The Challenges of Bankruptcy Reform

Abstract

The 2008 financial crisis was followed by a global economic downturn, a credit crunch, and a reduction in cross-border lending, trade finance, and foreign direct investment, which adversely affected businesses around the world. The consequent increase in the number of firm insolvencies in the corporate sector highlights the need for commercial bankruptcy laws to liquidate efficiently unviable firms and reorganize viable ones, so as to maximize the total value of proceeds received by creditors, shareholders, employees, and other stakeholders. The authors summarize the theoretical and empirical literature on bankruptcy design, discuss the challenges of introducing and implementing bankruptcy reforms, and present examples of how policymakers are trying to take advantage of the current economic downturn as an opportunity to engage in meaningful reform of the bankruptcy process. They also review the main principles of efficient insolvency laws and bankruptcy procedures.

Measuring the effectiveness of bankruptcy institutions: filtering failures in Slovenian financial reorganizations

“…Yet empirical evidence on the effectiveness of bankruptcy regimes at achieving this primary objective is very scant. This is especially true in the context of developing, emerging-market, and post-socialist countries, even though the design of effective bankruptcy institutions was among the paramount concerns during transition (Aghion et al , 1994) and continues to be a subject of ongoing reform debates worldwide (Cirmizi et al , 2012).…”

Differentiating and connecting indicators: the quality and performance of law in the World Bank's Doing Business Project

“…Considering these, the WB and the IMF also advise countries on reforming and modernising their courts after they reform their bankruptcy laws (e.g. see Rowat and Astigarraga, 1999; Cirmizi et al ., 2012). This factor is accounted for in Table 2 by the Quality of Judicial Proceedings Index, which measures the quality of the court structure and proceedings, case management, court automation and alternative dispute resolution in a court system (WBDB, 2016, p. 31).…”

Public Private Partnerships for Transport Infrastructure :

“…In the U.S. the bankruptcy framework primarily serves to protect debtors, aiming to help companies survive liquidity crises. As mentioned in Cirmizi et al (2012) the framework usually allows the debtor to keep control of the company during the bankruptcy event and even allows the debtor to acquire additional debt to restructure the company. In the US the companies tend to stay in control while trying to survive.…”