Insolvency and debt restructuring

Modern bankruptcy/insolvency systems and debtor-creditor regimes are the cornerstone of sustainable economic development and provide a safety valve for financial failures. Predictable insolvency regimes encourage creditors to cooperate with each other and to work with debtors to avoid the closure of a business, rather than opportunistically withdrawing credit and seizing assets at the first hint of financial distress. Strong insolvency laws promote the distribution, re-distribution and use of assets from failed businesses more efficiently, effectively and equitably. In many transition economies in central and eastern Europe and the former Soviet Union, further legal reform and technical assistance are needed to improve rules and procedures to reach international standards of best practice.

The coronavirus related economic crisis has highlighted the importance of insolvency systems that enable viable but struggling businesses to restructure their financial liabilities. In many economies, however, insolvency systems are used primarily for liquidation. We have published an assessment on business reorganisation tools accross all regions to identify where reform is most needed. We have also conducted comprehensive research into the interaction between insolvency laws and secured transaction regimes to understand how supportive the environment is in EBRD economies for new financing to businesses in financial distress, available here. An analysis of how national authorities responded to the Covid-19 pandemic with emergency insolvency and debt restructuring measures is available here.

The LTP's role

The EBRD helps economies to revise their insolvency laws and implementation frameworks. There is increasing recognition that the efficiency of insolvency regimes depends as much as on the quality of institutions, such as the judiciary, insolvency administrators and professional organisations for insolvency practitioners, as on the legal provisions. Domestic insolvency laws will vary and must do so to accommodate the rich variety of legal traditions across the EBRD regions. But these insolvency laws need to comply with the core principles of international standards and best practices as external actors are most likely to apply these when determining whether or not to invest in a given country. To help guide reform efforts, the EBRD has developed Core Principles of an Effective Insolvency System and Principles for an Effective Professional and Regulatory Framework for Insolvency Office Holders. See further details on these EBRD insolvency principles and other important international insolvency standards.

The EBRD assessment on business reorganisation found that many national authorities do not regularly collect and publish insolvency data. Meanwhile the need for better quality and more extensive data on insolvency proceedings and businesses for better policy-making has become widely recognised. Data can help measure the efficiency and effectiveness of insolvency proceedings.

As part of a new initiative in connection with the assessment, the EBRD is preparing a guide for insolvency regulators on the publication of insolvency data and why this matters for potential users of the system, as well as for investors evaluating the risk of investing in a particular economy. More data also enables national authorities and policymakers to target the intended beneficiaries of reforms.

Micro, small and medium enterprises (MSMEs) constitute the cornerstone of most of EBRD economies, but suffer from restricted access to finance and cumbersome processes (including insolvency procedures) which are costly and not adapted to MSME needs. In 2022, the Legal Transition Programme partnered with experts from the Boğaziçi University of Istanbul to analyse how data available on Turkish SMEs can be used to design more effective government support programmes, complementing the many EBRD (M)SME-focused initiatives and programmes, including the EBRD Advice for Small Business, and the Blue Ribbon and Star Venture programmes.

The final project report is available in English and Turkish below.

The design and development of coordinated and coherent financial support programmes that facilitate access to finance by (M)SMEs should be complemented by more efficient, flexible and transparent insolvency frameworks. The LTP is therefore incorporating within country projects valuable guidance from the  UNCITRAL Legislative Guide on Insolvency Law for Micro and Small Enterprises, published in 2022, on designing insolvency procedures that support MSMEs needs. In parallel, the team is implementing some of the measures in the EU Directive on Preventive Restructuring Frameworks and Second Chance aimed at early warning mechanisms and preventive restructuring to avoid unnecessary insolvent liquidations.