INSOLVENCY ASSESSMENT
(OUTLINE)
This outline has been developed as a complement to the World Bank’s Principles and
Guidelines for Effective Insolvency Systems and may serve as a guide in the assessment
of insolvency systems. It is designed to be a flexible tool for self-assessment and should
not be considered as a restrictive model nor an exhaustive matrix of all issues and
questions that may arise in a given country or system. Rather, it identifies key features
and issues that commonly arise in most insolvency systems. Each system must be
reviewed on its own merits based on its own unique blend of legal, institutional and
regulatory frameworks. Accordingly, the matrix should be expanded or varied as
necessary to encompass a full and comprehensive review of the system in question.
The matrix follows a practical approach to examining the various aspects of a system’s
creditor rights and insolvency systems, based upon the way in which those rights are
generally obtained and enforced. Accordingly, the matrix starts with a review of the
commercial framework and the set of laws, rights and remedies that relate to the
securing and protection of creditors. References in parentheses are to the applicable
section of the Principles and Guidelines.
1. Legal Framework for Creditor Rights
1.1. Laws Governing Creation and Enforcement of Security (confer P&G 5.2)
q Creation of Security Interests
• Range of security devices available in immoveables (real estate) and
moveable (eg, goods, inventory, receivables, etc.) property that are
commonly used in business financing
• Obligations capable of being secured (real/personal property)
• Possessory and non-possessory security interests
• Documents evidencing transactions
• Ease and cost of creation of security interests
• Effective recording and registration procedures
Ø Registration machinery and locations
Ø Variations for special types of collateral (e.g. intangibles, aircraft and
vehicles, accounts)
Ø Variations for special types of collateral (eg, intangibles, aircraft and
vehicles, accounts receivable, possessory)
Ø Transparency of procedures
Ø Effective priority rules
Ø Existence of hidden liens (e.g., tax liens not subject to registration)
• Extent to which security devices are routinely used in lending practices
• Limitations on foreigners taking security
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q Effectiveness of Enforcement Mechanisms
• Applicable laws governing enforcement (e.g., civil code, execution,
distraint, foreclosure, public auction, etc.)
• Ease and Predictability of Enforcement
Ø Remedies and process by which a secured creditor realizes on its
collateral (self help/cooperative turnovers, execution, distraint, auction)
Ø Timeframe to obtain judgment to enforce security interests or to
complete execution, foreclosure, public/private auction, including
appeals
Ø Existence and effect of hidden liens
• Transparency (notice requirements to other interest holders)
1.2. Laws Governing Enforcement of Unsecured Claims
q Availability of non-judicial collection techniques
• Circumstances, applicable laws, & contractual requirements
q Judicial remedies
• Availability of pre-judgement liens, attachments, garnishments and
restraining orders
• Length of time, cost to obtain judgement
• Availability of summary dispositions (documentation required)
• Enforcement of domestic judgements (execution, etc.)
Ø Restrictions on enforcement (e.g., for core operating assets)
• Access by foreigners to domestic courts on domestic claims
• Access by foreigners to domestic courts on foreign claims
• Enforcement of foreign judgements
1.3. Credit Culture
q Transparency and Accountability
• Information disclosure requirements
• Integrity of information
• Accounting and Auditing Standards (deviations from IAS)
q Credit risk management practices
• Loan classifications and provisioning requirements
• Internal guidelines for debt monitoring
• Approaches employed for debt collection/restructuring
q Laws supporting debt restructurings/workouts
• Tax laws
Ø Do tax laws accommodebt forgiveness, rescheduling or debt equity
swaps for lenders, and fiscal creditors.
Ø Forgiveness of principal, interest, penalties
Ø Triggering events for write-off and dates
Ø Creation of hidden or priority tax liens for state debts?
• Company/Securities laws
Ø Shareholder approvals for debt forgiveness/restructurings
Ø Debt-equity swaps permitted?
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q Predictability and Enforceability: non-bankruptcy exit mechanisms
• Applicable laws (company, etc.)
• Existence and efficiency of procedures
• Limitation only to solvent enterprises or can insolvent enterprises apply.
• Distributional priorities for solvent companies.
