bankruptcy policy an empirical investigation of...

BANKRUPTCY POLICY: AN EMPIRICAL INVESTIGATION OF 50 JURISDICTIONS

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Ziad Raymond Azar

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BANKRUPTCY POLICY: AN EMPIRICAL INVESTIGATION OF 50

JURISDICTIONS WORLDWIDE

Ziad Raymond Azar


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Abstract

This paper shows that auction bankruptcy is not a better determinant of financial

development than collective procedures involving judicial bargaining. While protecting

creditors is always a right policy choice that enhances the supply of credit, a carefully

crafted collective bankruptcy statute that balances the rights of creditors and debtors

equally promote credit availability. In addition, such collective procedure provides

creditors with higher recovery rates in financial distress and significantly lowers the cost

of capital. There is no evidence that auction bankruptcy does the same. Overall, efficient

collective procedures are more equitable and more conductive to financial development

than divisive auction bankruptcies. The Bankruptcy Index that this paper proposes

provides policymakers with a detailed road-map for drafting such efficient bankruptcy

statutes.


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INDEX

INTRODUCTION ........................................................................................................................................... 4 SECTION I – METHODOLOGY .................................................................................................................... 16

A – CRITERIA FOR SELECTING THE COUNTRIES COVERED BY THE STUDY .................................................. 16 B – IDENTIFYING LOCAL RESPONDENTS................................................................................................. 17 a. Networking...................................................................................................................................... 17 b. Authors............................................................................................................................................ 18 c. World Bank’s Doing Business Respondent Pool............................................................................. 19 d. International Development Law Organization ............................................................................... 20 C – RELEVANCE AND REPRESENTATIVENESS OF THE SAMPLE.................................................................. 23 a. Relevance of the Sample ................................................................................................................. 25 b. Representativeness of the Sample ................................................................................................... 26 i) Legal Origins................................................................................................................................... 26 ii) Income Group................................................................................................................................. 27 iii) Geographic Classification............................................................................................................. 28 D – CHECKING THE ROBUSTNESS OF THE ANSWERS ............................................................................... 28 a. Designing a Good Bankruptcy Survey ............................................................................................ 32 i) Clear and Precise Instructions ........................................................................................................ 32 ii) Functional Standardization ............................................................................................................ 34 iii) Language and On-line support...................................................................................................... 36 b. Independent Research..................................................................................................................... 36 c. Telephone Interviews ...................................................................................................................... 38 d. Coding Rules................................................................................................................................... 39

SECTION II – THE MODEL......................................................................................................................... 41 SECTION III – LEGAL HERITAGE: A DETERMINANT OF BANKRUPTCY LAW ............................................. 60

A – THE BI ........................................................................................................................................... 61 B – THE PDI ........................................................................................................................................ 62 a. Analyzing PDI scores...................................................................................................................... 65 b. The PDI’s Components ................................................................................................................... 67 C – THE PCI ........................................................................................................................................ 69 a. Analyzing PCI scores ...................................................................................................................... 71 b. PCI’s Components .......................................................................................................................... 73 D – TESTING OTHER EXOGENOUS DETERMINANTS OF BANKRUPTCY LAW................................................ 76

SECTION IV – BANKRUPTCY LAW: A DETERMINANT OF FINANCIAL DEVELOPMENT THROUGH ITS EFFECT

ON THE SUPPLY OF CREDIT AND LENDING RATES .................................................................................... 81

A – THE BANKRUPTCY INDEX (BI) IS A STRONG DETERMINANT OF FINANCIAL DEVELOPMENT................ 82 B – WHAT BANKRUPTCY RULES BETTER DETERMINE FINANCIAL DEVELOPMENT: PRO-CREDITOR OR PRO-

DEBTOR RULES?................................................................................................................................... 85 C – SHOULD BANKRUPTCY LAW EXCESSIVELY PROTECT CREDITORS AT THE EXPENSE OF DEBTORS’

CHANCE TO REORGANIZE?.................................................................................................................... 88 CONCLUSION ............................................................................................................................................ 92 APPENDIX A – BANKRUPTCY SURVEY...................................................................................................... 94 APPENDIX B – DATA AND REGRESSION TABLES..................................................................................... 100


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INTRODUCTION

Scholars have long debated the orientations that an efficient bankruptcy system

should adopt. Professor Thomas Jackson argues that bankruptcy should deal exclusively

with creditor-distribution questions and should solve procedural collective problems.1

Bankruptcy’s ultimate goal should be to maximize the recovery rate of creditors while

scrupulously preserving the absolute priority rule. In the absence of bankruptcy, creditors

who seek to individually recuperate their loans from a failed debtor face strategic and

duplicative costs that yield lower overall recovery rates to all claimants. Creditors find it

in their best interest to agree ex-ante on binding collective procedural rules that would

address these inefficiencies.2 However, creditors who deal with the debtor change

continuously over time and overwhelming transaction costs make the hypothetical

bargain impossible to materialize. As a consequence, the creditors’ bargain is

“hypothetical;” it is a bargain that rational creditors would have reached ex-ante to

orderly divide the debtor’s assets. Mandatory judicial bankruptcy is hence efficient if it

replicates the terms of such a hypothetical bargain.3 Specifically, the law should not re-

distribute wealth or expropriate non-bankruptcy entitlement beyond collective

imperatives. As Jackson puts it, “bankruptcy functions best when it acts in a mode that is

1 Thomas H. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors’ Bargain, 91 YALE L. J. 857, 857 (1982) (Hereinafter Jackson, Creditors’ Bargain) 2 In the absence of bankruptcy, Professor Jackson defines three costs that face creditors who seek to recuperate their loans from a failed debtor. The first is a “strategic cost.” Outside bankruptcy law, recuperation of one’s loan is a first come first served exercise. Facing uncertain returns, creditors will incur another larger cost by running on the debtor and precipitating its failure. The going concern value of viable debtors is lost in disorderly liquidations that bring lower overall recovery rates for all claimants. Finally, the duplication of inquiry and collection costs that every enforcing creditor endures increase total administrative costs and further erode overall creditors’ returns. Id. 860-8 3 Id. 866-7.


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almost entirely derivative.”4 Bankruptcy law should always “mirror the relative value of

the substantive entitlements of the non-bankruptcy word.”5 Otherwise, debtors can abuse

the rights of their creditors by shopping between two legal regimes with different legal

entitlements.

Professor Baird and others6 go one step further and advocate a full market

solution to financial distress.7 To Baird, since bankruptcy addresses creditor-distribution

questions exclusively, it always involves a sale of assets and a division of the sale’s

proceeds among creditors. Hence, the only difference between liquidation and

reorganization is the form that the sale of assets takes. In liquidation, ownership rights are

effectively sold on the open market to third parties while in reorganization, these rights

are fictively sold to the debtor’s claimholders in return to canceling their pre-bankruptcy

rights.8 If optimal bankruptcy rules should reflect the creditors’ hypothetical bargain

exclusively, reorganization is warranted only if creditors would agree ex-ante to a

hypothetical sale of assets instead of a true one. Baird believes that such bargain is

improbable especially when the debtor is a publicly held corporation.9 Indeed, a market

sale does not necessarily destroy the going concern value of the debtor for the later can be

sold as a functioning entity. A market sale provides a superior valuation than a

hypothetical one, which only imperfectly mimics market appraisals. Furthermore, third

party buyers bear the consequences of wrongly valuing the bankrupt. Judges with much

4 Thomas H. Jackson, Translating Assets and Liabilities to the Bankruptcy Forum, 14 J. OF LEGAL STUDIES 73, 114 (1985) 5 Id. 6 See e.g., Michael C. Jensen, Corporate Control and the Politics of Finance, 4 J. OF APPLIED CORPORATE

FIN. 13 (1991). 7 Douglas G. Baird, The Uneasy Case for Corporate Reorganization, 15 J. OF LEGAL STUDIES 127 (1986) (hereinafter, Baird, The Uneasy Case for Corporate Reorganization) 8 Id. at 127 9 Id. at 128


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limited business experience cannot better value the debtor’s business.10 Baird’s approach

would limit the role of judges to what he claims they do best: dividing the proceeds

among creditors by strictly following the absolute priority rule. Such proposals became

known as “auction bankruptcy.”

Others scholars take the opposite stance. To Professor Elizabeth Warren, the

bankruptcy system reflects a “deliberate decision to pursue different distributional

objectives from those that the de facto scheme of general collection law embodies.”11

Parties that might enjoy absolute priority outside bankruptcy could legitimately be asked

to share some of the burdens of insolvency to the benefit of weaker and non-adjusting

junior stakeholders. In an ideologically significant reversal, Professors Thomas Jackson

and Robert Scott imperfectly but surely rejoin Warren in defending at least some

redistribution in bankruptcy on efficiency grounds.12 Typically, costs are assigned to the

best monitor of risks. By assigning and transferring risks this way, the overall cost of

capital decreases.13 However, individual risk-bearing techniques cannot prevent nor limit

the risks of common disasters. These are contingencies that are inherent to all business

activities and whose materialization or consequences cannot be influenced by the actions

of individual parties, such as those of competent or incompetent managers, or those of

good or not so good monitors of the debtor. Common disasters can be addressed only by

devising a risk-sharing mechanism that would reduce the amount of uncertainty and the

10 Id. at 136-38. Citing also Walter J. Blum, The Law and Language of Corporate Reorganization, 17 U. OF

CHICAGO L. REV. 565, 577-8 (1950); Paul F. Festersen, Equitable Powers in Bankruptcy Rehaiblitation:

Protection of the Debtor and the Doomsday Principle, 46 AM. BANKR. L. J. 311, 329 (1972); J. Ronald Trost, Corporate Bankruptcy Reorganizations: For the Benefit of Creditors or Stockholders? 21 UCLA L. REV. 540, 548-9 (1973) 11 Elizabeth Warren, Bankruptcy Policymaking in an Imperfect World, 92 MICH. L. REV. 336, 353 (1993) 12 See Thomas H. Jackson & Robert E. Scott, On the Nature of Bankruptcy: An Essay on Bankruptcy

Sharing and the Creditors' Bargain, 75 VA. L. REV. 155 (1989) 13 Id. at 166, citing Thomas H. Jackson & Anthony T. Kronman, Secured Financing and Priorities Among

Creditors, 88 YALE L.J. 1143 (1979)


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potential for loss that each party faces in the case these risks materialize.14 To Jackson

and Schott, it is impossible to distinguish common disasters from those that can be

blamed on individual actions ex-ante. The important transaction costs that this exercise

entails would exceed the benefits of the bargain especially for repeat lenders. “A prepaid

insurance scheme that effects a partial across-the-board reduction in the returns to

secured creditors may be the only feasible implementation option.”15 Such prepaid

insurance scheme lowers further the risk of capital and increases on average the debtor’s

overall value and creditors’ overall returns.

Whatever are the reasons justifying such a claim, those who defend redistribution

in financial distress defend also the process of judicial bargaining where judges,

creditors, and debtors actively participate in valuing the assets and in shaping the

outcome of financial distress.16 To policymakers and countries that aim to reform the

laws of debtors and creditors, the question remains plain. (1) Which system, if any, is

more efficient: judicial or auction bankruptcy? (2) In case judicial bankruptcy is superior,

how re-distributional should it be? Should bankruptcy be biased toward debtors and

toward preserving their going-concern value or should it be biased toward protecting

creditors’ pre-bankruptcy contractual rights at the expense of debtors’ chance to

reorganize and survive? (3) Finally, are such biases in bankruptcy law pre-determined by

factors such as legal institutions, culture, and wealth? This paper proposes to answer

14 Id. 15 Id. at 168 16 See e.g., Julian R. Franks & Walter N. Torous, A comparison of financial recontracting in distressed

exchanges and chapter 11 reorganizations, 35 J. OF FIN. ECON. 349, 362-5 (1994) (showing that the deviation in absolute priority rule in bankruptcy is the price of the option that the debtor in possession has to delay repayment by getting in Chapter 11, where the price is higher the more the company’s value is

close to the debt value.)


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these questions by conducting a cross-country empirical study in a representative sample

of 50 jurisdictions.

Countries adopt different bankruptcy rules reflecting different political and

economic choices. A cross-country study can identify and measure the effects that

different bankruptcy policies have on the supply and cost of capital. The availability and

affordability of capital are major indicators of financial development. In numerous

articles, Professor Shleifer and others find that the supply of credit positively correlates

with higher creditor protection.17 Some have raised strong methodological concerns with

respect to these studies.18 More importantly, these studies focused on very narrow aspects

of bankruptcy law, mainly the grab power of secured creditors and their ability to bail

out of the collective proceeding.19 In other words, these studies have investigated the

effects of auction bankruptcy. No empirical study has ever attempted to analyze

comprehensively the major building blocks of bankruptcy statutes and to empirically

measure the effects of the collective procedure as such on various financial outcomes.20

By measuring the effects of collective proceedings on financial development, this paper

provides empirical evidence as to which bankruptcy approach, if any, is more conductive

17 Rafael LaPorta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W. Vishny, Law and Finance, 106 J. OF POLITICAL ECON. 1113 (1998) (hereinafter LaPorta et al., Law and Finance); Simeon Djankov, Caralee McLiesh and Andrei Shleifer, Private Credit in 129 Countries, Working paper (http://post.economics.harvard.edu/faculty/shleifer/papers/private_credit_jan23.pdf) (January 2006) (hereinafter Djankov et al., Private Credit in 129 Countries). 18 Holger Spamann, On the Insignificance and/or Endogeneity of La Porta et al.'s 'Anti-Director Rights Index' under Consistent Coding, Harvard Law School John M. Olin Center Discussion Paper No. 7 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=894301) (January 2006) (hereinafter, Spamann); Sofie Cools, The Real Difference in Corporate Law Between the United States and Continental Europe: Distribution of Powers, Harvard John M. Olin Discussion Paper No. 490 (http://ssrn.com/abstract=623286) (September 2004). 19 The LLSV Creditors’ Right Index or CRI. 20 For a comprehensive review of the literature in the field, see e.g., Azar, Ziad Raymond , "Bankruptcy Policy, Legal Heritage, and Financial Development: An Agenda for Further Research." (May 2007). Available at SSRN: http://ssrn.com.ezp1.harvard.edu/abstract=1079704 (hereinafter, Azar, Agenda for

Further Research).


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to growth and efficiency: collective procedures with judicial bargaining or market

solutions to financial distress such as auction bankruptcy. It also provides decisive

answers as to how re-distributional bankruptcy statutes should be and the effects that

legal institutions, culture, and wealth differences have in determining bankruptcy policies

and choices. The Bankruptcy Index that this paper proposes provides policymakers with a

roadmap for drafting efficient bankruptcy statutes.

Using the guidance of the literature in this field, I identify dispositions that are

core to any modern bankruptcy statute. I then prepare a survey that investigates these

aspects of bankruptcy law (the “Bankruptcy Survey”) and send it to local experts around

the world.21 In Bankruptcy Policy – A Review and Critique of Bankruptcy Statutes and

Practices in Fifty Countries Worldwide,22 I have extensively studied the reasons that

justify my focusing on these core bankruptcy dispositions as well as the theoretical and

conceptual foundations that justify the protocol I have adopted in this paper to code

respondents’ answers. This paper takes the reasoning therein as a starting point without

further discussion with the only aim to explore and describe the collected data and the

corresponding observations and conclusions resulting for that exercise.

Section I describes the method that I have used throughout the empirical

investigation stage. The survey provides detailed information that allows respondents to

follow uniform references and assumptions when providing their answers. The survey

avoids general conceptual questions whose terms and definitions can vary across

21 Appendix A presents the latest version of the Bankruptcy Survey that I have sent to local bankruptcy experts worldwide. A 400-pages country-by-country documentation reflecting a detailed summary of (i) the answers received for each country and (ii) telephone interviews is also available online at http://www.law.harvard.edu/academics/graduate/sjd_candidates/ziadazar. 22 Azar, Ziad Raymond, "Bankruptcy Policy: A Review and Critique of Bankruptcy Statutes and Practices in Fifty Countries Worldwide." (May 2007). Available at SSRN: http://ssrn.com.ezp1.harvard.edu/abstract=1079702 (hereinafter, Azar, Bankruptcy Policy).


