Market Exit Rules - Principles Case Studies for Slovakia & Turkey

Market Exit Rules - PrinciplesMarket Exit Rules - PrinciplesCase Studies for Slovakia & TurkeyCase Studies for Slovakia & Turkey

Why do Entrepreneurship Initiatives FailWhy do Entrepreneurship Initiatives FailLessons from International ExperienceLessons from International Experience

CairoCairo, Egypt, Egypt

5 November 2006

Gordon W. JohnsonKirkland & Ellis LLP

[email protected]

Kirkland & Ellis LLP

Context: Credit Environment SystemsContext: Credit Environment Systems

Foster Commercial Confidence & Reliability– Markets more accurately price, manage, resolve risk– Establish reliable backdrop for negotiations– Reduce asset deterioration & promote credit access

Safety valve for corporate distress– Salvage viable businesses and preserve jobs– Efficient transfer of assets (bankruptcy)

Vital to balance in commercial relationships– Encourage responsible corporate behavior & governance– Penalize owners and managers who lack financial discipline

or behave irresponsibly

2Kirkland & Ellis LLP

Premise: The Starting PointPremise: The Starting Point

Credit is the lifeblood of modern commerce– Willing lenders & range of lending options– Reasonable, manageable repayment risk– Effective commercial and security laws

Increasing significance of collateral– Greater assurance of recovery– Requires broadest range of security (im) movable– Ineffective laws lead to underutilized assets

Linkage to Financial System

– Properly assess, price and resolve default risk– Basel II: Capital requirements based on risk weighting / loss exposures and

unexpected loss (tied to legal systems)


Risk Assessment ContinuumRisk Assessment ContinuumIncreasing risk of financial distress

Credit Assessment

Information

Identify Security

Negotiation pricing

Contracting

Registry Monitoring

Risk Assessment

Information

Identify Options

Negotiation pricing

Amend Contracts

Possible action

Monitoring

Enforcement Formal Insolvency

Liquidation, Rescue

Security Rights

Information

Negotiation (Plan)

Implementation

Monitoring

Risk E

valuatio

n P

rocess

Credit Access Risk Management Resolution / Recovery


Scope: ICR Systems ReviewedScope: ICR Systems ReviewedLegal Systems Governing Commercial Relationships

Credit Information systems

D & O Liability

Risk Management Practices

Workout Framework

Enabling Framework (i.e. tax treatment of bad debts, NPLs)

AMCs & systemic corrective measures

Enforcement / InsolvencyCredit Risk ManagementCredit Access / Protection

Compatibility of Systems

Collateral Systems(Im)movable

Registry Systems (Transparency)

Enforcement Systems

Public Auction & Collections

IPG A1-5 IPG B1-5

Corporate Exit Mechanisms

Liquidation

Rehabilitation

Quasi-formal restructuring

IPG C1-D9

Implementation– Institutional Systems

– Regulatory Systems


Systems in Action: Laws & ImplementationSystems in Action: Laws & ImplementationROSC Areas Legal Framework Institutional Framework Regulatory Framework

Credit InformationCredit Referencing, Credit Information & Safeguard

Credit Bureaus, Agencies, Financial Institutions

Central Bank, Finance, Agencies & Self-Regulation

Security & Collateral

Guarantees & Setoffs

Mortgage & Pledge Laws

Title Transfers / Assignments

Notary Publics

Notice and Registry Systems

Ministries of Economy, Justice, Company Affairs, Trade & Industry

Registries

Company Registries

Land Records / Registries

Security Registries

Registry Institutions

Companies / Land Registrar

Regulation of Practices by Government Agency or Private Entities

Debt Resolution – Enforcement

Contract Laws

Civil/Commercial Proceedings

Auction Laws, AMCs

Internal Systems (Banks)

Courts

Central Bank

Bank Supervisors

Courts / Execution

Quasi Formal Restructurings

Alternative Dispute Resolution

Tax Laws

Out-of-court restructurings

Bus. / Commerce Chambers

Coordinating Institutions

Courts

ADR Network

Coordinating Institutions

Professional Associations

Reorganizations

Concordat, Schemes, etc.