• Is the process of liquidation of businesses judicial or non-judicial?
• How are these procedures commenced?
• Appointment of receiver, administrator or liquidator?
• Typical time frame and returns for creditors.
q Allocation of insolvency risk vs. stabilizing commercial expectations
q Existence of secondary markets for debt and securities
2.0 Legal Framework for Insolvency
2.1 Orientation/Context of Insolvency Systems
q Interface with broader legal framework
q Commercial and economic environment: incentives and policies
q Cultural context
2.2 Design Features and Compliance with International Best Practice
q Key Features Assessment (confer P&G 2.2.2)1
• Director and Officer liability
• Existence/balancing of liquidation and rehabilitation
• Accessibility and Commencement Criteria
• Bankruptcy Estate
• Commencement Effects (moratorium/stay and impact on management)
• Ability to Effectively Conduct Business Operations
• Treatment of Stakeholder interests
• Role/duties of creditors and creditors’ committee
• Role/duties of court officers
• Ability to adjust rights of creditors (cancellation, setoff, netting, antecedent
transactions, etc.)
• Distributional efficiencies and priorities
q Key Features for Rehabilitation (confer P&G 2.3.2)
• eligibility and applicability
• access criteria
• commencement effects (on incumbent management and creditors)
• stabilization of business operations (including financing of operations)
• administration of the process
• claims resolution procedures
• access to and obligations to disclose information
• roles and protection of stakeholders (secured, unsecured and employees)
• plan formulation and implementation
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The attached annex contains a broader outline for a more comprehensive law assessment.
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• binding and discharge effects
• use of modern techniques for accelerated procedures, debt-equity
conversions, etc.
q Alignment of incentives and disincentives for stakeholders and players
2.3 Insolvency Treatment of State-Owned Enterprises
2.4 Insolvency Treatment of Financial Institutions (confer P&G 9.0)
q General policy considerations
q Corrective actions
q Definition of insolvency and bank administration procedures
q Taking control of a bank under general insolvency procedures
q Set off and netting
q Bank restructuring
q Bank restructuring corporations
q Crisis containment
3.0 Institutional Framework for Insolvency (confer P&G 3.0)
3.1 Role of Governing Institutions/Judicial Authorities
q Role of governing institutions/judicial authorities
q Performance standards
q Institutional needs and resources
3.2 Specialization among courts/judges and tribunals
3.3 Organization of the Court
q Internal operations; court administration; case management
q Court use of experts and quasi-judicial support personnel
q Uniform court rules and case practice and management regulations
q External operations and activities
3.4 Court Operations
q Efficiency
q Transparency
q Accountability
3.5 Judicial decision-making
q Consensual resolution of cases and controversies
q Reliance on and relevance of precedent for judicial guidance
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q Balance between discretion and bright-line rules
q Timeliness of decisions
q Dispute resolution techniques
3.6 Appellate process
q Harmonized bankruptcy appellate procedures
q Capacity of appellate courts for handling bankruptcy matters
q Efficiency of appeals
3.7 Institutional Integrity
q Qualification, selection and monitoring of judges
q Training and continuing education of judges
q Corruption and undue influence on courts
q Relationship of courts to the Public
4.0 Regulatory Framework for Insolvency (confer P&G 4.0)
4.1 Existence of System of Regulation
q Defined standards for case administration
q Professional and continuing education standards
q Existence of best practice guidance
q Compliance with and monitoring of statutory requirements for standards
and guidance
4.2 Role and Function of Regulatory Body
q Who regulates office holders (independent body, court, creditors)
q Existence of procedures for considering applications for authorization,
checking educational requirements and testing knowledge and
understanding
q Monitoring means by which office holders can undertake continuing
professional education
q Monitor facilities by which office holders can obtain insurance/bonding
q Procedures for monitoring performance and compliance, with case
administration, professional and ethical standards and best practice
guidance; for looking into complaints; and for discipline.