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jurisdictions. It uses detailed case studies and asks respondents to predict their outcome

based on the law as practiced in their jurisdictions. The survey is flexible enough to treat

equally functionally-equivalent concepts of law. However, it is also standardized to

guarantee the comparability of the answers among various jurisdictions. To buttress the

paper’s method, I research the commercial and bankruptcy codes of the countries that are

part in this study when these are available in English and French. I rely on secondary

sources otherwise. The purpose of this exercise is to highlight any discrepancies that

could exist between the respondents’ answers to the bankruptcy questionnaire and the

information that primary and secondary sources provide. I address and clarify these

inconsistencies by conducting a twenty-minute telephone interview with all local

participants.

The project’s original objective was to study the largest possible number of

countries with a population of more than 2 million. This ad hoc limitation aimed to

exclude economies of minor relevance from this research’s scope. The fifty countries that

are effectively included in this study represent a sample where I was successful in

identifying local experts willing to answer questions with respect to their jurisdiction’s

bankruptcy system. One hundred and one judges, practitioners, and academics worldwide

have taken part in this empirical investigation. Among them, there are thirteen judges

who are appointed to the Supreme Court in their respective countries, forty-eight

partners, five law professors, and numerous experts who extensively wrote on bankruptcy

law in their jurisdictions. I collected fifty six written answers, and conducted fifty two

international telephone interviews. The sample that I use to conduct this research includes

all the originators of legal traditions (i.e. France, Germany, Scandinavian countries, and


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the United Kingdom), eighteen out of the twenty four OECD countries, twenty one out of

the fifty six high-income World Bank member countries, ten upper middle-income

countries, twelve lower middle-income countries, and seven low-income countries. The

sample represents all legal traditions, all income groups, and is spread over all

geographical locations.

Using the Bankruptcy Survey, I construct in Section II a comprehensive,

objective, transparent, and easily replicable index on bankruptcy law that I call the

Bankruptcy Index (BI). The BI is a combination of two sub-indexes: (1) the Pro-Debtor

Index (PDI) and (2) the Pro-Creditor Index (PCI).

The PDI tests the impact of financial distress on the ability of the failed company

to continue its operations with minimal disturbance. In this context, it is a gauge of the

extent of the second chance that bankruptcy law affords to failing entities. Based on my

earlier work on bankruptcy policy,23 I identify a range of bankruptcy rules that enable the

debtor to take the efficient action and to continue its operations with minimum disruption.

(1) Management should not be displaced upon filing for reorganization; (2) there should

be no restrictions for filing for reorganization; (3) the mechanism for selling the debtor’s

assets in liquidation should be efficient; (4) courts should timely issue turnover orders in

order to let the estate recover assets that are essential for the survival of the debtor; (5)

the debtor should be able to assume, assign and reject executory contracts; (6) the debtor

should have enough opportunities to get post-petition financing. Other rules aim to

increase the pool of assets that are available to the debtor by bringing back to the estate

properties that would have been lost otherwise. These are (7) the strong-arm powers of

23 See Azar, Bankruptcy Policy, supra note 22.


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the trustee, and (8) preference rules. The more available are these rules, the higher is PDI.

Ideally, a bankruptcy regime should score high on PDI.

The PCI is a measure of creditors’ protection in bankruptcy. It is a collective

index that takes into account the interests of all creditors – i.e. secured and unsecured. It

focuses on the protections that the law affords to all creditors in order to protect their pre-

bankruptcy contractual entitlements. In this context, if LLSV Creditors’ Right Index

(CRI) is tantamount to auction bankruptcy, PCI is tantamount to bankruptcy bargaining.

When extending credit, a secured lender bargains mainly for the following two

rights: (1) the right to be repaid without delay upon default – this means that creditor-

rights are better protected if filing for reorganization does not automatically stay secured

creditors’ enforcement actions, or if secured creditors receive adequate protections that

put them in a similar position as if their rights were not stayed – and (2) the right to be

paid in absolute priority up to the value of the collateral and its proceeds. Moreover,

creditors in general are more protected if: (3) management is displaced upon filing for

reorganization; (4) there are restrictions for filing for reorganization; (5) creditors

actively participate in the reorganization procedure and vote on the reorganization plan;

(6) the reorganization plan cannot be confirmed if it is not in the best interest of the

creditors; and (7) the law expressly provides a time limit after which, the court is obliged

to reconsider the reorganization case, to convert it to a liquidation procedure, or to simply

lift the stay on individual enforcement actions. A high PCI reflects higher creditor

protection in bankruptcy. The higher the PCI, the more bankruptcy law is able to prevent

equity holders from abusing the system and forum shop.


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Theoretically, an optimal bankruptcy law should preserve the going concern value

of a distressed firm (i.e., score high on PDI) while minimally infringing pre-bankruptcy

contractual entitlements (i.e., score high on PCI). An inefficient bankruptcy system fails

to preserve the going concern value of a failing firm and extensively infringes on pre-

bankruptcy contractual entitlements (i.e., scores low on PDI and on PCI). There is no

clear theoretical answer with respect to the efficiency of a bankruptcy law that scores low

on PDI and high on PCI or vice versa. This last question is important because drafting

bankruptcy statutes is an exercise that balances between seemingly conflicting goals; how

far should bankruptcy statute go to preserve the going concern value of the debtor at the

expense of creditors’ pre-bankruptcy contractual entitlements? This model contributes to

the literature by exploring these major issues. It empirically tests the accuracy of the first

two claims. It also provides a definitive answer to the third question by testing the

relative role and importance of PDI and PCI with respect to efficiency and development

outcomes.

In Section III, I analyze the scores that the surveyed countries have obtained on

BI, PDI, and PCI. I find that differences in legal institutions (i.e. legal heritage), culture

(i.e. religion), and wealth (i.e. per-capita income) determine bankruptcy rules and the

observed worldwide discrepancies in bankruptcy policies. This is especially true with

respect to creditors’ protection where the effect of legal heritage is particularly

pronounced. Countries with a German and Scandinavian Civil Law heritage protect

creditors the best in bankruptcy. Countries with a French Civil Law heritage protect

creditors the worst. The differences between countries with a French Civil Law heritage

on the one hand and all other groups of countries with a different legal heritage on the


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other hand are statistically significant at the one percent level. This confirms various

other cross-country empirical studies that have previously highlighted this phenomenon.24

Whereas earlier studies have distinguished the performance of French Civil Law

countries from the performance of France itself and have pointed to the lack of reform in

former French colonies as a possible explanation to the relatively weaker performance

that French civil law countries typically display in such empirical studies, the data in this

paper contradict these arguments. Here, France protects creditors the worst: France scores

10 percent on the PCI and ranks last only before Morocco’s score of seven percent.25 By

contrast, legal institutions (i.e. legal heritage) and culture (i.e. religion) do not

significantly determine differences in pro-debtor rules. Different policy choices are here

random or possibly, path dependent. I find some evidence that show that richer countries

are better able to preserve the going concern value of debtors in bankruptcy than poorer

countries (i.e. PDI correlates with per-capita income when not controlling for religion).

In Section IV, I investigate the role of bankruptcy law in determining financial

development through its effect on the supply and cost of capital. The analysis highlights

the benefits of scoring high on BI. High BI scores significantly correlate with higher

ratios of private credit to GDP, higher recovery rates in bankruptcy, and lower lending

rates. Countries that wish to reform their bankruptcy regime can adopt the Bankruptcy

Index as a road-map toward efficiency. The analysis also reveals that erring toward

privileging creditors in bankruptcy is rarely a wrong policy choice (i.e., high PCI, low

24 See e.g., LaPorta et al., Law and Finance, supra note 17; Djankov et al., Private Credit in 129 Countries, supra note 17; THE WORLD BANK GROUP, DOING BUSINESS IN 2004, UNDERSTANDING REGULATION (2003) (hereinafter, DB04) 25 Note, however, that this empirical study investigates bankruptcy statutes as of January 2003. Since then, France has greatly reformed its bankruptcy regime with the aim to improve creditors’ protection and creditors’ participation in the collective proceedings. Today, France’s PCI score would equal 31 percent.


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PDI). PCI alone strongly correlates with higher ratios of private credit to GDP and higher

recovery rates in bankruptcy. Privileging debtors in bankruptcy at the expense of

creditors is always inefficient (i.e., high PDI, low PCI). PDI alone correlates with lower

ratio of private credit to GDP and negatively, but insignificantly, affect creditors’

recovery rate in bankruptcy. However, data show that adopting a balanced approach,

whereby the statute preserves the going concern value of the debtor by giving the debtor

enough powers to reorganize without excessively expropriating creditors’ pre-bankruptcy

contractual entitlements, remains the optimal approach (high PDI and high PCI scores).

Data also show that collective procedures with judicial bargaining (i.e., BI) are

superior determinants of financial development than auction bankruptcy (i.e., CRI). BI,

PCI, and CRI positively correlate with the ratio of private credit to GDP at the one

percent level of significance. Here, CRI and PCI display a slightly superior statistical

performance. But CRI’s and PCI’s statistical performance is not superior enough to BI’s

performance in order to conclude that bankruptcy statutes should exclusively protect

creditors or should mimic auction bankruptcies. This is especially true when one notes

that BI seems an economically superior determinant of the ratio of private credit to GDP

in the relevant regression. A one percent increase in BI increases credit supply by 1.4

units whereas a similar increase in CRI or PCI causes the same ratio to increase only by

0.77 and 0.819 units respectively. BI impacts the supply of credit 70 and 80 percent more

than CRI and PCI. By contrast, results are more conclusive when one compares the role

that BI, CRI, and PCI have in determining creditors’ recovery and banks’ private lending

rates. BI seems a better determinant of creditors’ recovery in bankruptcy both statistically

and economically. In addition, BI negatively correlates with banks’ private lending rates


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whereas CRI and PCI do not. Even if they did, BI determines banks’ private lending rates

at least twice as much as PCI and three times more than CRI. Overall, collective

procedures seem more equitable and more conductive to financial development than

divisive auction bankruptcies. Section V concludes.

SECTION I – METHODOLOGY

In this section, I explain the method that I have used throughout my research.

Section A explains how I have selected the countries that are part of this dissertation.

Section B details how I have identified local experts to answer the bankruptcy survey.

Section C stresses the relevance and representativeness of the country sample. Finally,

Section D details the checks, diligence, and robustness tests I undertook to buttress the

accuracy of the collected data.

A – CRITERIA FOR SELECTING THE COUNTRIES COVERED BY THE STUDY

This project’s original objective was to study the largest possible number of

countries with a population of more than 2 million.26 This ad hoc limitation aimed to

exclude economies of minor relevance from this research’s scope. The 50 countries that

are effectively included in this study represent a sample where I was successful in

identifying local experts that are willing to answer questions with respect to their

jurisdiction’s bankruptcy system. For example, the reason why Tunisia and Paraguay –

not Libya and Chile – are included in this study is because I have succeeded in

26 I report midyear 2004 population statistics as published in World Development Indicators 2005 available

at http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,menuPK:232599~pagePK:64133170~piPK:64133498~theSitePK:239419,00.html (November 30, 2006)


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identifying potential respondents that answered a bankruptcy survey in the first two

countries and have failed in identifying a willing participant in the later two.

B – IDENTIFYING LOCAL RESPONDENTS

One hundred and one judges, practitioners, and academics representing 50

jurisdictions worldwide have taken part in this empirical investigation. This study draws

authority from the number and skills of local professionals who have contributed their

expertise to support its findings. It was hence essential that I identify respondents with

strong and certified proficiency in the fields of business and bankruptcy laws. I did so

using four different routes: (1) by networking; (2) by contacting authors who wrote

articles or chapters on bankruptcy laws in seminal U.S. and English publications; (3) by

using the resources of the World Bank’s Doing Business project that a re available to the

public; and (4) by asking for and getting the help of the International Development Law

Organization.

a. Networking

As a consultant for the World Bank, I had the opportunity to meeting and working

with bankruptcy judges from various jurisdictions during a week-long seminar on

bankruptcy law that was held at Pepperdine University – Malibu, California – on May

19-23, 2003.27 More than seventy high-ranking bankruptcy judges, representing more

than 60 countries, took part to this seminar. The participants to this seminar represented a

27 For more information on the Insolvency Initiative of the World Bank, the Global Judge Forum, and other seminars, see http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/LAWANDJUSTICE/GILD/0,,contentMDK:20086184~menuPK:146153~pagePK:64065425~piPK:162156~theSitePK:215006,00.html (November 30, 2006)


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pool of potential respondents that I have targeted in order to conduct this empirical

investigation.

The reasons for targeting this pool of potential respondents are straightforward.

Most participants represented countries eligible to be included in this dissertation.

Moreover, these high-ranking judges represented the most reliable source of information

with respect to bankruptcy law in their respective jurisdictions. These judges interpret

and “make” the law in their countries. The answers they provide are most probably

similar to those they will provide when they adjudicate real cases with facts similar to the

assumptions that the bankruptcy survey provides.

I invited most of these judges via email to participate in this empirical

investigation. When possible, I followed up with a phone call. Participation was on a

voluntary basis. Respondents committed to answer the survey and follow up questions,

and agreed to be interviewed by phone in case further clarification is required. I promised

to acknowledge respondents’ contribution and to send them a copy of the investigation’s

results when these are published. Twenty three judges answered the survey.28 Among

them, thirteen are appointed on the supreme/high court of their jurisdiction. The

remaining participants are senior bankruptcy judges, senior appellate judges, or judges

affiliated with the ministry of justice in their respective countries.29

b. Authors

Collier International Business Insolvency Guide, published by Lexis Nexis,

covers in detail the bankruptcy systems and laws of more than 35 jurisdictions

28 The response rate is around 32.8%. 29 See infra table I.


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worldwide.30 Every chapter in Collier International is devoted to the law in one particular

country and is written by a leading academic or practitioner in the bankruptcy field.

Another publication of similar nature is Getting the Deal Through, Insolvency &

Restructuring, published by Law Business Research Ltd. in collaboration with the

International Bar Association.31 Getting the Deal Through covers more than 40

jurisdictions. Every chapter is devoted to one jurisdiction and is written by local experts

chosen from among the most reputable bankruptcy practitioners in every country. I

approached most of the authors from Collier International and Getting the Deal Through

by e-mail and invited them to participate in this empirical investigation. Twenty two

practitioners and academics accepted the invitation.32

c. World Bank’s Doing Business Respondent Pool

Since 2003, the World Bank Group has launched a major initiative aimed at

studying the business laws and regulations in as much as 175 jurisdictions around the

world.33 The Doing Business series examines a broad scope of topics that ranges from

investigating the basic legal and administrative barriers that hinder the formation of new

companies, to studying more complex issues in business taxation, business licensing, and

corporate insolvency and restructuring in all 175 countries.34 To accomplish this titanic

work, the Doing Business team has access to the services and advice of more than 4,000

local regulators and practitioners worldwide. These are subject to a rigorous selection

30 COLLIER INTERNATIONAL BUSINESS INSOLVENCY GUIDE (Richard F. Broude et al. eds., Lexis Publishing 2005). 31 GETTING THE DEAL THROUGH, INSOLVENCY AND RESTRUCTURING IN 43 JURISDICTIONS WORLDWIDE (Bruce Leonard ed., Law Business Research 2005) 32 The response rate is around 16.5%. 33 THE WORLD BANK, DOING BUSINESS IN 2007: HOW TO REFORM (2007) 34 For more information on the Doing Business initiative, see http://www.doingbusiness.org (November 30, 2006)


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process that is based on their proven expertise in the relevant legal field. The Doing

Business respondents’ credentials and contact information are publicly available on

Martindale Hubbell35 and on the World Bank’s Doing Business website.36 I invited by

email those respondents with bankruptcy expertise to participate in this empirical

investigation. Forty eight participants accepted the invitation.37

d. International Development Law Organization

To increase the coverage of this dissertation, I requested the help of the

International Development Law Organization (IDLO) who agreed to sponsor the

survey.38 IDLO is an organization that aims to encourage and facilitate the improvement

and use of legal resources in the development process.39 It has a strong network of

qualified lawyers in developing and remote countries where it is hard to find local experts

with the required computer and language skills to participate in such research projects.

