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“No Way Out”: The Lack of Efficient Insolvency Regimes

Modern and efficient insolvency regimes allow a potentially viable debtor company to reorganize and survive its financial distress and continue operating productively in the economy. When reorganization fails, insolvency regimes should allow for the swift and fair conversion to liquidation. Efficient recovery and maximization of assets is, however, not the norm in MENA and bankruptcy is perceived as a last resort.

Countries in the Middle and North Africa (MENA) generally suffer from an underdevelopment of insolvency and need to make it a reform priority. No MENA country can claim an efficient liquidation process by international standards. According to Doing Business 2010, the recovery rate on debt when closing a business is less than half what it is for the Organization for Economic Cooperation and Development (OECD)  countries, and the time it takes to close a business is 3.5 years in MENA compared to 1.7 in OECD. Several countries in the region have laws that punish debtors with civil penalties, such as loss of the right to manage a company, restriction of movement (seizure of passport), and even prison. The approach to a debtor as an entity to be rehabilitated is rare, as across the region, reorganization is rare, even when legal provisions may allow it. Such reorganization provisions tend to be heavily creditor-driven, providing little flexibility to debtors. Even liquidation procedures are considered ineffective. Provisions in the laws are dated, and many of the laws have not been revised and modernized for a decade, or several decades. None of the countries in the regions have laws that comply with modern international best practice standards. Court systems tend to be slow and very formalistic. Procedures are expensive and inefficient, resulting in only a small amount remaining for distribution to creditors after fees are paid. These institutional inefficiencies and obstacles seem to lead many creditors to opt out of the system and resolve their disputes with creditors through informal means.  Systemically, this leaves a gap in the ability of creditors to engage in collective resolution of debt and ensure fairness and maximization of asset recovery.

Decriminalizing insolvency and allowing for a fresh start after bankruptcy is a key measure in improving insolvency regimes in the region. After the bankruptcy case is properly completed, through reorganization or liquidation, individual debtors should be freed from debt and given a fresh start as economic actors. Significant and serious investment should be undertaken in training judges specifically in bankruptcy procedures and nurturing a “culture of reorganization,” by developing expertise among professionals in restructuring and the economics of financial distress. Laws should be modernized to allow for more efficient procedures for both liquidation and reorganization, however, laws alone cannot serve the needs of modern and sophisticated economies without a real reform of the judicial system. Slow and ineffective court systems are a major obstacle to efficient liquidation. International best practice standards suggest specialized courts to hear insolvency cases, in tandem with a substantive and economic, rather than a formalistic, approach.

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