4.3 Role and Function of Office Holders
q Standards for office holders competence and accountability
• Standards, regulations and procedures for assessing suitability and
competence
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• Regulations and procedures for probity and insurance/bonding tested
• Action against incompetence, fraud or mishandling of cases
• Standards and guidance and suitability of criteria regularly reviewed, and
revised, in the light of experience, of court consideration of specific issues
or of developments in government policy
q Qualification, Training and Selection of office holders
q Competence of office holders
q Continuing Education Requirements/Programs
q Existence and Membership of Professional Associations
5.0 Principles for Informal Workouts and Restructurings
5.1 Techniques used and compliance with best practice
5.2 Judicial/Administrative Agency Control
5.3 Use of Mediation and Arbitration
5.4 Structured Informal Processes
6.0 Systemic Effects
6.1 Conditions and policy implications of systemic crises
6.2 Principles and conditions for systemic restructuring
6.3 The utility of asset management companies
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Annex A
(Outline for Insolvency Law Assessment)
1. Liquidation Procedures
1.1. Principal Laws Governing Liquidation
Laws which apply to formal or judicial liquidations
1.2. Courts Which Administer Liquidation
• Courts which may be involved in a liquidation
• Jurisdiction of courts over:
a. debtor, its officers, directors
b. assets (turnover of property and collection of claims)
c. secured creditors
d. unsecured creditors
e. holders of equity interests
f. matters related to debtor, its assets or its relations with creditors
• Venue (geographic location or judicial district of the court system where
case must be conducted)
1.3. Commencement of a Liquidation
• Requirements for debtor to commence a case:
a. corporate authority
b. domicile or location of assets within jurisdiction
c. eligibility for relief; excluded entities
• Requirements for creditor(s) to commence a case:
a. proof of insolvency
b. proof of improper conduct of business
c. proof of debt to creditors commencing case
• Effects of Commencement
1.4. Parties to a Liquidation
• Judge
• Office holders and fiduciaries
• Committees of creditors or holders of equity interests
• Government administrators
• Professionals: accountants, lawyers, others
1.5. Liquidation Estate
• Property which is liquidated
• Property which may be excluded from creditor claims
• Fraudulent or preferential transfers
a. pre-bankruptcy period within which transfers may be reviewed
and are subject to avoidance
b. elements of a case to set aside a pre-bankruptcy transfer
1.6. Administrative Powers
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• Stays or injunctions protecting debtor, estate, assets or co-obligors of
debtor
• Procedures for use, sale and liquidation of estate property
• Operation of business during liquidation
1.7. Creditors and Claims
• Notice of proceedings to creditors
a. notice of commencement of proceeding
b. notice of specific actions by liquidator
c. notice of date by which claims must be filed
• What is a claim?
• Submission of claim to court
• Allowance or disallowance of claim
• Claims secured by real and personal property
a. effect of liquidation proceeding or realization on collateral
b. deficiency claim
c. power of liquidator to surcharge secured party for costs of
administration.
• Claims entitled to priority or preference in distribution
a. costs of administering estate, including professional fees
b. employee claims
c. government or sovereign claims
d. other significant priority/preference claims
• Claims of general creditors
• Claims of foreign creditors
• Claims for environmental damage
• Set off of mutual debts
• Contract and lease repudiation or assumption
a. claims arising from repudiation
b. requirements for assumption
c. assignability of contracts and leases
• Discharge of claims and debtor
• Manner and timing of distributions
1.8. Officers, Directors, Affiliates
• Personal liability
a. wrongful trading
b. taxes owed by entity
c. wages, employee benefits owed by entity
d. environmental damage caused by entity
e. other
• Disregard of separateness of affiliated entities
• Subordination of claims
• Insolvency-related crimes
1.9. Non-Judicial Liquidation
• Law or practices which apply to informal or non-judicial liquidations
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• Comparison to judicial liquidations
2. Rehabilitation/Compositions/Schemes
2.1. Overview of schemes for rehabilitation
• Formal or judicial reorganizations
• Composition Schemes
a. Voluntary
b. Involuntary
• Schemes of arrangement
• Other
2.2. Courts Which Administer Reorganizations
• Courts which may be involved in a reorganization