IDLO sent the survey in a mass email to its network of lawyers and alumni to solicit their

participation in this study. This effort provided 8 additional participants. Table 1 lists all

101 respondents with their title and professional affiliation.

Table 1: Respondents’ Name, Title, and Affiliation

Country Name Title Affiliation

Algeria H. Ghaddar Partner Ghaddar Law Firm

Sahri Slaimi Fadila Professor University of Annaba, School of Law

Samir Hamouda Partner Hamouda Law Firm

Nebiha Zerigui Sr. Associate Hamouda Law Firm

Fériéle Oulounis Associate Hamouda Law Firm

Argentina Alfredo L. Rovira Partner Brons & Salas

35 http://www.martindale.com 36 http://www.doingbusiness.org/LocalPartners 37 The response rate is about 16%. 38 Marcelo R. Lu, a Professional Associate with the World Bankk Group (2004) contacted IDLO’s Alumni and Partner Relation Officer, Catherine Perrigaud. 39 For more information on IDLO, see http://www.idlo.int


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Mariana Sierra Associate Brons & Salas

Alejandro D. Fiuza Partner Marval, O'Farrell & Mairal

Pablo J. Gayol Associate Marval, O'Farrell & Mairal

Australia Michael Quinlan Partner Allen Arthur Robinson

Dora Jabbour Partner Jabbour Law Firm

Austria Alexander Klauser Partner Brauneis, Klauser & Prändl

Gregor Maderbacher Associate Brauneis, Klauser & Prändl

Belgium Ivan Verougstraete President Supreme Court of Belgium

Paul L.C. Torremans Professor University of Gent, School of Law

Brazil Thomas Felsberg Partner Thomas Felsberg and Associates

Andrea Acerbi Associate Thomas Felsberg and Associates

Luciana Laquima Judge Bankruptcy Court

Cameroon Sylvain Souop Partner Souop Law and Finance

Canada James Farley Justice The Supreme Court of Ontario

J.A. Carfagnini Partner Goodmans LLP

David B. Bish Sr. Associate Goodmans LLP

Croatia Mario Vukelic Judge High Comm. Court of the Rep. of Croatia

Ivan Dusic Partner Vukmir Law Office

Denmark Jeanette Melchior Sr. Dep. Judge Maritime & Comm. Court of Copenhagen

Finland Pekka Jaatinen Partner Castrén & Snellman

France Jean-Luc Vallens Judge Ministry of Justice

Germany Heinz Vallender President Cologne Bankruptcy Court

Stefanie Rüntz Judge Bankruptcy Court

Kolja von Bismark Partner Clifford Chance

Stefan Sax Sr. Associate Clifford Chance

Greece George V. Bazinas Partner Anagnostopoulos Bazinas Fifis

Constantinos N. Klissouras

Partner Anagnostopoulos Bazinas Fifis

Haiti Durand R. Jeanty Partner Cabinet Jeanty

Honduras Roger Marin Professor Univ. Nacional Autónoma de Honduras

Hong Kong Nicholas D. Hunsworth Partner Johnson Stokes & Master

Hungary Ágnes Szent-Ivány Partner Sándor, Szegedi, Szent-Ivány & Komromi Attorneys at Law

India Dara Mehta Sr. Partner Little & Co.

Rajas Kabekar Associate Little & Co.

Indonesia Ernst G. Tehuteru Partner Ali Budiardjo, Nugroho, Reksodiputro

Theodoor Bakker Of Counsel Ali Budiardjo, Nugroho, Reksodiputro

Agus Ahadi Deradjat Partner Ali Budiardjo, Nugroho, Reksodiputro

Herry Nuryanto Kurniawan

Sr. Associate Ali Budiardjo, Nugroho, Reksodiputro

Kevin Omar Sidharta Associate Ali Budiardjo, Nugroho, Reksodiputro

Ireland Jane Marshall Partner McCann FitzGerald

Italy Luciano Panzani Judge Supreme Court of Italy

Japan Shinichirou Abe Partner Asahi Koma Law Offices


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Jordan Yousef S. Khalilieh Managing Partner Rajai K. W. Dajani & Associates

Basem Milhim Professor University of Jordan, School of Law

Korea Chiyong Rim Judge Bankr. div. of Central Dist. Court of Seoul

Yousuk Moon Judge Bankr. div. of Central Dist. Court of Seoul

Lebanon Nabil Mallat Partner Hyam Mallat Law Offices

Chantale Joseph Fadous Partner Etude Me Chantale Fadous

Raymond Azar Partner Raymond Azar Law Offices

Rabih Hatem Associate Raymond Azar Law Offices

Malaysia Michael Lim Partner Shearn Delamore & Co.

Marhaini Nordin Sr. Legal Ass. Shearn Delamore & Co.

Mexico Carlos Sanchez Mejorada Partner Sanchez Mejorad Y Associados, S.C.

Morocco Fatima Seffar President Appellate Court of Marrakech

Amin Hajji Partner Hajji Law Offices

Netherlands Herman Unger Judge The Netherlands Commercial Court

Norway Ernst Moe Sr. Judge Stavanger bankruptcy court

Johan Ratvik Partner Advokatfirma DLA Nordic DA

Line Voldstad Associate Advokatfirma DLA Nordic DA

Pakistan Jawad S. Khawaja Judge Lahore High Court

Ali Adnan Ibrahim Sr. Associate Afridi & Angels

Paraguay Luis A. Breuer Partner Berkemeyer Attorneys and Counselors

Yolanda Z. Pereira Associate Berkemeyer Attorneys and Counselors

Maria Gwynn Associate Berkemeyer Attorneys and Counselors

Peru Gonzalo Raffo Sr. Associate Estudio Aurelio Garcia Sayàn Abogados

Guilhermo Auler Partner Forsyth & Arbe Abogados

Philippines Teodoro D. Regala Partner Abello Concepcion Regala & Cruz

Poland Jan M. Zdzienicki Partner Janicka-Sosna, Namiotkiewicz, Clifford Chance sp.k.

Romania Edita Lovin Judge Romania Supreme Court

Cristi Sava Partner Sava Law Firm

Theodor Nicolescu Dep. Sec. of State Prime Minister’s Chancellery

Russia Irina Strizhakova Dep. Manager Andreas Neocleous & Co.,

Natalia G. Prisekina Partner Russin & Vecchi

Senegal Pap Omar Sakho Judge Supreme Court of Senegal

Singapore Patrick Ang Partner Rajah & tann

Slovenia Miodrag Dordevic Justice Supreme Court of the Republic of Slovenia

South Africa

Ralph Zulman Judge Supreme Court of South Africa

Sweden Lars Mikael Mellqvist Judge Svea Hovratt

Tanzania Steven Bwana Judge Commercial Court of Tanzania

Charles R.B. Rwechungura

Sr. Partner Rex Attorneys

Thailand Auen Kunkeaw Chief Judge Supreme Court

Tunisia Elyès Ben Mansour Partner Avocats Conseils Associés

Safouen Ben Abdallah Partner Challenge International Consulting


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Uganda Alan Shonubi Sr. Partner Shonubi,Musoke and Co. Advocates

Monica Kalyegira Mugenyi

Legal Officer Privatisation & Utility Sector Reform Project

U.K. Gavin Lightman Justice High Court

Ian Fletcher Professor University College London

David Marks Barrister

U.S.A. Ziad Raymond Azar SJD Candidate Harvard Law School

Venezuela Arturo De Sola Partner De Sola, Pate & Brown

Thomas J. Pate Partner De Sola, Pate & Brown

Grecia Sosa Associate De Sola, Pate & Brown

Fernando Peláez-Pier Partner Hoet Peláez Castillo & Duque

Carlos Dominguez Partner Hoet Peláez Castillo & Duque

Henrique Castillo Partner Travieso Evans Arria Rengel & Paz

Pedro Rengel Nuñez Partner Travieso Evans Arria Rengel & Paz

C – RELEVANCE AND REPRESENTATIVENESS OF THE SAMPLE

This study investigates fifty countries worldwide. However, its findings and

recommendations are more universal in nature. To see why, I study in this section the

relevance and representativeness of the sample. It is challenging to compare the countries

that are included in this research with those that are not. There is an unlimited amount of

indicators that one could take into consideration when comparing the similarities and

differences between two countries. Such indicators include, for example, the level of

literacy or the life expectancy of a country’s population. One could compare a country’s

political stability, its ethnic and racial minorities, or the state of its infrastructure, among

other things. Moreover, some variables cannot be objectively compared because of

idiosyncrasies relevant to each country. For example, the political right in France is

typically more leftist than the political left in the U.S.A;40 correlating social orientations

with the generic denomination of the ruling party at a given time in history could be

misleading. To study the representativeness of a sample in cross-country studies, one

should focus on few important indicators that are relevant to the investigated topic. Here, 40 See e.g., MARK J. ROE, POLITICAL DETERMINANTS OF CORPORATE GOVERNANCE (2003).


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I utilize indicators that are typically used in the comparative corporate law field. (a) The

country sample I use in this study includes relevant economies. (b) Moreover, it

represents (1) all legal traditions, (2) all income groups, and (3) all geographic locations

around the globe. Table 2 lists the 50 countries and their legal heritage, income group and

geographic dispersion.

Table 2: List of Countries and their characteristics

Countries Legal Origin Income Level Geographic Location

Algeria French Lower Middle Income Middle East & North Africa

Argentina French Upper Middle Income Latin America & Caribbean

Australia English High Income East Asia & Pacific

Austria German High Income Western Europe

Belgium French High Income Western Europe

Brazil French Lower Middle Income Latin America & Caribbean

Cameroon French Low Income Sub-Saharan Africa

Canada English High Income North America

Croatia German Upper Middle Income Eastern Europe & Central Asia

Denmark Scandinavian High Income Western Europe

Finland Scandinavian High Income Western Europe

France French High Income Western Europe

Germany German High Income Western Europe

Greece French High Income Eastern Europe & Central Asia

Haiti French Low Income Latin America & Caribbean

Honduras French Lower Middle Income Latin America & Caribbean

Hong Kong (China) English High Income East Asia & Pacific

Hungary German Upper Middle Income Eastern Europe & Central Asia

India English Low Income South Asia

Indonesia French Lower Middle Income East Asia & Pacific

Ireland English High Income Western Europe

Italy French High Income Western Europe

Japan German High Income East Asia & Pacific

Jordan French Lower Middle Income Middle East & North Africa

Korea German High Income East Asia & Pacific

Lebanon French Upper Middle Income Middle East & North Africa

Malaysia English Upper Middle Income East Asia & Pacific

Mexico French Upper Middle Income Latin America & Caribbean

Morocco French Lower Middle Income Middle East & North Africa

The Netherlands French High Income Western Europe

Norway Scandinavian High Income Western Europe


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Pakistan English Low Income South Asia

Paraguay French Lower Middle Income Latin America & Caribbean

Peru French Lower Middle Income Latin America & Caribbean

The Philippines English Lower Middle Income East Asia & Pacific

Poland German Upper Middle Income Eastern Europe & Central Asia

Romania French Lower Middle Income Eastern Europe & Central Asia

Russia French Upper Middle Income Eastern Europe & Central Asia

Senegal French Low Income Sub-Saharan Africa

Singapore French High Income East Asia & Pacific

Slovenia German High Income Eastern Europe & Central Asia

South Africa English Upper Middle Income Sub-Saharan Africa

Sweden Scandinavian High Income Western Europe

Tanzania English Low Income Sub-Saharan Africa

Thailand English Lower Middle Income East Asia & Pacific

Tunisia French Lower Middle Income Middle East & North Africa

Uganda English Low Income Sub-Saharan Africa

United Kingdom English High Income Western Europe

United States of America English High Income North America

Venezuela French Upper Middle Income Latin America & Caribbean

a. Relevance of the Sample

This dissertation studies countries that are of major interest to the academic

community in the field of comparative corporate and bankruptcy laws. The sample

includes all the originators of legal traditions: France for French civil law; Germany for

German civil law; Denmark, Finland, Norway, and Sweden for Scandinavian civil law;

England for the common law; and the U.S. for its influential approach to corporate

bankruptcy.41 It includes eighteen out of the twenty four OECD states42 and 21 out of the

56 high-income World Bank member countries.43 The sample also comprises prominent

emerging economies like Argentina, Brazil, India, Indonesia, Malaysia, Mexico,

Romania, Singapore, and Slovenia among others.

41 I follow the classification that the Doing Business Project has adopted in DB04, supra note 24. For more information on how countries were divided into different legal families, see La Porta et al., Law and

Finance, supra note 17, at 1117-21. 42 This represents 75 percent of all OECD countries. 43 This represents 37.5 percent of all World Bank High Income countries.


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b. Representativeness of the Sample

The sample includes countries that represent (a) all legal traditions, (b) all income

groups, and (c) all geographic classification. To test the representativeness of my sample,

I use as a benchmark the sample that was adopted by the World Bank in its seminal

publication Doing Business in 2004, Understanding Regulation (DB04).44 DB04 is one

of the most comprehensive cross-country studies ever done. It investigates business

regulations and their enforcement in 133 countries around the world. All 133 countries

that are included in DB04 are eligible to be part of this dissertation. It is hence useful to

compare the weight that I give to countries of a particular legal tradition, income group,

and geographic classification with the weight that the World Bank gives to similar

countries in DB04.

i) Legal Origins

The last column of table 3 below compares the weight that each legal tradition

gets in this study – as a percentage of the total number of countries in the sample – to the

weight that each legal tradition gets in DB04. Countries with a French civil law heritage

get similar representation in both studies – i.e. 48%. Countries with Germanic and

Scandinavian civil law heritage get slightly more weight in this study than in DB04. In

general, however, civil and common law countries are represented quasi-identically in

both studies – i.e. 72% for civil law countries in this study v. 73% in DB04 and 28% for

common law countries in this study v. 27% in DB04.

Table 3: Weight of Legal Traditions

Legal Origin Number of Countries Percentage of Total Number

44 Supra note 24


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dissertation v. DB04

1. French civil law 24 48% 48%

2. German civil law 8 16% 14.30%

3. Scandinavian civil law 4 8% 3%

4. Total civil law 36 72% 73%

5. Common law 14 28% 27%

ii) Income Group

The sample is representative of all income groups.45 The last column of table 4

compares the weight that each income group gets in this study – as a percentage of the

total number of countries in the sample – to the weight that each income group gets in

DB04. This study gives slightly more weight to high-income and upper-middle income

countries than the weight these countries get in DB04. Bankruptcy law – especially in its

restructuring aspect – is more relevant to developed and emerging economies than to low

income countries.46 While DB04 studies various aspects of business laws in addition to

insolvency like the regulation of entry, contract enforcement, labor regulation, and credit

bureaus, this dissertation focuses exclusively on bankruptcy and reorganization. It makes

hence more sense for it to focus on a slightly richer sample of countries than the one

DB04 selects.

Table 4: Weight of Income Groups

Income Groups Number of Countries Percentage of Total Number

dissertation v. DB04

1. High Income 21 42% 22.5%

2. Upper Middle Income 10 20% 13.5%

3. Lower Middle Income 12 24% 27.0%

4. Low Income 7 14% 37.0%

45 I use the World Bank regional and income group classifications, available at http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20420458~menuPK:64133156~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html (November 24, 2006) 46 See WORLD BANK, DOING BUSINESS IN 2005: REMOVING OBSTACLES TO GROWTH, 71 (2004) (explaining why poor country should focus less on reorganization law and more on simple enforcement procedures).


