When the process of transition to a market economy started in Central and Eastern Europe, insolvency systems served principally as a conduit to filter public assets to the private sector. Generally, this was done inefficiently and without appropriate institutional and regulatory framework.
Substantial reform efforts have since contributed in the EBRD region to an improved insolvency culture and legal practice . While liquidation has improved in many countries, reorganisation in insolvency proceedings remains weak. Furthermore many countries lack a developed debt restructuring culture and there are rules or guidelines for creditor cooperation on restructurings either do not exist or are not followed in practice.
Why reform is needed
The current financial crisis highlights the fact that credit automatically flows to places where creditors are fairly treated. Modern insolvency systems and debtor-creditor regimes are the cornerstone of sustainable economic development and provide a safety valve for financial failures.
- A culture of creditor cooperation in debt restructuring helps all stakeholders to avoid insolvency and is based upon the recognition of enlightened collective self-interest.
- Predictable insolvency regimes encourage creditors 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 distribution, re-distribution and use of assets from failed businesses more efficiently, effectively and equitably.
- In many transition countries 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 EBRD's role
The EBRD supports transition countries to revise their insolvency laws and implementing institutions. Early in the transition effort, the EBRD assisted Azerbaijan and the Kyrgyz Republic. The EBRD also assisted Russia to develop implementation regulations for one of its early insolvency law revisions in the mid-1990s.
There is increasing recognition that efficiency of insolvency regimes depends on the quality of institutions such as the judiciary, insolvency administrators and professional organisations for insolvency practitioners, as much as on the legal provisions.
Recently the EBRD worked with the Bankruptcy Supervision Agency of Serbia on the publication of a Manual on the National Standards and Code of Ethics for Bankruptcy Administrators. The Manual, published in autumn 2010, provides interpretation and practical advice in respect of national standards and ethics for insolvency administrators, which were developed with the earlier assistance of the Bank. The Bank has also worked with authorities in the Russian Federation on the development of professional standards and ethics for insolvency administrators.
Insolvency Law Regime Core Principles
Domestic insolvency laws will vary and must do so to accommodate the rich variety of legal traditions across the EBRD region. But these 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. This has led the EBRD to define a set of 10 core principles.