On 25 October 2016 the World Bank issued the 2017 Doing Business Report. Doing Business measures aspects of regulation that enable or prevent private sector businesses from starting, operating and expanding. These regulations are measured using 11 indicator sets, including ‘Resolving Insolvency’.
Overall, new data show that there has been an increase in the pace of reform, i.e. more economies are reforming and implementing more reforms. With reference to the ‘Resolving Insolvency’ section of the Report, it ranks countries depending on the time, cost, outcome and recovery rate for a commercial insolvency and the overall strength and efficiency of the legal framework for insolvency.
Doing Business studies the time, cost and outcome of insolvency proceedings involving domestic entities as well as the strength of the legal framework applicable to liquidation and reorganization proceedings. The data for the resolving insolvency indicators are derived from questionnaire responses by local insolvency practitioners and verified through a study of laws and regulations as well as public information on insolvency systems. The ranking of economies on the ease of resolving insolvency is determined by sorting their distance to frontier scores for resolving insolvency.
The distance to frontier score aids in assessing the absolute level of regulatory performance and how it improves over time. This measure shows the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005.
It is interesting to note that the majority of the countries that rank at the top in the ‘Resolving Insolvency’ Section of the report, do not necessarily perform very well when it comes to the aggregated result reported in the ‘Ease of Doing Business’ Rank. For instance, Finland ranks 1st in insolvency and 13th in the generic index, Japan 2nd and 34th respectively, Germany 3rd and 17th. Only the Korean Republic (4th and 5th), the United States (5th and 8th), Norway (6th both) and Denmark (8th and 3rd) perform comparably well in both cases.
These results tell us that, despite empirical evidence of the contrary, insolvency law is frequently neglected by legislators and public opinion, and its role as a booster for the economy is often overlooked. Studies show that effective reforms of creditor rights are associated with lower costs of credit, increased access to credit, improved creditor recovery and strengthened job preservation. If at the end of bankruptcy proceedings creditors can recover most of their investments, they can keep reinvesting in viable firms and improving companies’ access to credit. Similarly, if a bankruptcy regime respects the absolute priority of claims, this allows secured creditors to continue lending and maintains confidence in the bankruptcy system.
It is up to the academic community to build consensus on the above mentioned themes.