“Arab Spring” countries need functioning insolvency systems to support growth

By Svitlana  Pyrkalo

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There will be no real growth without working insolvency systems in Egypt, Tunisia, Morocco and Jordan, the new EBRD Law in Transition report argues.

The report, entitled “Financial law reform: from Moscow to Casablanca”, looks at several aspects of legal reform across the whole EBRD region, including corporate governance and local capital markets in the EBRD’s new region of operations, the southern and eastern Mediterranean. A leading article covers insolvency and the prospects for business rescue in the four countries in this region in which the EBRD has just started investing.

The report argues that the region needs to help its struggling companies for the sake of economies as a whole. In Tunisia, for instance, non-performing loans are a central issue blocking economic growth; credit has stopped because of them. But rough treatment of businesses in trouble has many other costs. Jobs and homes, pledged against loans, are lost needlessly when companies are forced to hide their troubles until too late, instead of finding a solution with their banks.

“Some companies simply need to go bankrupt and out of business. But, especially in times of crisis, keeping viable businesses afloat when they are experiencing a temporary financial crisis is crucial,” says EBRD’s Catherine Bridge, counsel in insolvency and debt restructuring. “Insolvency and bankruptcy in the EBRD’s new region are still stigmatised and viewed as a personal failure or the result of fraud; creditors try to get their money out of a business no matter what and as quickly as possible. But precipitous unplanned insolvency destroys the value of a business and means that everybody loses – debtors, creditors, the financial system and society as a whole”.

Countries differ in terms of dealing with commercial difficulties. In Egypt, for instance, a bounced check can mean criminal responsibility. Morocco and Tunisia have followed the French legal tradition and have more modern ‘business rescue’ focused laws. But those laws rarely work in practice, and debtors throughout the region can still face significant civil and criminal sanctions.

Creditors and companies need to find a way to sit together as early as possible to work out the best plan for the business, which will benefit all sides and this is what the EBRD aims to address.

“Anywhere in the world where the economy isn’t doing well, companies don’t do well, so helping companies survive economically is important everywhere,” says Frederique Dahan, Head of Financial Law Unit at the EBRD.

“We have already helped several European countries set up frameworks for early preventive action and out-of-court resolution. We think a similar approach, plus reducing the stigma of insolvency, will help in SEMED, and we will work towards that. The EBRD – which is both a lender and equity investor – knows both sides of the story. We can help strike the right balance between protecting debtor and creditor interests”.

Download the full Law in Transition 2013 report “Financial law reform: from Moscow to Casablanca”

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