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International Monetary Fund

Abstract

Recent experience has demonstrated the extent to which the absence of orderly and effective insolvency procedures can exacerbate economic and financial crises. Without effective procedures that are applied in a predictable manner, creditors may be unable to collect on their claims, which will adversely affect the future availability of credit. Without orderly procedures, the rights of debtors (and their employees) may not be adequately protected and different creditors may not be treated equitably. In contrast, the consistent application of orderly and effective insolvency procedures plays a critical role in fostering growth and competitiveness and may also assist in the prevention and resolution of financial crises: such procedures induce greater caution in the incurrence of liabilities by debtors and greater confidence in creditors when extending credit or rescheduling their claims.

International Monetary Fund

Abstract

Although the insolvency laws of countries differ in important respects, it is possible to identify two overall objectives that are generally shared by most systems.

International Monetary Fund

Abstract

Liquidation procedures are generally relied upon once there is no economically reasonable possibility of rehabilitation. Although such procedures can therefore be viewed as the second of the two components of the insolvency proceedings, they are dealt with first in this study because they are utilized most often, and are generally viewed as the “core” proceedings upon which rehabilitation procedures are constructed. While many companies successfully rehabilitate, they normally do so out of court and actually rely on the “shadow” of liquidation to facilitate rehabilitation.

International Monetary Fund

Abstract

The overall economic objective of rehabilitation procedures is to enable a financially distressed enterprise to become a competitive and productive participant in the economy, thereby benefiting not only the stakeholders of the enterprise (owners, creditors, and employees) but also the economy more generally. For a rehabilitation procedure to achieve this objective, it must create incentives for all stakeholders to participate in the proceedings, or—when necessary—prevent some stakeholders from undermining it. Thus, for example, the features of the procedures must be sufficiently attractive to encourage debtors to commence proceedings sufficiently early on in their financial difficulties, thereby increasing the chance of rehabilitation. On the other hand, the rehabilitation procedure must provide sufficient protection to creditors to gain their confidence that it will not be used merely as a device by a nonviable enterprise to delay liquidation, during which time the value of their claims will deteriorate. To ensure that the rehabilitation achieved under the procedure will provide for long-term competitiveness rather than merely a temporary respite, the insolvency law (and other relevant laws) must avoid placing undue constraints on the type of restructuring that can take place. Thus, for example, a rehabilitation plan should be able to provide for debt-for-equity conversions, as well as for the restructuring or forgiveness of debt.

International Monetary Fund

Abstract

Given that creditors are key beneficiaries of the insolvency process, the law should be designed and implemented in a manner that enables them to play an active role in this process. They should normally be the decision makers in a number of key areas. For example, during liquidation proceedings, it is advisable that creditors be given the authority to dismiss the liquidator (discussed below), approve the temporary continuation of the business by the liquidator, and approve a private sale. In rehabilitation proceedings, they should normally have the authority to dismiss the administrator and propose and approve a rehabilitation plan. In addition, the law should give them a role in requesting or recommending action from the court, including, for example, a recommendation that the rehabilitation proceedings be converted to liquidation. Giving creditors an active role in the process is particularly important when the institutional framework is relatively underdeveloped. Creditors will lose confidence in the process if all of the key decisions are made by individuals that are perceived as having limited expertise or independence.

International Monetary Fund

Abstract

The differences in national insolvency laws have important consequences in the case of enterprises with assets and liabilities in different countries. If a branch of an enterprise located in one country becomes insolvent, should creditors in that country be allowed to initiate insolvency proceedings while the enterprise as a whole is still solvent? If the enterprise as a whole is insolvent, should there be separate proceedings in the various countries where its branches are located? This approach is referred to as the “territorialist principle.” Alternatively, should there be a single procedure, based in the country where the head office or place of incorporation is situated? This approach is referred to as the “universalist principle.” Should there be a single liquidator or administrator, or one for each country where the enterprise has a place of business or assets? Should the liquidator or administrator appointed in one country be able to recapture assets fraudulently transferred by the debtor to another country? A review of national laws finds that countries take divergent positions on these issues.

International Monetary Fund. European Dept.
This paper analyzes the economic effects of weak claims enforcement for Cyprus. Claims enforcement in Cyprus is considerably less efficient than in most European Union countries. The banking crisis, which led to a spike in the number of pending litigious civil and commercial cases, could be a factor in the low enforcement efficiency. For Cyprus, piecemeal reform of the enforcement framework may have limited success, and a wholesale review is likely needed. Adding updated components may not fit well with the underlying civil procedure. Instead a comprehensive review, with a focus on limiting case suspensions allowed under interim applications and considering an alternative compensation basis for lawyers should be considered.