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iii) Geographic Classification

The sample includes countries that are geographically spread around the globe.

This fact is highlighted in table 5 below. North and South-America, the Caribbean,

Western and Eastern-Europe, Central, East, and South-Asia, the Pacific, the Middle-East,

North and Sub-Saharan Africa, all geographic locations are represented. Finally, the 50

countries that are covered in this dissertation represent around 34 percent of all countries

with a population of over 2 million.47

Table 5: Geographic Spread

Geographic Classification Number of Countries

1. North America 2

2. Latin America & the Caribbean 8

3. Western Europe 12

4. Eastern Europe & Central Asia 7

5. Middle East & North Africa 5

6. Sub-Saharan Africa 5

7. East Asia & Pacific 9

8. South Asia 2

D – CHECKING THE ROBUSTNESS OF THE ANSWERS

The study covers 50 countries. One hundred and one (101) local judges,

practitioners, and academics took part in this study – an average of two respondents per

country. I received a total of 56 answers48 and conducted 52 interviews. Table 6 below

summarizes these statistics.

Table 6: Number of Answers, Number of Interviews, and Characteristics of Respondents

1. Total number of countries included in this study: 50 countries

47 The United States’ State Department recognizes 193 countries worldwide. Of these countries, approximately 45 countries have a population of less than 2 million. See, http://geography.about.com/gi/dynamic/offsite.htm?zi=1/XJ&sdn=geography&zu=http%3A%2F%2Fwww.state.gov%2Fs%2Finr%2Frls%2F4250.htm (November 25, 2006) 48 By answers, I mean written responses to the bankruptcy survey and/or to completion memorandums that I sent to respondents throughout the empirical investigation stage.


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2. Total number of local respondents: 101 respondents

3. Total number of answers received: 56 answers

4. Total number of interviews held: 52 interviews

5. Total number of participating professors: 5 professors

6. Total number of participating judges: 23 judges

7. Total number of participating bankruptcy practitioners: 72 practitioners It is a very well settled practice in the “law and finance” literature to construct

legal indexes across large samples of countries and to correlate these indexes with

various other economic indicators. The purpose of the exercise is to study the effect of

law on various development outcomes, such as economic growth, unemployment, or the

supply of credit in a given economy, among other things. The method was pioneered by

Raphael La Porta, Florencio Lopez de Silanes, Andrei Shleifer, and Robert Vishny in

their seminal article “law and Finance” that was published in the Journal of Political

Economics in 1998.49 In this article, the authors examined the legal rules that protect

corporate shareholders and creditors in 49 countries. A team of research assistants

answered a number of standard questions by researching the corporate laws of each

country included in the authors’ study. The survey was not sent to local practitioners to

confirm the accuracy of the answers. In their subsequent articles of similar nature, the

authors relied on the answers of one law firm per country.50 Some of these later studies

were not limited as was the case previously to measure the black letter of the law. Two

seminal articles authored by Djankov et al. and published in the Quarterly Journal of

Economics rely on the subjective experience of one law firm per country to solicit

numerical estimates on the time, cost, and number of procedural steps required to go

49 Supra note 17 50 See, e.g., Juan Botero et al., The Regulation of Labor, 119 Q. J. OF ECON. 1339 (2004); Raphael La Porta et al., What Works in Securities Laws? 61 J. OF FIN. 1 (2006); Simeon Djankov et al., Private Credit, supra note 17; Simeon Djankov et al., The Law and Economics of Self-Dealing, NBER Working Paper No. 11883 (2005)


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through complex litigations in a given jurisdiction.51 The method gained in popularity

and in authority among part of the scientific community and peaked when the World

Bank and the International Financial Corporation have adopted it as a basis for their

flagship yearly policy report, the Doing Business Project.52

The method has its limitations. Professor N. Gregory Mankiw, in his now

classical article The Growth of Nations, comprehensively highlights the problems that are

inherent to all cross-country empirical investigations.53 These problems are threefold. The

first is a simultaneity problem – the fact that the right-hand-side variables are not

exogenous but jointly determined with the dependent variable on the left-hand-side of the

equation. In cross-country studies, “there are few, if any,” exogenous variables to use.

The second is a multicollinearity problem.54 Here, the right-hand-side variables are

strongly correlated among each others. “[C]ountries that do things right do most things

right, and those countries that do things wrong do most things wrong.”55 One reason why

the multicollinearity problem is very hard to fix in this kind of studies is the fact that

international data set are crippled with measurement errors. “Everyone who uses cross-

country data admits that many variables are crude proxies at best.”56 Finally, cross-

country studies face a Degrees-of-Freedom Problem. There are limited numbers of

countries on which to run regressions. This is in contrast to the infinite number of

variables that could explain the left-hand-side indicator that is being investigated. The

51 Simeon Djankov et al., The Regulation of Entry, 117 Q. J. OF ECON. 1 (2002); Simeon Djankov et al., Courts, 118 Q. J. OF ECON., 453 (2003). 52 See http://www.doingbusiness.org/MethodologySurveys (November 30, 2006) 53 N. Gregory Mankiw, The Growth of Nations, 1 BROOKINGS PAPERS ON ECON. ACTIVITY 275 (1995). 54 Id. at 304 55 Id. 56 Id. at 305


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results of such cross-country study hinges, hence, on what variables the investigator

chooses to exclude.57

It is hard to find a solution to address the degree-of-freedom problem. Countries

are by definition few in number and, as professor Mankiw puts it, “there appears to be

little choice but to admit the limitations of cross-country… regressions.”58 Cross-country

studies can, however, add interesting and useful facts to our quest for knowledge with

respect to growth; they can “raise our confidence in theories” that explain growth and

economic efficiencies.59 The issue is then to address as best as possible the problems of

simultaneity and multicollinearity. I address the first issue elsewhere in this paper.60

Here, I limit the discussion to the most important aspect for correcting the

multicollinearity problem, namely, the accuracy of the Bankruptcy Index that this

dissertation constructs and uses in the various regressions it proposes. I address this

major concern by following rigorously five procedural steps for data collection: (A) I

design a good bankruptcy survey and identify local respondents with strong experience in

bankruptcy law and the way it is locally enforced; (B) I carry-out rigorous independent

research; (C) I hold lengthy and comprehensive telephone interviews with every local

participant; and (D) I establish transparent and uniform coding rules to assure the

comparability of the information collected and to facilitate their replicability by other

researchers. I have already extensively explained in Section II above the process of

selecting the local experts that have participated to this study. I limit the discussion below

to the remaining four procedural steps.

57 Id. at 306 58 Id. 59 Id. at 304 60 See infra Section IV


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a. Designing a Good Bankruptcy Survey

The accuracy of the data that an empirical investigator collects depends greatly on

the accuracy of the questions that are asked to respondents. The challenges that one faces

when designing a survey are well documented but these are exacerbated when the survey

is to be used on a multi-jurisdictional basis.61 Most importantly, the survey should

combine the rigidity of standardization, which is the essence of any comparative cross-

country study, with enough flexibility to allow for the uncovering of functionally

equivalent concepts among different legal systems. Indeed, what matters is less the black

letter of the law and more its effective implementation on business transactions. Two

notions might look different on the books yet provide similar results when enforced by

local courts. Four features distinguish the bankruptcy survey that I have used for this

empirical research: (a) clear and precise instructions; (b) standardized but functional

questions; and (c) survey available in English and French with on-line support.

i) Clear and Precise Instructions

Japan has five collective procedures; two “liquidation” type procedures – i.e. the

Bankruptcy Procedure (hasan) and the Special Liquidation Procedure (tokubetsu seisan),

and three “reorganization” type procedures – i.e. the Civil Rehabilitation Procedure

(minji saisei), the Corporate Reorganization Procedure (kaisha kosei), and the Company

Arrangement Procedure (kaisha seiri).62 The opening of the first reorganization

procedure – i.e. Civil Rehabilitation Procedure – does not necessarily stay secured

creditors’ individual enforcement actions whereas the opening of the second

61 See e.g., Elizabeth Martin, Survey Questionnaire Construction, in 3 ENCYCLOPEDIA OF SOCIAL MEASUREMENT 723 (Kimberly Kempf-Leonard ed., 2005). 62 Kazuki Okada & Takahiko Itoh, Japan, in GETTING THE DEAL THROUGH: INSOLVENCY AND

RESTRUCTURING IN 42 JURISDICTIONS WORLDWIDE, 189 (2006)


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reorganization procedure – i.e. Corporate Reorganization Procedure – does.63 In India,

the Sick Industrial Companies Act provides very intrusive rules in order to save failing

industrial companies64 whereas non-industrial companies are subject to the more general

Companies Act that greatly protects creditor rights.65 A survey that only asks a local

expert to answer by yes or no to whether there is an automatic stay in “reorganization” in

Japan or in India will get a misleading answer depending on which procedure the

respondent chose to use as reference. In Hungary, the corporate reorganization procedure

is called “Bankruptcy,”66 whereas in England, the word refers to the insolvency of a

natural person.67 A survey that only asks whether the debtor is completely barred from

managing its business in bankruptcy prompts a misleading answer if the survey uses the

word bankruptcy to signify “winding-up” or if the survey investigates legal entities. The

bankruptcy survey that I use addresses this issue by extensively providing detailed

information that allows respondents to adopt identical references and assumptions when

providing their answers. For example, the survey defines the debtor as a legal and

insolvent entity that aims to liquidate or reorganize under judicial supervision. It defines

the technical words that it uses and that could vary among jurisdictions. For example,

trustee has different meaning in different countries. The survey defines the word

“Trustee” as whoever is in charge of the business of the debtor under the circumstances

described in the question – hence it could be the debtor itself – and whoever is allowed

by law to take the described actions. Timing is also important for the powers of the

63 Id. at 194 64 The Act is available at http://www.vakilno1.com/bareacts/sickindustrialact/sickindustriesact.htm (November 30, 2006) 65 See e.g., Companies Act § 391 66 See Ágnes Szent-Ivány, Hungary, in 2 Collier International Business Insolvency Guide, 24-1, ¶ 24.04[1][a] (Richard F. Broude et al. eds., Lexis Publishing 2005) 67 See e.g., VERNON DENNIS & ALEXANDER FOX, THE NEW LAW OF INSOLVENCY: INSOLVENCY ACT 1986

TO ENTERPRISE ACT 2002, 187-227 (2003)


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parties vary in function of the stages of the bankruptcy process. The surveys makes it

clear that when it asks about the powers of the trustee in reorganization, it always refers

to the period between the filing for the reorganization procedure and before the adoption

of a reorganization plan. The survey is not asking about what the reorganization plan can

provide for. If there are two reorganization procedures, one which stays individual

creditors’ actions and is hence more protective, and one which does not stay creditors’

individual actions, or only stays them after the reorganization plan is adopted or after the

vote of a majority of creditors, the survey investigates the first procedure, unless the later

is the most frequently used procedure in practice. If there are two reorganization

procedures, one for very small cases and one for bigger cases, the survey investigates the

procedure for bigger cases. If there are two reorganization procedures, one for general

business companies and one for special companies – i.e., very large companies, industrial

companies, banks, financial institutions – the survey investigates the first procedure of

general character. Finally, every question provides additional information and highlights

the nature of the transaction proposed, the incentives of the parties, the actions they took

in court, and the arguments each party raises. The instructions ask respondents to follow

the majority opinion when the law is not completely settled on a particular issue. Such

detailed instructions increase the precision of the participant’s responses and enhance the

accuracy of the collected data. Appendix A provides the latest version of the bankruptcy

survey.

ii) Functional Standardization

Standardization is essential if the collected data is to be comparable across countries. Yet

standardization introduces rigidities that make it harder to detect functionally equivalent


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concepts in countries with different legal systems. One good example in this context is

the stay in bankruptcy. Most civil law countries like France do not stay creditors’

individual enforcement actions upon filing for bankruptcy such as in the U.S. but only

upon the issuance of the court-order accepting the petition and opening the bankruptcy

case. Practitioners, however, constantly request a preliminary injunction against

creditors’ actions along the bankruptcy petition and the French judge typically grants

such injunction upon filing.68 A question that asks “whether creditors’ enforcement

actions in France are automatically stayed upon the filing of a bankruptcy petition” could

then prompt a misleading negative answer. Yet in practice, the French and U.S. systems

are functionally equivalent in this respect. The bankruptcy survey addresses this issue by

avoiding general conceptual questions and by exposing the respondents to a hypothetical

and detailed case study. I call this approach functional standardization. To schematize,

take again the issue of the Stay in bankruptcy. Question 2 of the bankruptcy survey

investigates this subject through the following hypothetic scenario:

Debtor defaults on a $50,000 tax payment due to Government (G) and on a $100,000 loan (secured by a mortgage on a building) due to Secured Creditor (SC). On January 1, 2004, the court allows G to levy on Debtor’s assets (i.e., equipment) and grants SC the permission to foreclose on the building. The equipments and building are immediately seized in preparation for the public auction to be held on January 15, 2004. On January 14, Debtor files for bankruptcy. Debtor’s value is much higher as a going-concern than if sold piecemeal. Trustee moves in court to stop the public auction, requests the immediate turnover of the equipment and the control of the building. G and SC refuse. Will Trustee most likely prevail against G in liquidation? in reorganization? Will Trustee most likely prevail against SC in liquidation? in reorganization?

Bankruptcy Survey, Question no. 2, Appendix A

68 Telephone Interview with Jean-Luc Vallens, Judge, Ministry of Justice, Professor of Law (August 18, 2006).


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The above question is not conceptual; it allows the respondent to use various concepts

from outside bankruptcy law to reach the most common outcome. The survey’s

functional standardization approach increases the accuracy of the collected answers.

iii) Language and On-line support

Finally, even the best written survey could prompt questions from local

respondents who are not familiar with the English language or with foreign legal

concepts. Some reputable practitioners in Africa felt uncomfortable reading and

answering technical questions in English. To address this issue, I translated the

bankruptcy survey into French and asked respondent to answer the survey using their

native language. I also made sure that all respondents have my e-mail address and

telephone number so that they can request any clarification they deem necessary. I was

always available to address respondents’ concerns by e-mail or by calling them in case

they had detailed or broad questions that are better addressed orally.

b. Independent Research

To sharpen the accuracy of the collected answers, I independently researched the

commercial and bankruptcy laws of the 50 countries that are part of this study. Indeed,

even the most experienced practitioner could misinterpret a question, miss important

instructions or assumptions, and provide a correct but irrelevant or incomplete answer. In

countries where more than one respondent answered the survey, I noted the existence of

conflicting answers, especially with respect to complex, instruction-intensive questions.

