Insolvency Law in Emerging Markets
Corporate insolvency law can serve as a powerful mechanism to promote economic growth. Ex ante, a well-functioning insolvency framework can facilitate entrepreneurship, innovation and access to finance. Ex post, corporate insolvency law can perform several functions, including the reorganization of viable companies in financial distress, the liquidation of non-viable businesses in a fair and efficient manner, and the maximization of the returns to creditors. Therefore, having an efficient insolvency framework becomes essential for any economy, and even more so for emerging economies, where there is a higher potential for growth and the lack of developed capital markets makes it harder for firms to have access to finance.
Unfortunately, the academic literature has generally paid more attention to the regulation of corporate insolvency in developed countries. Thus, it has largely omitted the debate about the optimal design of insolvency law in jurisdictions that comprise 85% of the world’s population and 59% of the global GDP, since they include some of the world’s largest economies such as China, India, Brazil, Russia and Indonesia.
In my new article, entitled ‘Insolvency Law in Emerging Markets’, I seek to fill this gap in the academic literature by analyzing the problems and features of insolvency law in emerging markets. The paper argues that, even though, in an ideal scenario, any reform of the insolvency framework in these countries should start by improving the judicial system and the sophistication of the insolvency profession, these reforms usually take time, resources and political will. In fact, due to a variety of factors, including corruption, lack of awareness about the importance of the insolvency system for the real economy, or lack of political incentives to engage in a complex institutional reform whose benefits will probably only materialize in the long run, they might never occur. For this reason, my paper suggests an insolvency framework for emerging economies which takes the current market conditions and institutional features of these countries into account.
My proposed regime of corporate insolvency for emerging markets is based on three fundamental pillars. First, workouts and pre-insolvency proceedings should be promoted as a way to avoid an insolvency system that is usually value-destroying for both debtors and creditors. Second, insolvency proceedings should be reformed to respond more effectively to the problems and features existing in emerging markets, which generally include the prevalence of micro and small firms, as well as the existence of large controlled companies, inefficient courts, and unsophisticated insolvency practitioners. Finally, emerging economies should adopt a more contractual approach to deal with a situation of cross-border insolvency. Thus, by facilitating the choice of insolvency forum, debtors, creditors and society as a whole will be able to enjoy the benefits associated with having access to more sophisticated insolvency frameworks. Therefore, this contractual approach to cross-border insolvency can serve as an additional tool to promote entrepreneurship, access to finance and economic growth in emerging markets.
Aurelio Gurrea-Martínez is an Assistant Professor of Law and Head of the Singapore Global Restructuring Initiative at Singapore Management University.
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