • Commencement Requirements

      • Who May File

      • Commencement Criterion

      • Conversion from Liquidation to Rehabilitation

    • Consequences of Commencement

      • The Stay

      • Debtor Control

    • Transition to Liquidation

    • Proceedings: The Plan

      • Identifying the Preparer

      • Content

      • Approval and Effect

    • Proceedings: Other Issues

      • Treatment of Encumbered Assets and Secured Creditors

      • Avoidance of Pre-Commencement Transactions and Transfers

      • Treatment of Contracts

      • Post-Commencement Financing

      • Prepackaged and Pre-Negotiated Rehabilitation Plans

  • Institutions and Participants

    • Creditors

    • The Liquidator and the Administrator

      • Qualifications and Appointment

      • Dismissal

      • Remuneration

      • Liability

    • The Court

      • Exercise of Discretion

      • Efficiency

      • Specialization

  • Cross-Border Insolvency Issues

  • Appendix

    • The UNCITRAL Model Law on Cross-Border Insolvency:


Over the years, the IMF has become increasingly involved in the promotion of orderly and effective insolvency systems among its members. Experience has demonstrated that reform in this area can play a major role in strengthening a country’s economic and financial system. For example, an effective insolvency system provides an important pillar of support for the domestic banking system by enabling banks to curtail the deterioration of the quality of their claims, including claims on the corporate sector, whether through a court-approved restructuring or, where necessary, through an efficient liquidation. Insolvency reform can be particularly relevant for economies in transition, where it can play a critical role in addressing the problems of insolvent state-owned enterprises. In the context of financial crises, an orderly and effective insolvency system can provide an important means of ensuring adequate private sector contribution to the resolution of such crises. Finally, although insolvency procedures are implemented through the courts, the very existence of an orderly and effective insolvency system establishes incentives for negotiations between debtors and their creditors, which may lead to out-of-court agreements being reached “in the shadow” of the law.

Drawing on the lessons of experience, this report discusses the major policy choices to be addressed by countries when designing an insolvency system. The issues discussed are relevant to all countries, irrespective of the different stages of their development. As noted in the Introduction, while the report expresses certain preferences with respect to some of the more important of these choices, it does not attempt to establish standards in this complex area. Moreover, it may need to be updated in the future to take into account developments in this area.

The report has benefited considerably from input from both the official and private sectors, and the IMF’s Legal Department would like to express its thanks to those that have provided support during its preparation.

With respect to input from the official sector:

The report builds upon—and is consistent with—the Key Principles and Features of Effective Insolvency Regimes set forth in the report of the G-22 Working Group on International Financial Crises.

Appended to the report is a contribution from the Secretariat of UNCITRAL (the UN Commission on International Trade Law) regarding cross-border insolvency problems and the model law prepared by UNCITRAL to address these problems.

The report has benefited from comments by a number of international organizations, including the World Bank, the Organization for Economic Cooperation and Development, the European Bank for Reconstruction and Development, the Asian Development Bank, and the International Finance Corporation.

Regarding assistance from the private sector:

The Legal Department would like to thank INSOL International (the International Federation of Insolvency Practitioners), which provided useful comments and has expressed general support for the report.

The Legal Department relied extensively upon the advice of a number of international insolvency experts, and would like to extend its particular thanks to the following experts, all of whom took considerable time in reviewing and providing guidance on earlier drafts of the report:

  • Dr. Manfred Balz (Germany), one of the principal drafters of Germany’s new insolvency law and former Chairman of the Group on Bankruptcy of the European Union Council; presently General Counsel, Deutsche Telekom AG;

  • Richard A. Gitlin (United States), Attorney-at-Law, Hebb & Gitlin, specializing in transnational insolvency law;

  • Prof. Junichi Matsushita (Japan), Professor of Law, Gakushuin University, Alternate Representative of Japan, UNCITRAL Working Group on Cross-Border Insolvency;

  • Prof. Jean-Pierre Sortais (France), Professor of Law, University of Lausanne;

  • Prof. Jay Westbrook (United States), Professor of Law, University of Texas, Co-Head, U.S. Delegation, UNCITRAL Working Group on Cross-Border Insolvency; and

  • Philip Wood (United Kingdom), Solicitor, Allen & Overy, specializing in financial and insolvency law.

In addition, the Legal Department would like to express its special gratitude to Professor Christoph Paulus of the University of Humboldt (Germany), who participated in all stages in the preparation of the report and whose knowledge of comparative insolvency issues proved invaluable. Appreciation is also extended to Anthony Smits and Oscar Urizar, who provided valuable analytical and research assistance in the preparation of the report.

Within the IMF’s Legal Department, Sean Hagan drafted the report and coordinated the work of the research team, made up of Boyko Dimitrachkov, Seng Chee Ho, Nadim Kyriakos-Saad, and Rhoda Weeks. Sonia Piccinini devoted considerable time and effort in the preparation of this publication.

The views expressed in the report are those of the IMF’s Legal Department and should not be attributed to the Executive Directors or the Management of the IMF.


The General Counsel