The number of conflicting answers, however, remained in general very limited and never

exceeded ten percent of the survey’s total questions. By independently researching the


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laws of the jurisdictions, I was frequently able to find references that solved and

explained these inconsistent answers. Moreover, it is important to understand the

rationale that stands behind a given answer, even when all respondents confirmed its

accuracy. For example, although avoiding a security interest that was perfected shortly

before bankruptcy is functionally equivalent whatever is the rationale that stands behind

such avoidance, it makes a difference from a policy perspective to understand whether

such avoidance is due to general security laws or to rules on preference.69

I researched the laws of the 50 jurisdictions by using the enormous resources

available at the Harvard University Law Library. A sizeable e-library of commercial and

bankruptcy laws for more than 170 countries is also available at the World Bank’s Doing

Business webpage http://www.doingbusiness.org/LawLibrary. I reviewed the bankruptcy

laws, commercial codes, and companies’ act of every jurisdiction when these were

available in English or French. I also made an extensive use of secondary sources, the

most important of which are (1) Collier International Business Insolvency Guide,70 (2)

Getting the Deal Through, Insolvency and Restructuring in 42 Jurisdictions Worldwide,71

(3) European Cross Border Insolvency,72 (4) The Doing Business Series,73 (5) Business

Law in Africa, Ohada and the Harmonization Process,74 (6) Commercial Enforcement

and Insolvency Systems, The World Bank Global Judge Forum, a series of working

papers that is available on file with the author and that describes the essential features of

69 See e.g., Azar, Bankruptcy Policy, supra note 22. 70 COLLIER INTERNATIONAL BUSINESS INSOLVENCY GUIDE (Richard F. Broude et al. eds., Lexis Publishing 2005). 71 Supra note 31. 72 ALLEN & OVERY, EUROPEAN CROSS-BORDER INSOLVENCY: A GUIDE TO INSOLVENCY PROCEDURES

ACROSS THE EUROPEAN UNION (2002) 73 See e.g., ESTUDIO RUBIO, LEGUÌA, NORMAND & ASOCIADOS, 1 DOING BUSINESS IN PERU, §18 (Juris Publishing, Inc. 1999) 74 BORIS MARTOR ET AL., BUSINESS LAW IN AFRICA: OHADA AND THE HARMONIZATION PROCESS (2002)


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the bankruptcy law of various jurisdictions. The series was presented to the participants

of the World Bank’s conference on bankruptcy law in Pepperdine University, May 19-23,

2003. The research process and its conclusions and findings are documented in a 400-

page document available with the author.75

c. Telephone Interviews

The bankruptcy survey is complex and cannot be solely answered by independent

research. Some conflicting answers were hard to reconcile. To buttress the investigation’s

method, I conducted 52 international telephone interviews with local participants in order

to orally discuss the answers they provided and to better understand the bankruptcy

system in their respective jurisdiction. At least 48 hours before each interview, I sent to

the interviewee a “completion memorandum,” where I stated in terms similar to those of

the bankruptcy survey the topic of our discussion, the necessary instructions, and the

questions that I wanted to ask. This allowed the interviewee to prepare in advance and to

answer the questions more efficiently during the telephone call. Contrary to the first

round of empirical query where I sent the same standardized survey to all respondents, I

adapted the Completion Memorandum to the legal system of every jurisdiction, and

emphasized those conflicting, unclear, or incomplete responses. Each telephone interview

lasted 20 minutes minimum. Many lasted much longer, as long as one hour in some

circumstances. Again, I translated the completion memorandum to French and conducted

the telephone calls in three different languages to optimize the interview process.

Appendix B is an example of a typical completion memorandum.

75 The document is on file with the author.


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d. Coding Rules

Finally, receiving accurate answers is not enough; it is also important to correctly

interpret the responses and to “code” them uniformly – i.e. translate them into the ones

and zeros that are used to build the Bankruptcy Indicator scores (BI). The dissertation’s

hypothesis is that a higher score reflects a more efficient bankruptcy statute in any given

country. A country in quest of improving the efficiency of its bankruptcy laws should

legislate according to the BI’s criteria. The coding exercise comprises hence to a large

extent a judgment call with respect to the quality of the substantive choices that countries

adopt in their legislation. Establishing substantive, uniform, and transparent coding rules

is as much an essential exercise as the data collection process itself.

To schematize, the bankruptcy survey inquires whether it is possible for the

trustee in liquidation to postpone selling the assets of the estate and to momentarily

manage the debtor’s business for another 6 months in order to avoid a temporary

downturn in the corresponding assets’ market prices. Assuming that the trustee is right,

granting the trustee permission to do so is the most efficient solution. Surprisingly, this is

possible in all 50 jurisdictions. The difference resides in how practical it is to do so. The

liquidator in the United Kingdom (U.K.) can continue managing the estate with a simple

court authorization76 while the Jordanian liquidator cannot do so without securing a

super-majority vote of creditors in a general creditors meeting. Moreover, the Jordanian

liquidator puts its personal liability at stake in case things do not turn out as originally

planned in hindsight.77 Without coding rules, such important differences among legal

systems could be lost and the functional equivalence concept that this bankruptcy survey

76 See Christopher Mallon & Sally Willcock, England and Wales, in 2 COLLIER INTERNATIONAL BUSINESS

INSOLVENCY GUIDE, 21-1, ¶ 21.04[2][f] (Richard F. Broude et al. eds., Lexis Publishing 2005) 77 Jordanian Commercial Code § 411


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promotes could be distorted into a concept of legal irrelevance; all systems become

similar since they all allow in a way or another the reaching of the efficient outcome.

Although the efficient outcome is reachable both in the U.K. and in Jordan, the coding

rules that I adopt assign one to the U.K. and zero to Jordan to reflect the inability of the

Jordanian liquidator to obtain its request in practice. The variety of solutions among

bankruptcy systems worldwide is great. In Italy, for example, the trustee that wishes to

defer the sale of assets in liquidation under the old bankruptcy procedure had to secure

the consent of the creditors’ committee and the court but does not put this issue to a vote

in a general creditors meeting.78 Should this outcome translate into one – i.e. efficient

outcome – or should it translate into zero – i.e. inefficient outcome? I gave this Italian

rule a score of one because securing the consent of the creditors’ committee is not a

formidable obstacle, at least not as formidable as obtaining a super-majority vote of

creditors in a general creditors meeting. Detailed coding rules increase the survey’s

ability to measure the differences among jurisdictions and increase the transparency of

the final results. Transparency is important because it makes the BI easily replicable and

expandable by other researchers in the field. I list the survey’s questions and explain in

detail the coding assumptions and the rules that I have adopted to code respondents’

answers in Table 7 below.

The Bankruptcy Survey that I have sent to local bankruptcy experts worldwide is

attached to this paper as Appendix A. A 400-pages country-by-country documentation

reflecting a detailed summary of (i) the edited answers received for each country. (ii)

78 See Giancarlo Tabegna, Italy, in 3 COLLIER INTERNATIONAL BUSINESS INSOLVENCY GUIDE 28A-1, ¶ 28A.05[14] (Richard F. Broude et al. eds., Lexis Publishing 2005)


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research results from secondary sources, and (iii) telephone interviews is also available

online at http://www.law.harvard.edu/academics/graduate/sjd_candidates/ziadazar.

SECTION II – THE MODEL

In this section, I construct a comprehensive, objective, transparent, and easily

replicable index on bankruptcy law that I call the Bankruptcy Index (BI). The BI is a

combination of two sub-indexes: (1) the Pro-Debtor Index (PDI) and (2) the Pro-Creditor

Index (PCI). I use these indexes to test empirically the effects that different bankruptcy

policies have on various economic outcomes, such as their effects on the supply of credit,

lending rates, and creditors’ recovery rate in financial distress. I also use these indexes to

investigate the existence of institutional differences that could explain the observed

disparity in bankruptcy policies among countries, such as whether the country’s legal

institutions (i.e. legal heritage), culture (i.e. religion), and wealth (i.e. per-capita income)

predetermine its approach to bankruptcy law.

The PDI does not measure the ability of the debtor to shirk creditors’ rights. It

tests instead the impact of financial distress on the ability of the failed company to

continue its operations with minimal disturbance. In this context, it is a gauge of the

extent of the second chance that bankruptcy law affords to failing entities. Facing similar

financial circumstances and similar choices, the debtor – i.e. meaning here whoever is in

charge of the failing company’s affairs, including old management or a court appointed

trustee – should have the power to take the same efficient action whether the firm is in

“liquidation” or in “reorganization.” The efficient action is the one that maximizes the

value of the estate. It is a function of the financial situation and the particular

opportunities facing a given debtor. The debtor’s prerogatives should not be determined


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by rigid legal rules that dictate a predetermined and standardized set of measures based

on whether the firm is formally in “liquidation” or in “reorganization.”

Based on my earlier work on bankruptcy policy,79 I identify a range of bankruptcy

rules that enable the debtor to take the efficient action and to continue its operations with

minimum disruption. (1) Management should not be displaced upon filing for

reorganization; (2) there should be no restrictions for filing for reorganization; (3) the

mechanism for selling the debtor’s assets in liquidation should be efficient; (4) courts

should timely issue turnover orders in order to let the estate recover assets that are

essential for the survival of the debtor; (5) the debtor should be able to assume, assign

and reject executory contracts; (6) the debtor should have enough opportunities to get

post-petition financing. Other rules aim to increase the pool of assets that are available to

the debtor by bringing back to the estate properties that would have been lost otherwise.

These are (7) the strong-arm powers of the trustee, and (8) preference rules. The more

available are these rules, the higher is PDI. Ideally, a bankruptcy regime should score

high on PDI.

The PCI is a measure of creditors’ protection in bankruptcy. While the LLSV

Creditors’ Right Index (CRI) is a “grab” indicator that focuses exclusively on the secured

creditors’ powers to foreclose on their collaterals during financial distress, the PCI is a

collective index that takes into account the interests of all creditors, secured and

unsecured, without necessarily reducing the potential conflict of interests that opposes

these two class of creditors. It focuses on the respective protections that the law affords to

each and all classes of creditors in order to protect their pre-bankruptcy contractual

entitlements without hindering the debtor’s ability to maximize the value of its assets. In 79 See Azar, Bankruptcy Policy, supra note 22.


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this context, if CRI is tantamount to auction bankruptcy, PCI is tantamount to bankruptcy

bargaining.

The PCI and PDI are inherently the opposites in some, but not all, of their

substantive components. Theoretically, every “pro-debtor” right is “anti-creditor” in its

immediate effects and vice-versa. For example, displacing management in financial

distress is an anti-debtor and a pro-creditor right. Not imposing restrictions on filing for

reorganization is a pro-debtor and an anti-creditor right. However, not all bankruptcy

rules are so binary in nature. The effects of various pro-debtor policies on creditors can

be checked with equivalent creditor-protection rules that make creditors at least as well

off as if these policies did not exist. The existence of these pro-creditor rules guarantees

that debtors will use their bankruptcy rights to effectively preserve the going-concern

value of their business and not to rip their creditors’ pre-bankruptcy contractual

entitlements. For example, the absence of an automatic stay, a pro-creditor rule, can be

checked by a system of swift preliminary injunctions and turnover orders that would stop

creditors from immediately enforcing their rights when such immediate enforcement

excessively hurts the chances of a viable debtor to reorganize. To the contrary, if the law

automatically stays secured creditors, a pro-debtor rule, the secured creditors’ pre-

bankruptcy entitlements are minimally affected if the law mandates the adequate

protection of their rights. The law can do so by ordering, for example, that secured

creditors get paid in absolute priority the loan’s principal and due interest payments up to

the value of their collaterals. The law can also mandate the lifting of the automatic stay if

the secured creditor’s collateral is not adequately protected or if such collateral is not

essential for the survival of the debtor. Hence, while a country cannot score perfectly on


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both PDI and PCI because of the conflicting effects that some policy choices have on

both indicators, it is possible to maximize the score on both indexes by ingeniously

mixing bankruptcy rules that preserve the going concern value of the debtor while

minimally disturbing creditors’ pre-bankruptcy contractual rights. The creative balancing

of pro-debtor and pro-creditors rules create a system of mutual checks-and-balances that

prevents the bankruptcy system from erring in what is commonly referred to as type I

error – a bias toward inefficient reorganizations of unviable debtors– without falling into

what is commonly referred to as type II error – a bias toward inefficient and hasty

liquidations of viable debtors at a discount.

When extending credit, a secured lender bargains mainly for the following two

rights: (1) the right to be repaid without delay upon default – this means that creditors’

rights are better protected if filing for reorganization does not automatically stay secured

creditors’ enforcement actions, or if secured creditors receive adequate protections that

put them in a similar position as if their rights were not stayed; and (2) the right to be

paid in absolute priority up to the value of the collateral and its proceeds. Moreover,

creditors in general are more protected if: (3) management is displaced upon filing for

reorganization; (4) there are restrictions for filing for reorganization; (5) creditors

actively participate in the reorganization procedure and vote on the reorganization plan;

(6) the reorganization plan cannot be confirmed if it is not in the best interest of the

creditors; and (7) the law expressly provides a time limit after which, the court is obliged

to reconsider the reorganization case, to convert it to a liquidation procedure, or to simply

lift the stay on individual enforcement actions. A high PCI reflects higher creditor


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protection in bankruptcy. The higher the PCI, the more bankruptcy law is able to prevent

equity holders from abusing the system and forum shop.

The sum of PCI and PDI constitutes BI. PCI and PDI have no independent

existence outside of BI. Invariably, bankruptcy statutes have dispositions that are relevant

to both creditors and debtors. If not, the statute is not a bankruptcy statute per se, and the

procedure it regulates is not collective. However, the purpose of this research is to

investigate collective procedures that factor and regulate the interests of all stakeholders,

equity and debt, secured and unsecured creditors. Hence, it is a wrong approach to create

a bankruptcy index, BI, that results from the multiplication of PCI and PDI. Indeed, this

approach would be measuring the interaction of two independent indexes and not the

complementarities of two dependent variables that the collective nature of bankruptcy

law mandates. When summing PDI and PCI, I give both indicators the same weight – i.e.

50% each. This guarantees the research’s balanced and normative neutrality with respect

to which group-of-claimants bankruptcy law should privilege, if any: equity or debt. In

fact, one drawback from dividing BI into two sub-indexes is to create the illusion of the

existence of two independent indexes, PCI and PDI. This approach has the benefit,

however, to provide this research with the means to test which of these two measures is

in fact most influential in determining the efficiency outcomes with which BI correlates.

By doing so, this study provides guidelines on what should be the relative weight that a

statute should assign to pro-debtor (PDI) and pro-creditor (PCI) dispositions.

Theoretically, an optimal bankruptcy law should preserve the going concern value

of a distressed firm (i.e., score high on PDI) while minimally infringing pre-bankruptcy

contractual entitlements (i.e., score high on PCI). An inefficient bankruptcy system fails


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to preserve the going concern value of a failing firm, and extensively infringes on pre-

bankruptcy contractual entitlements (i.e., scores low on PDI and on PCI). There is no

clear theoretical answer with respect to the efficiency of a bankruptcy law that scores low

on PDI and high on PCI or vice versa. This last question is important because drafting

bankruptcy statutes is an exercise that balances between seemingly conflicting goals; how

far should bankruptcy statute go to preserve the going concern value of the debtor at the

expense of creditors’ pre-bankruptcy contractual entitlements? This model contributes to

the literature by exploring these major issues. It empirically tests the accuracy of the first

two claims. It also provides a definitive answer to the third question by testing the

relative role and importance of PDI and PCI with respect to efficiency and development

outcomes.

In Bankruptcy Policy – A Review and Critique of Bankruptcy Statutes and

Practices in Fifty Countries Worldwide,80 I have extensively studied the reasons that

justify my focusing on these core bankruptcy dispositions described above as well as the

theoretical and conceptual foundations that justify the protocol I have adopted in Table 7

below to code the local respondents’ answers. This paper takes the reasoning therein as a

starting point without further discussion with the only aim to explore and describe the

collected data and the corresponding observations and conclusions resulting for that

exercise. Table 7 summarizes the various components and coding assumptions that I have

used in order to form the PDI, PCI, and BI indexes. Table 8 describes the other variables

that I use throughout the empirical analysis that follows.

Table 7: The Pro-Debtor, Pro-Creditor, and Bankruptcy Index

BANKRUPTCY INDEX (BI)

80 See Azar, Bankruptcy Policy, supra note 22.


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The Bankruptcy Index (BI) ranges from 0 to 87.7 percent. It is the average of PDI and PCI. It is current as of January 2003.

