Region needs policies to entitle firms a dignified exit
The region should provide for a system that would enable a dignified exit, not only for corporate businesses but also to small enterprises and individuals, said Sumant Batra, President of Insol International – a worldwide federation of 9,500 national associations of accountants, lawyers and experts.
"The focus is always on improving the entry laws such as the Company Law. Improving the insolvency system has not been a priority," he said. "If there is no dignified exit window available, which provides maximum return, the investor would be very reluctant."
According to the World Bank, it takes 3.5 years for a company in the Mena region to go through insolvency, double the 1.7 year average in the OECD. Closing a business takes longest in the UAE with five years.
You would expect to recover about 29.9 cents on the dollar in the Mena compared to the 92.5 cents recovery rate in Japan. In the UAE, you can only recover 10.2 cents, the lowest recovery rate in the region. About 14 per cent per cent of the firm's value is also expected to melt away through insolvency proceedings in Mena. In the UAE one would expect 30 per cent lost in value.
Non-performing loans (NPLs) are expected to peak this year, primarily because they are lagging indicators. What about insolvency cases, shall we see more of them this year?
There has been a significant increase in the US, the UK and Europe. Asia has remained largely immune but all active vibrant economies integrated in the global level did see an increase, a trend that continued until 2009. This year things will start stabilising because of the proactive move of the governments.
How is the Middle East progressing in terms of improving on their insolvency framework?
Except for countries such as Egypt and Jordan and the DIFC, not much has been done in the past few years to improve the insolvency system. That has not been a priority. The focus is always on improving the entry laws such as the Company Law. In most countries there is no restructuring law at all or there is no clause dealing with cross border insolvency.
About 98 per cent of businesses in the region are classified as SMEs. Are you recommending frameworks specific to this segment?
I do agree that SMEs need a special treatment and that is a recognition that is starting to come now. In Asia, we have a similar forum that has been taking place for 10 years now. We are meeting in Delhi in April and the focus, for the first time, is effective insolvency system for SMEs.
Is that also an issue in developed economies?
I wouldn't really say in the US because the system there is very efficient. It still remains an issue in the Middle East, North Africa, Asia and Eastern Europe.
What is it that you want to achieve in April? Do you intend to issue a policy recommendation?
The Indian Prime Minister Manmohan Singh felt that small enterprises, which are largely proprietorship, do not submit themselves to the corporate insolvency law regime. One of the outcomes is the clarity with which some other economies dealt with small enterprise, so India can do the same.
Do you see the same appetite to address this need in this region?
I think yes. But you have to prioritise things. Mena needs to take a lot of general steps before it goes into specialisation areas such as small enterprises.
How important is a country's exit system in alluring investors?
A decent exit system provides a big incentive for any foreign investor. If his normal standard rate of interest for granting debt were 11 per cent, in an economy where insolvency system is weak, he would make it 15 per cent because risk is high. Second, it discourages growth of private entrepreneurship
Third, if there were laws enabling constructive restructuring, employment would be preserved. Fourth, it also helps create financial discipline because directors' liabilities will be linked with the insolvency. That is what they call special responsibility in the twilight period – a time when the company is going into financial difficulty but it is not insolvent. During that period, their fiduciary duties and responsibility is changed – they move from shareholders to creditors. And these are all very fatal.
Do you propose Mena to introduce personal insolvency frameworks?
It is up to Mena policy makers to identify their priorities. Consumer debts are increasing, credit cards are used for financing… at some point there will be defaults. This will bring you into legitimising bankruptcy.
Failure has to be legitimised as much as success otherwise you are creating a stigma and you are disincentivising people. We have to give a chance for people to start afresh.
PROFILE: Sumant Batra President, Insol International
Batra, also the Managing Partner of New Delhi-based Kesar Dass B and Associates law firm, is an international consultant to the World Bank, Asian Development Bank and Organisation of Economic Co-operation and Development in corporate governance, corporate insolvency and restructuring, small and medium enterprise and other areas.
Batra entered the law practice in 1989, was elevated as a judge and has recently retired as Chief Justice of the High Court of Kerala.
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