• Jurisdiction of courts over:
a. debtor, its officers, directors
b. assets (turnover of property and collection of claims)
c. secured creditors
d. unsecured creditors
e. holders of equity interests
f. matters related to the debtor, its assets or its relations with
creditors
• Venue (the geographic location or judicial district of the court system
where case must be conducted)
2.3. Commencement of a Reorganization
• Requirements for debtor to commence a case:
a. corporate authority
b. domicile or location of assets within jurisdiction
c. eligibility for relief; excluded entities
d. proof of good faith or ability to reorganize
• Requirements for creditor(s) to commence a case:
a. Proof of insolvency
b. Proof of improper conduct of business
c. Proof of debt to creditors commencing case
2.4. Participants and their Roles
• Judge
• Officer Holders and fiduciaries
a. debtor as a (theoretical) fiduciary
b. administrators and other office holders as fiduciaries
• Committees of creditors or holding of equity interests
• Professionals: accounts, lawyers, other
2.5. Reorganization Estate
• Property which comprises the estate
• Property which may be excluded from creditor claims
• Fraudulent or preferential transfers
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a. pre-bankruptcy period within which transfers may be reviewed
and are subject to avoidance
b. elements of a case to set aside a transfer
2.6. Administrative Powers
• Stays or injunctions protecting debtor, estate, assets
• Procedure for use or sale of estate property
• Operation of business during reorganization
• Borrowing, obtaining credit
• Settlement or compromise of disputes
2.7. Creditors and Claims
• Notice of proceedings to creditors
a. Notice of commencement of proceedings
b. Notice of specific actions by a debtor or fiduciary
c. Notice of date by which claims must be filed
• What is a claim?
• Submission of claim to court
• Allowance or disallowance of claim
• Claims secured by real and personal property
a. effect of reorganization proceeding on realization on collateral
b. deficiency claim
c. power to surcharge secured party for cost of administration
• Claims entitled to priority or preference in distribution
a. costs of administering estate, including professional fees
b. employee claims
c. government or sovereign claims
d. other significant priority/preference claims
• Claims of general creditors
• Claims of foreign creditors
• Claims for environmental damage
• Set off of mutual debts
• Contract and lease repudiation or assumptions
a. claims arising from repudiation
b. requirements for assumption
c. assignability of contracts and leases
• Discharge of claim and debtor
• Manner and timing and distributions
2.8. Officers, Directors, Affiliates
• Personal liability
a. wrongful trading
b. taxes owed by entity
c. wages, employee benefits owed by entity
d. environmental damage caused by entity
e. other
• Disregard of separateness of affiliated entities
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• Subordination of claims
• Insolvency-related crimes
• Role in reorganization
• Selection of post-reorganization management
2.9. Reorganization Plan and Process
• Who may propose reorganization plan?
a. Deadlines for proposal or approval of plan
• Negotiation of plan
• Mandatory components of plan
• Optional components of plan
• Disclosure to creditors of pertinent information and solicitation of votes
• Classification of claims
• Treatment of priority and preference claims
• Treatment of secured claims
• Treatment of unsecured claims
• Treatment of holders of equity interests
• Treatment of contracts
• Approval of plan
a. voting majorities
b. approval without creditor agreement
c. legal requirements
• Court enforcement of reorganization
a. distribution scheme and terms of plan
b. discharge of claims and discrimination against debtor
2.10. Fast-track/prepackaged reorganization procedures
• general discussion and key differences and considerations
3. Specialized topics of significance
3.1. Environmental issues
3.2. Lender liability
3.3. Other
4. Cross-Border Insolvency
4.1. Recognition of Foreign Cases, Representatives
• Case commencement and relief available to a foreign representative
a. appear in a local case
b. commence a plenary case or a case ancillary to a foreign case
c. kinds of relief available
• Standards for recognition of foreign representatives
• Standards for granting relief
4.2. Recognition of Foreign Creditors and Claims
4.3. Recognition of Foreign Judgments or Orders
4.4. Return of Assets to a Foreign Representative
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• Local secured claims
• Local priority or preference claims
• Local general creditor claims
4.5. Conflict of Law Issues
• Application of foreign substantive law
• Use of avoiding powers
a. foreign
b. local
4.6. Bankruptcy Treaties and Conventions