PRO-DEBTOR INDEX (PDI) The pro-debtor index (PDI) is the average of eight indexes, some of which are themselves the average of other indicators. PDI measures the ability of bankruptcy law to preserve the going concern value of a failing firm. The index ranges from 0 percent (weak preservation of going concern value) to 100 percent (strong preservation of going concern value.) It is current as of January 2003. I – Management Not Automatically Ousted

The first index inquires whether management is not automatically ousted upon filing for reorganization. It equals 100 if filing for reorganization does not automatically or typically entail the immediate ousting of the debtor’s management. It equals zero otherwise. The automatic appointment of a trustee is not necessarily tantamount to management displacement. Management is typically displaced only when the powers of the trustee are so extended that it practically takes over the day-to-day control of the business of the debtor (e.g. Australia). If the creditors have to vote in order to confirm pre-bankruptcy management (e.g., Germany), I code zero as if management is automatically displaced. Not automatically displacing management upon filing for reorganization is a pro-debtor right that increases the overall PDI score.

II – No Major Restrictions on filing

The second index inquires about the existence of restrictions on filing for reorganization. It equals 100 if there are no major restrictions on filing for reorganization. It equals zero otherwise. I define major restrictions on filing for reorganization as follow: (1) filing for reorganization entails the immediate ousting of debtor’s management (e.g., U.K.); (2) filing for reorganization does not automatically or necessarily stay the starting or the continuation of unsecured creditors’ enforcement actions (e.g., Pakistan); (3) starting a reorganization procedure requires the previous consent of a statutorily defined percentage of creditors (e.g., Hungary); (4) the law sets a mandatory minimum recovery rate that the debtor should be able to pay to its creditors in order to allow the opening or the successful completion of a reorganization procedure (e.g., Jordan, Lebanon). Not imposing major restrictions for filing for reorganization is a pro-debtor right that increases the overall PDI score.

III – Efficient Sale Procedures

The third index inquires about how efficient is the sale procedure of the debtor’s assets in liquidation. It is the average of two indicators: (1) “postponing sale in liquidation” and (2) “method of sale in liquidation.”

(1) Postponing Sale in Liquidation

It equals 100 if the liquidator can postpone the sale of assets and can manage the debtor’s business for six months when this increases creditors’ recovery rate. It equals zero otherwise. The liquidator is


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deemed able to postpone the sale of assets when it needs the previous authorization of the court, supervising judge, and/or the creditors’ committee when one is appointed. I code similarly in case the court has the authority to allow the trustee to skip a general creditors’ meeting where normally the trustee has to put the issue to vote. The liquidator is deemed unable to postpone the sale of assets when this decision requires the vote of all creditors in a general creditors’ meeting (e.g., Indonesia). The ability to postpone the sale of assets in liquidation when it is more efficient to do so is a pro-debtor right that increases the overall PDI score.

(2) Method of Sale in Liquidation

It equals 100 if the liquidator can choose the sale method that maximizes creditors’ recovery rate without facing excessive procedural hurdles that are imposed by the bankruptcy statute. It equals zero otherwise. I code 100 if the liquidator is able to adopt any or all of the following assets-sale methods: (1) sale as a going concern of some working units of the debtor; (2) sale of other assets piece by piece; (3) public auction sale; and (4) private sale. The liquidator is deemed to have the power to freely choose among these assets-sale methods even when it has to previously solicit the court, supervising judge, and/or the creditors’ committee’s consent (e.g., Tanzania, Uganda). The liquidator is deemed not to have the power to freely choose among these assets-sale methods if it has to previously put the issue to a vote in a general meeting of creditors, or if the law imposes strict sale rules that cannot be, or are not typically, waived by the court under any circumstances. The trustee’s larger ability to choose the most efficient method for the sale of the debtor’s assets is a pro-debtor right that increases the overall PDI score.

IV – Turnover Orders The fourth index inquires about the speed with which the court can

issue turnover orders that allow the debtor to recuperate assets which are vital for its survival before creditors can auction these assets on the market. It is the average of four indicators: (1) “turnover order against government in liquidation;” (2) “turnover order against government in reorganization;” (3) “turnover order against secured creditor in liquidation;” and (4) “turnover order against secured creditor in reorganization.” The existence of swift turnover orders is a pro-debtor right that increases the overall PDI score.

(1) Liquidation: Turnover Order Against Government

It equals 100 if assets seized by the government in an execution procedure for pre-petition unpaid taxes can be turned over in a liquidation procedure to the liquidator in time before the consummation of the execution sale. It equals zero otherwise.

(2) Reorganization: Turnover Order Against Government

It equals 100 if assets seized by the government in an execution procedure for unpaid tax can be turned over in reorganization to the trustee in time before the consummation of the execution sale. It equals zero otherwise.


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(3) Liquidation: Turnover Order Against Secured Creditor

It equals 100 if assets seized by the secured creditor in an execution procedure triggered by the debtor’s pre-petition default can be turned over in a liquidation procedure to the trustee in time before the consummation of the execution sale. It equals zero otherwise.

(4) Reorganization: Turnover Order Against Secured Creditor

It equals 100 if assets seized by the secured creditor in an execution procedure triggered by the debtor’s pre-petition default can be turned over in reorganization to the administrator/debtor in time before the consummation of the execution sale. It equals zero otherwise.

Additional note with respect to Turnover Orders

It is important to note that this indicator does not measure the existence or inexistence of an automatic stay in a collective procedure. It is only an indicator of the celerity of the court in protecting the going concern value of the debtor and of the rigidities it faces to achieve this aim. The following examples schematize this difference: (1) The law could provide for an automatic stay but only when the court issues the order opening the bankruptcy proceedings. Typically, however, such order intervenes weeks after the filing for bankruptcy and the court cannot, or typically, will not issue on time a temporary injunction in order to stay the sale of assets such as in Morocco and Paraguay for example (i.e. the survey assumes that the sale is scheduled for the next day after the filing for bankruptcy). These countries score zero on “turnover orders” for such orders intervene too late even though the bankruptcy regime provides for an automatic stay at a later stage. (2) Courts in some countries cannot stay the enforcement actions that the government or a secured creditor has started before the debtor files for liquidation or for reorganization. This remains true even when the sale of the debtor as a whole on a going-concern basis provides creditors with a higher recovery rate. Here, such countries score zero on “turnover orders” even though the law provides for an automatic stay; the survey assumes that the government and the secured creditor have started enforcing their rights before the debtor files for bankruptcy. (3) Finally, in some countries such as Denmark, the law does not necessarily provide for an automatic stay in liquidation and in reorganization procedure. However, the court can, and typically, will immediately issue a temporary injunction upon the debtor’s filing for insolvency protection if there are good indications that the sale of the debtor as a going-concern provides higher returns to all creditors. Here, the score is 100, although the law does not provide for an automatic stay.

V – Executory Contracts

The fifth index inquires about the rules governing executory contracts in bankruptcy. The more power the trustee has to preserve the estate’s contractual relations, the more it is able to maximize the estate’s worth by preserving the estate’s going-concern value, and the higher is the overall PDI score. This “executory contracts” indicator is the average of eight indicators:


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(1) Rejecting Executory Contracts

It equals 100 if reorganization law provides the trustee with express powers to reject an executory contract, with or without court consent, when such contract is onerous to the debtor. It equals zero otherwise.

(2) No Priority Damages

It equals 100 if the disenfranchised party to the rejected contract gets only an unsecured no-priority claim against the debtor in liquidation. It equals zero otherwise.

(3) Liquidation: Assuming Executory Contracts with Automatic Cancellation Clause

It equals 100 if the court will most probably allow the trustee in liquidation to assume an executory contract – sale of goods – against the will of the other party to the bargain. It equals zero otherwise. The contract contains a disposition that declares the automatic cancellation of the contract upon the debtor’s default. Default is defined as the debtor missing a payment on a due date. The debtor defaults shortly before filing for liquidation. (1) The debtor is assumed to have filed for liquidation before the creditor had the time to expressly notify the debtor or the relevant authorities (i.e. courts) about its intention to cancel its obligations; (2) However, the creditor did not waive, either directly or indirectly, its contractual rights to cancel the contract; (3) The seller of goods did not include in the sale contract a clause of reservation of property. It is important to note that an automatic cancellation clause upon “default” is not necessarily tantamount to what is typically called an “ipso facto” clause. The later is a contractual disposition that cancels the other party’s obligations upon the debtor filing for bankruptcy or defaulting on any of its obligations even those that are not necessarily related to the contract at hand. Bankruptcy statutes might bar ipso facto clauses but uphold default clauses such as in Belgium’s Judicial Composition Procedure and Japan’s Civil Rehabilitation Procedure. The answer to this question lays in judicial precedents and jurisprudence.

(4) Reorganization: Assuming Executory Contracts with Automatic Cancellation Clause

It equals 100 if the court will most probably allow the trustee in reorganization to assume an executory contract – sale of goods – against the will of the other party to the bargain. It equals zero otherwise. The same assumptions as those described above apply.

(5) Liquidation: Assigning Executory Contracts with "no-Assignment" Clauses

It equals 100 if the court will most probably allow the trustee in liquidation to assign an executory contract – sale of goods – against the will of the other party to the bargain. It equals zero otherwise. The contract forbids the assignment of the contract upon the debtor’s default. The debtor defaults shortly before filing for liquidation. The same assumptions as the one described above apply.

(6) Reorganization: Assigning Executory Contracts with "no-Assignment" Clauses

It equals 100 if the court will most probably allow the trustee in reorganization to assign an executory contract – sale of goods – against the will of the other party to the bargain. It equals zero otherwise. The same assumptions as the one described above apply.


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(7) Liquidation: Compelling a Contractual Relationship

It equals 100 if it the court can compel the seller to renew a pre-petition, long-term, periodic-delivery-of-goods contract that has recently expired, when the contract’s renewal is essential for the preservation of the debtor’s going-concern value in a liquidation procedure. It equals zero otherwise.

(8) Reorganization: Compelling a Contractual Relationship

It equals 100 if it the court can compel the seller to renew a pre-petition, long-term, periodic-delivery-of-goods contract that has recently expired when the contract’s renewal is essential for the preservation of the debtor’s going-concern value in a reorganization procedure. It equals zero otherwise.

VI – Debtor in Possession Financing

The sixth index investigates how easy it is for the debtor to finance the estate after filing for bankruptcy. The more flexible and diverse the statute’s dispositions are in this respect, the more the trustee can preserve the going-concern value of the estate, and the higher is the overall PDI score. This “debtor in possession financing” indicator is the average of six indicators:

(1) Liquidation: Sell Free and Clear of Previous Lien

It equals 100 if the court will probably allow the trustee in liquidation to sell a real-estate asset free and clear of any competing interest when the validity of the mortgage that is encumbering the real-estate is put in doubt and is litigated in court with equal chances of success or failure. It equals zero otherwise. It is assumed that (1) the sale is essential for preserving the going-concern value of the debtor, (2) the price is right, (3) the liquidator proposes to keep the sale proceeds in an interest bearing account until the complete resolution of the litigation with respect to the validity of the mortgage, and (4) the potential mortgagee opposes the liquidator’s request.

(2) Reorganization: Sell Free and Clear of Previous Lien

It equals 100 if the court will probably allow the trustee in reorganization to sell a real-estate asset free and clear of any competing interest when the validity of the mortgage that is encumbering the real-estate is put in doubt and is litigated in court with equal chances of success or failure. It equals zero otherwise. The same assumptions described above apply.

(3) Liquidation: Compelling Collateral Substitution

It equals 100 if the court can compel a pre-petition secured creditor who holds a valid mortgage on a real-estate asset to accept a collateral substitution in order to grant a post-petition creditor a senior mortgage on the same collateral in a liquidation procedure. It equals zero otherwise. It is assumed that (1) the substituted collateral has an equivalent value to the original; (2) the transaction in its described form is the only available one that the debtor has in order to obtain post-petition financing; (3) the post-petition credit is essential for the preservation of the going concern value of the debtor; (4) and the mortgagee opposes the transaction.

(4) Reorganization: Compelling Collateral Substitution

It equals 100 if the court can compel a pre-petition secured creditor who holds a valid mortgage on a real-estate asset to accept a collateral substitution in order to grant a post-petition creditor a senior


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mortgage on the same collateral in a reorganization procedure. It equals zero otherwise. The same assumptions described above apply.

(5) Liquidation: Post-Petition Loan with Administrative Super-Priority

It equals 100 if the trustee in liquidation, with or without court’s authorization, can grant post-petition creditors an administrative super-priority that ranks them above government taxes, employees’ wages, and court expenses upon the distribution of the estate’s proceeds. It equals zero otherwise. It is assumed that (1) the transaction in its described form is the only available transaction that the debtor has in order to obtain post-petition financing; (2) the post-petition loan is essential for the preservation of the going-concern value of the debtor; (3) the other creditors oppose this transaction.

(6) Reorganization: Post-Petition Loan with Administrative Super-Priority

It equals 100 if the trustee in reorganization, with or without court’s authorization, can grant post-petition creditors an administrative super-priority that ranks them above government taxes, employees’ wages, and court expenses upon the distribution of the estate’s proceeds. It equals zero otherwise. The same assumptions described above apply.

VII – Trustee’s Powers

The seventh index measures the avoiding powers of the trustee in bankruptcy. The larger are these powers, the more the trustee is capable to bringing back to the estate assets that would have otherwise been totally lost, and the higher is the overall PDI score. “Trustee’s powers” is the average of five indicators:

(1) Trustee Perceived as the Foe of the Secured Creditors

It equals 100 if the trustee in reorganization is perceived as the foe of the secured creditors. It equals zero otherwise. This perceptive question highlights how aggressive is the trustee in practice in defending the estate’s interest against those creditors who are most eager to bail-out of the collective proceeding (i.e. secured creditors).

(2) Liquidation: Perfection After Filing is Not Valid

It equals 100 if the act of perfecting a mortgage in the relevant registry, one day after the filing for liquidation, will most probably be avoided by the court. It equals zero otherwise. It is assumed that (1) the loan was originally intended to be secured by both parties to the credit contract but the mortgagee perfects its security 35 days after the signature of the security agreement; (2) The mortgagor performed all the required formalities that would allow the mortgagee to perfect its security on time and the non-perfection is the result of the mortgagee’s sole oversight; (3) The mortgagee did not perfect its security in any relevant registry (in case there are more than one registry where the security should be perfected with different consequences for each omission such as in Ireland); (4) The loan is for value, and the mortgagor and mortgagee are in good faith; (5) All unsecured creditors knew of the existence of the mortgage agreement but did not necessarily consent to it; (6) Unsecured creditors did not detrimentally rely on the absence of the filing in the relevant registry; And (7) the liquidator attacks the validity of the mortgage in court using all the legal tools that are at his disposal.


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(3) Reorganization: Perfection After Filing is Not Valid

It equals 100 if the act of perfecting a mortgage in the relevant registry, one day after the filing for reorganization, will most probably be avoided by the court. It equals zero otherwise. All the assumptions described above apply.

(4) Liquidation: Estate has the Powers of a Bona Fide Purchaser of Real-Estate

It equals 100 if the estate has the equivalent powers of a bona fide purchaser of real-estate in liquidation. It equals zero otherwise. It is assumed that (1) the debtor joins Partner in order to buy a real-estate building, and pays fifty percent of the sale price in order to obtain a fifty percent ownership stake in the building; (2) The agreement between the debtor and Partner is in writing, binding, and provable in court; (3) The debtor registers the building in the relevant registry exclusively in its own name (100 percent ownership) without the knowledge of Partner; (4) Partner learns about this fact couples of week after the debtor files for liquidation; (5) Partner requests an ownership stake in the building; (6) The liquidator opposes Partner’s request with all the legal tools that are available to it; The trustee claims that the estate owns 100 percent of the building and that Partner holds only an unsecured claim against the estate.

(5) Reorganization: Estate has the Powers of a Bona Fide Purchaser of Real-Estate

It equals 100 if the estate has the equivalent powers of a bona fide purchaser of real-estate in reorganization. It equals zero otherwise. All the assumptions described above apply.

