Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized A WORLDBANKSTUDY Debt Restructuring Debt Restructuring Out-of-Court A WORLDBANKSTUDY WORLD BANK STUDY Out-of-Court Debt Restructuring Jose M. Garrido © 2012 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org 1 2 3 4 14 13 12 11 World Bank Studies are published to communicate the results of the Bank’s work to the development community with the least possible delay. The manuscript of this paper therefore has not been prepared in accordance with the procedures appropriate to formally-edited texts. This volume is a product of the staff of The World Bank with external contributions. 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Contents Foreword ......................................................................................................................................v Acknowledgments .................................................................................................................. vii Abstract .......................................................................................................................................ix About The Author ......................................................................................................................x I. Background to Out-of-Court Debt Restructuring ........................................................1 1. Introduction ....................................................................................................................1 2. Relations Between Informal and Formal Insolvency Procedures ...........................2 3. Pre-Conditions for Debt Restructurings ....................................................................6 4. Advantages and Disadvantages of Informal Procedures .........................................8 II. Enabling Legislative Framework................................................................................... 15 1. General Conditions of an Enabling Framework ...................................................... 15 2. Other Legislative Provisions For an Enabling Framework ................................... 18 III. Informal Workout Procedure ......................................................................................... 27 1. Introduction ................................................................................................................. 27 2. Contractual Workouts ................................................................................................. 28 3. Enhanced Restructurings ............................................................................................ 39 4. Hybrid Procedures ....................................................................................................... 47 5. Relationships Between Out-of-Court Procedures and Formal Insolvency Procedures .....................................................................................................................51 6. Systemic Crises and Debt Restructuring: Decentralized and Centralized Approaches ...................................................................................................................5 2 IV. Conclusion: A Policy Agenda for Out-of-Court Debt Restructurings ................... 56 Figures Figure 1.1: The continuum of procedures for the treatment of fi nancial diffi culties ........3 Figure 1.2: Overlapping relations between out-of- court restructurings and formal insolvency proceedings ......................................................................................................4 Tables Table 2.1: Checklist for tax regulation issues in corporate restructurings ........................23 Table 2.2: List of elements of a legal system to be assessed to verify the existence of obstacles and incentives for out-of-court restructurings.........................................26 iii Foreword his study analyzes and consolidates the lessons we have learned on one of the most Timportant topics in the work of the World Bank’s Insolvency Initiative: the use of out- of-court debt restructuring mechanisms in addressing the problem of corporate distress. Identifying eff ective legal and institutional mechanisms for facilitating out-of-court debt restructuring has been at the heart of the World Bank Insolvency Initiative’s work in response to the current fi nancial crisis that has aff ected many of our member coun- tries. The recent fi nancial crisis has shown, much like the Asian crisis showed in the late 1990’s, how a systemic fi nancial crisis can lead to corporate solvency issues that outstrip the capacity of formal judicial mechanisms. In many cases, the resolution of debt prob- lems through non-judicial means has proven to be less disruptive and more eff ective than formal insolvency procedures. Indeed, our experience suggests that, restructuring can be facilitated through an appropriate legal enabling framework and the introduction of simplifi ed procedures that encourage parties to negotiate an enforceable solution to corporate indebtedness Over the course of the years, the World Bank Insolvency Initiative has developed, together with UNCITRAL, the international standard on the basis of which the compara- tive eff ectiveness of insolvency diverse systems can be studied. Today, the World Bank Principles, that form a part of this standard, are used in insolvency assessments around the world, covering the analysis of both formal and informal restructuring techniques through the Reports on the Observance of Standards and Codes (ROSC) initiative of the Financial Stability Board. Taking the international standard as the guiding principle, this study provides succinct guidance on each of the topics in the fi eld of debt restructuring, assisting in the identifi cation of the diff erent technical solutions that can be adopted for the treatment of corporate fi nancial distress. The study approaches the topic in a non-prescriptive way, and achieves its objective of providing basic information on the relevant legal and policy issues, se ing out the al- ternative solutions, and explaining their respective advantages and disadvantages. The analysis takes stock of the experience of the World Bank’s Legal Vice Presidency in car- rying out insolvency assessments in more than fi fty countries around the world, and on the experience of the Legal Vice Presidency in developing a research agenda designed to assist policy-makers in the choices that have to be made in the design of eff ective insol- vency and creditor rights systems. The study was presented at the World Bank Insolvency and Creditor Rights Task Force that met in Washington DC in January 2011. I had the honor of opening that meet- ing and I can a est to the interest that the issues covered by the meeting a racted in the international community of insolvency policy-makers and insolvency specialists. We sincerely hope that the guidance off ered in this document will be useful to both policy- makers and specialists from Member Countries. Anne-Marie Leroy General Counsel The World Bank Group v Acknowledgments his study is based on the experience of the members of the World Bank’s Insolvency Tand Creditor/Debtor Regimes Initiative over the last decade. The current version of the study was prepared and updated by Dr. Jose Maria Garrido, Senior Counsel, with sup- port from other members of the ICR Initiative, particularly, Dr. Adolfo Rouillon, former Senior Counsel, and Yesha Yadav, former Counsel. This study was presented at a round- table within the World Bank ICR Task Force meeting in Washington DC, in January 2011. The participants at that session included Neil Cooper, Michael Pomerleano, Tomas Araya, Shinjiro Takagi, Sijmen de Rani , and Yesha Yadav, each of whom provided valuable in- sights which helped to enrich this study. Earlier versions of the study have benefi ed from the