Reorganization Laws

Fast Track Procedures

Courts

Company Registrar

Agencies

Ministry of Justice

Supreme Court

Regulatory Agency / Assoc

Liquidations

Bankruptcy Laws

Auction Laws

Company wind-up

Courts

Company Registrar

Insolvency Administrators

Auctioneers

Experts


Accounting & Auditing

Context for InsolvencyContext for Insolvency

Institutional

Enterprise

Creditors

Employees

Company laws

Shareholders

Directors etc

Labor laws

Secured Creditors

State

Collateral laws

Mortgage laws

Contract/Commercial

Tax & other laws

Securities laws

Others laws

Bank Regulators

Environmental, Tariff & others

Professionals

Administrative Reg

ulat

ory

Legal

Corporate Governance

Governmental & Political

Cultural

& S

ocial

Econ

omic

&

Com

mer

cial

Insolvency System

Fiscal & Monetary

Bankr., Civil

CommercialAgency


Overview of Insolvency SystemsOverview of Insolvency Systems

Liquidation

Common Law countries

UK, Commonwealth (53) - Australia/NZ, HK, Malaysia, Singapore, South Asia, Sub-Saharan Africa, handful of Latin Am & Caribbean

Civil Law countries

Continental Europe, Asia, Francophone Africa (OHADA),

Latin America

United States

DIP Reorganization model

Centrally Planned

FSU, China, Vietnam

Sharia law countries

Islamic & Arab nations


Recent Reform RevolutionRecent Reform Revolution

1979 to mid-80s: Major reforms: US, France, UK 1990s to date: FSU Transition & EU integration

– New Europe, CEE, and Central Asia (The Transplant Decade)

1990s: Rescue culture driven reforms: – Australia, Canada, Germany

Post-1997: Financial Crisis / Related Reform – Asian 5: Indon, Kor, (Mal), Phil, Thai / Japan

– Post-2000: Russia, Mexico, Turkey, Brazil, Argentina, Bolivia,

Post-2000: Progressive reforms – China, India / S. Asia

– EU - Spain, Portugal, Italy, others

Post-2001/2004: Age of Standards / Harmonization


AFR MNA

Cameroon, Kenya, Mauritius, Morocco, South Africa, Uganda

ASIA India, Nepal, Philippines, Sri Lanka, Vietnam

ECACzech Republic, Kyrgyz Republic,

Lithuania, Romania, Russia, Slovak Republic, Slovenia, Turkey, Ukraine

LACArgentina, Bolivia, Brazil, Chile, Colombia, Ecuador , El Salvador , Honduras, Jamaica,

Nicaragua, Paraguay

Lessons: ICR ROSCsLessons: ICR ROSCs

32


Lessons: Lessons: LLegal Framework & Registriesegal Framework & Registries

1. Creditor Rights Legislation– Secured Transactions on Real Estate: functional– Secured Transactions on Movable Assets: outdated

2. Registries– Inefficient & unreliable - Need to modernize and computerize– Need for registries for recording interests in movable assets

3. Insolvency Legislation– Frequently Antiquated & Inefficient– Unsupportive of modern businesses, especially lacking rescue

procedures for financially distressed enterprises


Lessons: Lessons: Court & Regulatory PracticesCourt & Regulatory Practices

4. Weak / Inefficient Enforcement Proceedings– True of unsecured and secured claims– Lack of extra-judicial enforcement mechanisms– Outmoded procedural codes and regulations

5. Ineffective Court Systems– For enforcement and insolvency proceedings– Inadequate training among judges / inefficient case administration – Inconsistency in decision making / lack of transparency – System abuse and influence

6. Weak Regulatory Frameworks– Lax or absent procedures to qualify, license and supervise and

discipline administrators and practitioners


Case Study - SlovakiaCase Study - Slovakia

Privatization of Banks (2000-01)

Starting a new business (2002)

Corporate governance (2002)

Security/access to credit (2003)

Insolvency & Enforcement (2006)


Background – Starting a new businessBackground – Starting a new business

Business unfriendly environment incompatible with economical reforms and their aims

Potential for corruption

Contrary to the idea of free and smooth entry into the market

Need to harmonise the law with the acquis communautaire in some aspects (e.g. publicity)