VIII – Preference Rules

The eighth and final index measures the extent of anti-preference rules applicable in bankruptcy. The more intrusive are such rules, the more the trustee is able to returning to the estate assets that would have been lost otherwise, and the higher is the overall PDI score. The “Preference rules” indicator is a sum of four indicators:

(1) Liquidation: Voluntary Bona Fide Payment of Non-Matured Debt to Unsecured Creditors is Avoidable

It equals 100 if the payment, two months before filing for bankruptcy, of a loan that would otherwise mature after the filing can be avoided as a preference in liquidation. It equals zero otherwise. It is assumed that: (1) the debtor pays in good faith without intending to prefer the creditor (2) who receives the payment in good faith without knowledge of the insolvency of the debtor.

(2) Reorganization: Voluntary Bona Fide Payment of Non-Matured Debt to Unsecured Creditors is Avoidable

It equals 100 if the payment, two months before filing for bankruptcy, of a loan that would otherwise mature after the filing can be avoided as a preference in reorganization. It equals zero otherwise. All the assumptions described above apply.


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(3) Liquidation: Bona Fide Payment of a due Debt to Unsecured Creditors is Avoidable

It equals 100 if the payment in the ordinary course of business of a due debt, two months before filing for bankruptcy, can be avoided as a preference in liquidation. It equals zero otherwise. All the assumptions described above apply.

(4) Reorganization: Bona Fide Payment of a due Debt to Unsecured Creditors is Avoidable

It equals 100 if the payment in the ordinary course of business of a due debt, two months before filing for bankruptcy, can be avoided as a preference in reorganization. It equals zero otherwise. All the assumptions described above apply.

PRO-CREDITOR INDEX (PCI)

The pro-creditor index is the average of seven indexes, some of which are average of various other indicators. PCI measures how much bankruptcy law protects creditors’ pre-bankruptcy contractual entitlements. The index ranges from 0 (weak creditors’ protection) to 100 (strong protection of contractual entitlements). It is current as of January 2003. I – Management Automatically Ousted

The first index inquires about whether management is automatically ousted upon filing for reorganization. It equals 100 if filing for reorganization automatically or typically entails the immediate ousting of the debtor’s management. It equals zero otherwise. “Automatically ousted” is similarly defined for PDI and PCI. Automatically displacing management upon filing for reorganization is a pro-creditor right that increases the overall PCI score. However, it equally decreases the overall PDI score.

II – Major Restrictions on filing

The second index inquires about the existence of major restrictions on filing for reorganization. It equals 100 if there are major restrictions on filing for reorganization. It equals zero otherwise. “Major restrictions” are similarly defined for PDI and PCI. Imposing major restrictions for filing for reorganization is a pro-creditor right that increases the overall PCI score. However, it equally decreases the overall PDI score.

III – No Automatic Stay on Secured Creditors in Reorganization

The third index inquires whether secured creditors’ enforcement actions are automatically stayed in reorganizations. It equals 100 if starting a reorganization procedure does not automatically stay secured creditors’ enforcement actions. It equals zero otherwise. Not staying secured creditors’ enforcement actions upon the start of a reorganization procedure is a pro-creditor right that increases the overall PCI score. There is an automatic stay if one of the following is true: (1) Secured creditors’ enforcement actions are automatically stayed upon the debtor’s filing for reorganization and without any further request (e.g. the U.S.); (2) Secured creditors’ enforcement actions are automatically stayed upon the issuing of the court order that opens the reorganization procedure (e.g. Peru); (3) An independent court order that stays secured creditors’ enforcement actions is routinely issued by the bankruptcy court every time the debtor files, or every time the bankruptcy court opens, a reorganization procedure. There is no automatic stay if one of the following is true: (1) the stay is issued at


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the court’s sole discretion; (2) the debtor has to prove the relevance and the necessity for such a stay; or (3) the stay is typically issued in an independent or complementary court decision that is distinct from the one that starts the reorganization process.

OR III – Equivalent Protection

The third alternative index inquires whether, even when an automatic stay is imposed upon the start of a reorganization proceeding, the bankruptcy statute provides secured creditors with equivalent protection that puts them in a position that is at least as better off as if their enforcement actions were not stayed – i.e. “equivalent protection” indicator. Evidently, in case the bankruptcy law does not automatically stay secured creditors in reorganization (i.e. “no stay in reorganization” scores 100), the “equivalent protection” indicator is not applicable and is not counted in the general computation of PCI scores. To the contrary, in case an automatic stay is imposed in reorganizations, the indicator to that effect becomes inapplicable and is replaced by the “equivalent protection” indicator in the computation of the overall PCI score. The “equivalent protection” index is the average of four indicators:

(1) Reorganization: Automatic recourse

It equals 100 if a secured creditor who holds a non-recourse note gets full recourse upon the debtor filing for “reorganization.” It equals zero otherwise. It is assumed that (1) the secured creditor lends the debtor one and a half million dollar. (2) The creditor is secured by a mortgage on the debtor’s real-estate asset – i.e. a hotel. (3) The loan agreement states that the debtor will not be liable beyond the market value of the hotel in case of default (non-recourse loan.) (4) At a later stage, the debtor becomes insolvent and files for bankruptcy. The debtor’s value is much higher as a going-concern than if sold piecemeal and the debtor proposes to restructure its business. (5) The tourism market is experiencing a strong but short-term downturn and the hotel is valued today at only one million dollar. (6) The secured creditor opposes the debtor’s plan. (7) The debtor moves in court to cash out the secured creditor by paying it the estimated market value of the hotel (i.e. one million dollar.) (8) The secured creditor, taking all required legal actions (if any,) refuses the one million dollar cash-out and retorts in court that it must either be paid the full one and a half million dollar or the hotel should effectively be sold on the market for its true market value. A bankruptcy statute that gives non-recourse secured creditors automatic recourse in reorganizations is more protective of creditors than statutes that do not provide for such right. Statutes that provide for such right obtain higher overall PCI score.

(2) Stay Lifted if the Collateral is Not Necessary for Reorganization

It equals 100 if the court most probably lifts the stay when the secured creditor proves that its collateral is not necessary for the effective reorganization of the debtor. It equals zero otherwise.


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(3) Stay Lifted if the Collateral is Not Adequately Protected in Reorganization

It equals 100 if the court most probably lifts the stay when the secured creditor’s interest in the collateral is not adequately protected in reorganization. It equals zero otherwise.

(4) Post Petition Interest Paid First to the Secured Creditors

It equals 100 if a secured creditor is paid post-petition interest in absolute priority. It equals zero otherwise. It is assumed that (1) the creditor is over-secured, (2) the security agreement is valid and conforms all substantive and formal rules, (3) the debtor enters reorganization for six months but fails to confirm a reorganization plan, (4) the procedure is converted to liquidation, (5) the secured creditor asks to be paid first the interests accumulated during the last six months from the proceeds of the sale of its collateral.

IV – Certainty Scale The fourth index is a “certainty scale.” I calculate it by dividing the

jurisdiction’s uncertainty period with the smallest uncertainty period that I have identified in the sample (i.e. the Netherlands’ 30-day uncertainty period; 30 days / x days.) The index ranges from zero (no certainty) to 100 (strong certainty.) The higher is the certainty scale, the higher is creditors’ protection, and the higher is the overall PCI score. I define the uncertainty period as follow: (1) when the insolvency procedure is unitary, the uncertainty period is the observation period such as the 180 days observation period in Mexico, France, and Russia; (2) when the insolvency procedure is not unitary, and there is an automatic stay on secured and unsecured creditors’ enforcement actions in reorganization, the uncertainty period measures the statutory defined maximum duration of the stay; (3) when the insolvency procedure is not unitary, and there is no automatic stay on secured (and/or unsecured) creditors’ enforcement actions in reorganization, the uncertainty period measures the maximum statutory or customary optional stay, sometimes called cooling-off period, that the court typically orders; (4) when the law, or custom, does not expressly provide for such a period, the period is not defined and the certainty scale scores zero. The “certainty scale” does not necessarily measure – and does not aim to measure – the time it takes to go through insolvency in a given jurisdiction. Hence, the uncertainty period (1) does not account for potential extensions to the deadline it identifies; and (2) does not take into account other procedural deadlines whose overall sum could provide an estimate of the time it takes to close insolvency proceedings when these deadlines were scrupulously respected. The certainty scale investigates only whether the law (or practice) expressly provides for a deadline after which, the law specifically asks the court to seriously reconsider the merits of the case. If such deadline exists, this indicator aims to compare this deadline to those of other jurisdictions.

V – Creditors’ Participation

The fifth index measures “creditors’ participation” in reorganization. Higher creditor participation reflects higher creditor protection and higher overall PCI scores. This indicator is the average of two


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indicators: (1) Creditors Vote on Plan

It equals 100 if the secured or unsecured creditors vote on the reorganization plan in a general meeting of creditors where the creditors vote individually or by class. It equals zero otherwise. (1) When only the creditors’ committee votes on the plan, or (2) when the court can confirm a reorganization plan that was not supported by at least one class of impaired creditors such as in Paraguay, the “creditors vote on plan” indicator equals zero.

(2) A Creditors' Committee is Typically Appointed in Reorganization

It equals 100 if a creditors’ committee is provided for by statute in reorganization or if such committee is typically appointed in reorganization. It equals zero otherwise.

VI – Secured Creditors’ Priority

The sixth index assesses “secured creditors’ priority.” Secured creditors are more protected if they are paid in absolute priority (higher PCI scores). “Secured creditors’ priority” is the average of two indicators:

(1) Secured Creditors Paid First

It equals 100 if the secured creditor is paid first from the proceeds of the sale of its collateral in liquidation. It equals zero otherwise. (1) It is assumed that the secured creditor holds a valid fixed-charge on a real-estate asset. (2) secured creditors are deemed to be paid in absolute priority even when the following expenses rank prior to secured creditors: (a) reimbursement of the costs of execution and the costs incurred in the safekeeping of the collateral; (b) funeral expenses; (c) limited family allowance; (d) back taxes on the collateral itself; (e) court and trustee’s fees with respect to the whole proceeding (i.e. this is not the administration expense.) To the contrary, if general taxes with respect to the business activities as a whole enjoy priority over secured creditors, it is assumed that secured creditors have no absolute priority on the proceeds’ of their collateral.

(2) Collateral’s Proceeds, Revenues, Rents, Profits, and offspring are Paid First to the Secured Creditors

It equals 100 if the secured creditor has absolute priority on the bargained-for proceeds, revenues, rents, profits, and offspring (hereinafter proceeds) that are derived from the exploitation of the mortgaged real-estate during the reorganization procedure. It equals zero otherwise. It is assumed that (1) the debtor enters reorganization for six months but fails to confirm a reorganization plan; (2) the procedure is converted to liquidation; and (3) the secured creditor asks to be paid the proceeds accumulated over the aforementioned six-month period in absolute priority.

VII – Best Interest Test

The seventh and final index measures the guarantees that bankruptcy law provides for dissenting creditors in reorganization. The “best interest test” indicator equals 100 if the court typically cannot confirm a reorganization plan that was adopted by the statutory required majority of creditors if the plan pays dissenting creditors less than what these creditors would have received if the debtor were immediately liquidated. It equals zero otherwise. The existence of a


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best-interest-test provides more protection to creditors and increases the overall PCI score.

Table 8: Definition of Variables

The Bankruptcy Index (BI)

The Bankruptcy Index (BI) ranges from 0 to 87.7 percent. It is the average of PDI and PCI. It is current as of January 2003. None of the sample countries reformed their bankruptcy laws in a way that affects BI as of January 2004.

The Pro-Debtor Index (PDI)

The pro-debtor index (PDI) is the average of eight indexes, some of which are themselves the average of other indicators. PDI measures the ability of bankruptcy law to preserve the going concern value of a failing firm. The index ranges from 0 percent (weak preservation of going concern value) to 100 percent (strong preservation of going concern value.) It is current as of January 2003. None of the sample countries reformed their bankruptcy laws in a way that affects PDI as of January 2004.

The Pro-Creditor Index (PCI)

The pro-creditor index is the average of seven indexes, some of which are average of various other indicators. PCI measures how much bankruptcy law protects creditors’ pre-bankruptcy contractual entitlements. The index ranges from 0 (weak creditors’ protection) to 100 (strong protection of contractual entitlements). It is current as of January 2003. None of the sample countries reformed their bankruptcy laws in a way that affects PCI as of January 2004.

The LLSV Creditors’ Right Index (CRI)

It is an index that aggregates creditor rights, following La Porta et al. (1998).81 A score of one is assigned when each of the following rights of secured lenders is defined in laws and regulations: (1) there are no restrictions, such as creditor consent or minimum dividends, for a debtor to file for reorganization; (2) secured creditors are able to seize their collateral after the reorganization petition is approved, i.e. there is no “automatic stay” or “asset freeze;” (3) secured creditors are paid first out of the proceeds of liquidating a bankrupt firm, as opposed to other creditors such as government or workers; (4) management does not retain administration of its property pending the resolution of the reorganization. The index ranges from 0 (weak creditor rights) to 4 (strong creditor rights) and is current as of January 2003 (Source: Djankov et al. 2007).82 None of the sample countries reformed their bankruptcy laws in a way that affects CRI as of January 2004. I

convert the scale of this index to 100 in order to make it comparable

to the Bankruptcy Index. Recovery Rate The variable estimates how many cents on the dollar claimants -

creditors, tax authorities and employees - recover from an insolvent firm as of January 2004. The calculation takes into account whether

81 See LaPorta et al., Law and Finance, supra note 17. 82 See Djankov et al. Private Credit in 129 Countries, supra note 17.


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the business is kept as a going concern during the proceedings, as well as court, attorney, and other related costs, including the discounted value due to the time spent closing down. Source: Doing Business Project.83

Ratio of Private Credit to GDP (PCr/GDP)

It is the average ratio of credit from deposit taking financial institutions to the private sector (IFS lines 22d and 42d) relative to GDP (IFS line 99b) in 2004. Line 22d measures claims on the private sector by commercial banks and other financial institutions that accept transferable deposits such as demand deposits. Line 42d measures claims on the private sector given by other financial institutions that do not accept transferable deposits but that perform financial intermediation by accepting other types of deposits or close substitutes for deposits (e.g. savings and mortgage institutions, post office savings institutions, building and loan associations, certain finance companies, development banks and offshore banking institutions) (Source: IMF International Financial Statistics September 2005).

Lending Rates It is the bank lending rate to the private sector (IFS line 60P.ZF) in

2004. Line 60P.ZF is defined as the “bank rate that usually meets the short and medium term financing needs of the private sector.” In cases where lending rates are not reported in the IFS, I obtain data directly from the World Bank’s Doing Business Project team (Source: IMF International Financial Statistics 2005 and the Doing Business Project).

Gross Domestic Product (GDP)

It is the logarithm of gross national income (current U.S. Dollars), average 2003-2004 (Source: World Development Indicators online).

Per Capita Income (GDP/K)

It is the logarithm of gross national income per capita (Atlas method), average 2003-2004 (Source: World Development Indicators online).

Per-Capita Income Growth (GDP/K Growth)

It is the average annual growth in gross domestic product per capita from 1999-2004 (Source: World Development Indicators online).

Contract Enforcement (Contr. Enf.)

It is the logarithm of the number of days to resolve a payment dispute through courts (average 2003-2004). The data are based on the methodology in Djankov and others (2003) but describe the number of calendar days to enforce a contract of unpaid debt worth 50% of the country’s GDP per capital. (Source: The Doing Business Project).84

Inflation (Infl.) It is the annual percentage inflation, GDP deflator, average 2003-

83 http://www.doingbusiness.org/CustomQuery (as of September 11, 2007) 84 Id.


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2004 (Source: World Development Indicators online).

Information Sharing (Info.)

The variable equals 1 if either a public registry or a private bureau operates in the country, 0 otherwise, and is constructed as of January 2003 (Source: Djankov et al. 2007).85

Legal Origin It is a dummy variable that identifies the legal origin of the Company

law or Commercial Code of each country. The four origins are English, French, German, and Scandinavian (Source: Doing Business in 2004).