Background – Corporate governanceBackground – Corporate governance

Unclear and hardly enforceable directors’ duties

Unclear rules for the protection of minorities often abused by both majorities and minorities

Lack of suitable capital protection rules (incl. financial assistance and related parties transactions)

Need to harmonise the law with the acquis communautaire


Background – Security/access to creditBackground – Security/access to credit

Difficult to create security over a number of classes of assets (e.g. movables, receivables)

Difficult to enforce security

Access to credit stifled by most enterprises, but mostly SMEs

Unjustified priorities (state related claims)


Slovak: Slovak: Key policies - Security/Credit AccessKey policies - Security/Credit Access

Wide definition of collateral (incl.future

assets)

Non-possessory charges

Public register of charges

Out-of-court enforcement (private or auctions)

Removal of unjustified priorities


Background - Insolvency / EnforcementBackground - Insolvency / Enforcement

Inefficient - 6-12 mos. to open, 3+ yrs to complete

Ineffective - low recovery rates (affecting both secured and unsecured creditors)

Lack of modern restructuring

No rules fostering responsible behaviour by stakeholders

No regulated profession of trustees

Enforcement - protracted and unpredictable


Slovak: Slovak: Key policies - InsolvencyKey policies - Insolvency

Consistent with World Bank Principles

Clearer rules governing stakeholders

Management of process transferred to trustees

New regulated profession of trustees created

More control shifted to creditors (secured creditors in particular) over realization of assets

New moratorium and restructuring concepts to give troubled businesses a chance


Case Study - Turkey Case Study - Turkey (Background)(Background)

Financial Crisis 2000 13-18 failed banks (USD billions NPLs) 90% lending secured - unconditional

mortgage (by pass courts) No security in moveable assets Contested foreclosures (2-3 yrs or longer) 99.5% of cases (est. 500,000) execution; 0.5% insolvency cases; stigma; 3-5 years No workout or modern company rescue law


Uncontested Order 4-8 mos

Declaration of Bankr (1 yr)

Procedure is rarely used

Liquidation (4-8 yrs) (Ave. 6 yrs)

Concordat

1 yr 2 yr 3 yr

Unconditional Mortgage (90% lending)

Judgment/Execution

Uncontested Public

Auction 2-3 mos

Contested Public Auction2-3 years

Contested Judgment/Exec.2-3 years

Contested Decl. (2-3 yrs) Claims Resolution (3-5 yrs)

Appeals from Declaration of Bankruptcy (2-3 yr)

Secured Creditor Actions Exempt

No creditors are stayed

Turkey - Debt Recovery Procedures

21Kirkland & Ellis LLPKirkland & Ellis LLP

Turkey (Restructuring via Reconciliation)

Court Judgment

Affected Creditors *

Injunction

* Affected Creditors are those whose debts are in default or to be restructured.

Out-of-court Restructuring

(prepackaged plan) Status conference Pretrial relief

Interim Supervisor

Priority Financing

Application

Upon request

Hearing on Plan ApplicationCommercial Court

30 days

Dismissed

Approved

Amended: 3 months / 2 month extension = 5-6 months

Istanbul ApproachOut-of-court Restructuring Application

< 75% but >

66%

Bank Signatories

Approval by 75%

Majority Approval 50+ number

& 2/3 amt

Court Judgment

Approved

Denied Liquidation

Concordat

Within 30 days

Previously: 2-3 years

BRSABank Restructuring

Agency


Lessons and TrendsLessons and Trends

Today’s reality: Increasing convergence in practices and laws driven by changes in business, technology and the int’l factor

Vacuum tube issue: laws cannot be developed without reference to the culture and broader legal framework, nor without input from key stakeholders

Transplant issue: no ideal laws, only those that serve the needs of a country; models and transplants are difficult


Lessons and TrendsLessons and Trends

Old-wine-new-wineskin: laws easily change, practices do not

Implementation gap: good laws, weak capacity, lax regulation

Other challenges: labor, taxes, governance, accounting

Risk Management: Increased need for better risk management tools and models / across the board (Basel II)


Documents

Market Exit Rules - Principles Case Studies for Slovakia & Turkey