Religion It is a dummy variable that identifies the religion practiced by the

largest proportion of the population. There are nine religions: Atheist, Buddhist, Catholic, Hindu, Indigenous, Judaism, Muslim, Orthodox Christian and Protestant (Source: Djankov et al. 2007)86

SECTION III – LEGAL HERITAGE: A DETERMINANT OF BANKRUPTCY LAW

In this section, I review and interpret the scores that various countries have

obtained on the BI, PDI, and PCI. I investigate the role of institutions (i.e. legal heritage),

culture (i.e. religion), and wealth (i.e. per capita income) as determinants of the observed

worldwide discrepancies in bankruptcy policy. I find that all three factors determine

significantly the overall Bankruptcy Index and specifically Pro-Creditor rules (i.e., the

PCI). However, differences in Pro-Debtor rules (i.e., the PDI) are random and

independent from institution and cultural disparities. I find some evidence suggesting that

richer countries preserve better the going-concern value of debtors than poorer countries

do.

85 See Simeon Djankov, Oliver D. Hart, Caralee McLiesh, & Andrei Shleifer, Debt Enforcement Around the World, 36 (December 20, 2006). ECGI - Finance Working Paper No. 147/2007 Available at SSRN: http://ssrn.com/abstract=953000 (hereinafter, Djankov et al., Debt Enforcement) 86 Id.


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A – THE BI

Overall, the BI averages 51 percent. Countries with a Scandinavian legal heritage

score the highest (61 percent). Countries with a German legal heritage follow (54

percent). Countries with a Common law heritage score third (52 percent). And countries

with a French legal heritage score the lowest at 39 percent. Legal heritage plays a

statistically significant role in explaining the low BI scores of French Civil Law

countries. Comparing these scores with those of Common Law countries yields a t-test

value of 3.99 (significant at the one percent level.) Similarly, comparing the BI scores of

French Civil Law countries to those of countries with a German and Scandinavian Civil

Law heritage yields t-test values of 4.44 and 5.72 respectively (significant at the one

percent level).

Figure 1: BI Average by Legal Heritage

0

10

20

30

40

50

60

70

World Average French Civil

Law

Common Law German Civil

Law

Scandinavian

Civil Law

Evidently, institutional differences explain why countries with a French Civil Law

heritage adopt bankruptcy statutes that score lower on BI. In the next sections, I study the

components of BI in order to identify why these institutional differences exist and where

they are most apparent.


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Table 9: BI Scores and Averages

BANKRUPTCY INDEX

Common Law French Civil Law German Civil Law Scandinavian Civil

Law Australia 56 Algeria 52 Austria 60 Denmark 67 Canada 66 Argentina 45 Croatia 48 Finland 57 Hong Kong (China) 51 Belgium 42 Germany 56 Norway 60 India 35 Brazil 35 Hungary 32 Sweden 59 Ireland 45 Cameroon 38 Japan 59 Malaysia 47 France 39 Korea 57 Pakistan 43 Greece 36 Poland 62 Singapore 56 Haiti 43 Slovenia 55 South Africa 63 Honduras 33 Tanzania 36 Indonesia 43 Thailand 65 Italy 40 Uganda 36 Jordan 31 U.K. 55 Lebanon 30 U.S.A. 76 Mexico 37 Morocco 36 Netherlands 55 Paraguay 35 Peru 24 Philippines 44 Romania 49 Russia 36 Senegal 32 Tunesia 42 Venezuela 46

Common Law 52

French Civil Law

39 German Civil Law

54 Scandinavian Civil Law

61

Sample Average: 51

Test of Means (t-Statistics)

Common vs. civil law

1.99 English vs. French origin

3.99 English vs. German origin

-0.29 English vs. Scandinavian origin

-1.31

French vs. German origin

-4.44 French vs. Scandinavian origin

-5.72 German vs. Scandinavian origin

-1.35

B – THE PDI

PDI is one of BI’s two components. Overall, the PDI averages 49 percent.

Countries with a Scandinavian legal heritage score the highest average at 57 percent.


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French Civil Law countries score second at 51 percent. Common Law countries score

third at 47 percent. German Civil Law countries score last at 41 percent.87 However, the

aforementioned differences in PDI scores are not statistically significant. Here, legal

heritage is not a determinant of policies that aim to preserve the going concern value of

debtors. Only the difference between countries with a French Civil Law heritage and

countries with a German Civil Law heritage is statistically significant at the ten percent

level.

Table 10: PDI Scores

Countries\Indicators

Man

agem

ent N

ot O

uste

d

No

Res

tric

tion

s on

fil

ing

Eff

icie

nt S

ale

Pro

cedu

res

Tur

nove

r O

rder

s

Exe

cuto

ry C

ontr

acts

Deb

tor

in P

osse

ssio

n F

inan

cing

Tru

stee

's P

ower

s

Pre

fere

nce

Pro

-Deb

tor

Ind

ex

Australia 0 0 100 50 13 33 40 25 33

Canada 100 100 100 75 88 67 40 0 71

Hong Kong (China) 0 0 100 50 25 33 40 0 31

India 100 0 100 0 13 17 40 0 34

Ireland 100 100 100 75 25 0 40 0 55

Malaysia 100 0 100 50 13 17 40 0 40

Pakistan 100 0 100 50 13 0 20 0 35

Singapore 0 0 100 75 13 33 40 0 33

South Africa 0 0 100 100 75 0 80 50 51

Tanzania 100 0 100 0 13 17 60 0 36

Thailand 100 100 100 75 25 33 40 100 72

Uganda 100 0 100 0 13 17 60 0 36

U.K. 0 0 100 100 13 33 40 0 36

U.S.A. 100 100 100 100 88 100 100 50 92

English Origin 64 29 100 57 30 29 49 16 47

Algeria 100 100 100 0 25 33 80 50 61

Argentina 100 100 50 25 75 33 60 25 59

Belgium 100 100 100 75 63 50 20 25 67

Brazil 100 100 50 50 13 17 40 25 49

Cameroon 100 100 100 0 88 33 20 50 61

France 100 100 100 100 75 33 20 25 69

87 This ranking fits closely anecdotal evidence that brands French Civil Law as pro-debtor and Germanic and Common Law as pro-creditor. See e.g., PHILIP R. WOOD, PRINCIPLES OF INTERNATIONAL INSOLVENCY, 4-5 (1995)


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Greece 100 100 100 50 25 33 40 25 59

Haiti 0 0 0 100 25 67 40 50 35

Honduras 100 100 100 0 13 0 40 0 44

Indonesia 100 100 50 0 25 0 60 0 42

Italy 100 0 100 100 13 17 80 0 51

Jordan 100 0 0 0 13 0 80 25 27

Lebanon 100 0 0 0 13 0 60 25 25

Mexico 100 100 100 0 50 17 40 50 57

Morocco 100 100 100 0 75 17 80 50 65

Netherlands 100 100 100 0 25 0 40 0 46

Paraguay 100 0 50 0 13 33 60 25 35

Peru 100 100 0 0 13 0 40 50 38

Philippines 100 100 50 50 38 33 80 0 56

Romania 100 100 0 0 25 33 80 50 49

Russia 100 100 50 0 50 33 60 50 55

Senegal 100 100 100 0 25 0 20 50 49

Tunesia 100 100 100 100 50 0 80 50 73

Venezuela 100 100 50 0 13 33 40 50 48

French Origin 96 79 65 27 35 22 53 31 51

Austria 0 0 100 0 25 33 80 50 36

Croatia 0 0 50 0 13 0 0 0 8

Germany 0 0 50 50 50 0 60 50 33

Hungary 100 0 100 0 13 17 20 0 31

Japan 100 100 50 0 25 50 80 50 57

Korea 0 0 100 50 75 0 80 50 44

Poland 100 100 100 100 50 17 40 50 70

Slovenia 100 0 100 0 25 17 80 50 46

German Origin 50 25 81 25 34 17 55 38 41

Denmark 100 0 100 100 25 0 80 50 57

Finland 0 0 0 100 38 67 80 50 42

Norway 100 0 100 100 75 33 80 50 67

Sweden 100 0 100 100 63 0 80 50 62

Scandinavian Origin 75 0 75 100 50 25 80 50 57

Sample Average 71 33 80 52 37 23 59 34 49


Common vs. civil law -1.46

-1.92 ***

2.96* 1.72 ***

-0.77 1.12 -1.03 -2.54

** -0.51

English vs. French origin

-2.76* -3.46* 3.27* 2.33 **

-0.51 0.94 -0.55 -1.87 ***

-0.81

English vs. German origin

0.63 0.17 2.76 **

1.98 ***

-0.34 1.10 -0.58 -1.72 0.73

English vs. Scandinavian origin

-0.38 1.19 2.04 ***

-2.33 **

-1.23 0.22 -3.03

* -2.18

** -1.01

French vs. German origin

3.58* 3.11* -1.09 0.13 0.05 0.64 -0.25 -0.74 1.75 ***

French vs. Scandinavian origin

1.50 3.76* -0.46 -3.62

* -1.15 -0.31

-2.47 **

-1.86 ***

-0.88

German vs. Scandinavian origin

-0.78 1.05 0.29 -3.87

* -1.15 -0.59 -1.54 -1.05 -1.60


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* Significant at the one percent level; ** Significant at the two percent level; *** Significant at the 10 percent level

a. Analyzing PDI scores

PDI scores among French Civil Law countries vary greatly. France, Belgium,

Morocco, Algeria, Tunisia and Cameroon score above 60 percent.88 Honduras, Peru,

Paraguay, and Haiti score below 50 percent.89 Russia, the Philippines, Mexico, and

Greece score in between.90 The fact that the PDI scores of French Civil Law countries in

Africa are closer to the PDI score of France than those of their Latin-American

counterpart could be due to the closer geographical and cultural ties that link West-

African countries to their former colonial master. The French 1983 bankruptcy reform

that shifted French bankruptcy policy from a creditor-centered system to a debtor-

centered system has easily “diffused”91 to these former colonies, which reformed their

bankruptcy statutes accordingly.92 Such “diffusion” did not reach, or at least not yet,

Latin-American countries, which could be more influenced by their former Spanish and

Portuguese colonial masters or by their geographically closer neighbor, the U.S.

An interesting observation to point at pertains to Cameroon and Senegal. Both

countries are members to the OHADA agreement and adopt, as such, the OHADA

uniform business code, which includes a uniform bankruptcy statute.93 The fact that these

two countries obtain different scores on PDI – i.e. 61 percent for Cameroon and 45

percent for Senegal – reveals how idiosyncratic differences in a particular jurisdiction’s

88 The scores are 69, 67, 65, 61, 73, and 61 percent respectively. 89 The scores are 44, 38, 35, and 35 percent respectively. 90 The scores are 55, 56, 57 and 59 percent respectively. 91 I am indebted to Holger Spamann for pointing out this diffusion effect. 92 See YVES GUYON, 2 DROIT DES AFFAIRES, ENTREPRISES EN DIFFICULTÉS REDRESSEMENT JUDICIAIRE -

FAILLITE, 7-18 (9th ed. 2003) (hereinafter GUYON). 93 See FILIGA MICHEL SAWADOGO, OHADA : DROIT DES ENTREPRISES EN DIFFICULTÉS (2002)


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jurisprudence, judicial practice, cultural biases, or simply judicial capacities affect the

enforcement and the outcome of identical legal dispositions.

Figure 2: PDI Average by Legal Heritage

0

10

20

30

40

50

60

World German Civil

Law

Common Law French Civil

Law

Scandinavian

Civil Law

a.

Similarly, the variations in the PDI scores among Common Law countries are

important. With marks at 92, 72, and 71 percent respectively, the U.S., Canada, and

Thailand score high and far above the sample’s PDI average. Other jurisdictions, such as

Hong Kong (China), India, Pakistan, Singapore, Tanzania, Uganda, and the U.K. score

very low, in the mid-thirty percents, far below the sample average.94 The 2002 Enterprise

Act’s major goals were to improve debtors’ chances to reorganize and to break with the

U.K.’s old tradition of excessively privileging creditors in financial distress. This paper

reveals that the British reform has failed to achieve its aim. One reason could be the fact

that the U.K.’s reforms were path-dependent. The U.K. has reformed its bankruptcy

94 The scores are 31, 34, 35, 33, 36, 36, and 36 percent respectively.


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system step-by-step by incrementally building on bankruptcy concepts that were to a

large extent part of its insolvency system.95

Finally, countries with a German Civil Law heritage score the lower on PDI. Only

Poland and Japan obtain PDI scores that are above the sample average.96 Paradoxically,

Germany has reformed its bankruptcy statute in 1999 in order to increase debtors’

chances to reorganize. Like the U.K., however, Germany fails to score high on PDI.97

Some scholars have argued that Germany’s 1999 bankruptcy statute has failed to

effectively change Germany’s vested practice of favoring creditors at the expense of

debtors’ rights.98 The data here corroborate these arguments.

b. The PDI’s Components

Overall, legal heritage does not determine aggregate PDI scores. However, it can

explain some of the apparent differences in PDI’s components. For example, French Civil

Law countries are the most forgiving to the managers of the bankrupt debtor. The

managers of the failing debtor are not automatically ousted upon filing for reorganization

in all the surveyed French Civil Law countries.99 Sixty four percent of the surveyed

Common Law countries and half of the surveyed German Civil Law countries adopt a

similar rule. The difference between French Civil Law countries and countries with a

Common Law heritage or with a Germany Civil Law heritage is statistically significant at

the one percent level respectively (i.e., t-values of 2.76 and 3.58 respectively.) Similarly,

French Civil Law countries have on average the most lenient rules for filing for 95 See, DENNIS & ALEXANDER FOX, THE NEW LAW OF INSOLVENCY, INSOLVENCY ACT 1986 TO ENTERPRISE

ACT 2002 (2004) 96 The scores are 70 and 57 percent respectively. 97 Germany scores only 33 percent. 98 See Christoph G. Paulus, Germany: Lessons to Learn From the Implementation of a New Insolvency

Code, 17 CONN. J. INT'L L. 89, 89-90. 99 Haiti scores one because it has no reorganization procedure and the debtor can only file for liquidation.


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reorganization. All Scandinavian and German Civil Law countries – except Japan and

Poland – and 71 percent of countries with a Common Law heritage impose major

restrictions on filing for reorganization. The differences between French Civil Law

countries on the one hand and all other groups of countries with a different legal heritage

on the other hand are statistically significant at the one percent level.100

Common Law countries have the most flexible rules with respect to selling the

debtor’s assets in liquidation. All surveyed Common Law countries obtain a perfect 100

percent score on their sale procedure. German, Scandinavian, and French Civil Law

countries average 81, 75, and 65 percent respectively. The differences between Common

Law countries on the one hand and all other groups of countries with a different legal

heritage on the other hand are statistically significant.101

Courts in Scandinavian countries are the promptest in issuing stop and turnover

orders. All Scandinavian countries score a perfect 100 percent on this indicator. Common

Law countries rank second at 57 percent. French and German Civil Law countries lag far

behind at 27 and 25 percent respectively. Legal heritage invariably explains these

differences at various degrees of statistical significance.102 In addition, the data reveals

that the Scandinavian trustee is the most powerful of all. Scandinavian countries score, on

average, 80 percent on “Trustee’s Powers” compared to 55 percent for countries with a

Germanic legal heritage, 53 percent for countries with a French legal heritage, and 49

100 The t-test value for Countries with a Common Law heritage versus those with a French Civil Law heritage is -3.46. The t-test value for French versus German Civil Law countries is 3. 11. The t-test value for French versus Scandinavian Civil Law countries is 3.76. See Table 10 above. 101 T-test values confirm that these differences are statistically significant between Common and Civil law countries generally, and French Civil Law countries specifically at the one percent level (t-values equal 2.96 and 3.27 respectively). These differences are also statistically significant between Common Law countries and German Civil Law countries and between Common Law countries and Scandinavian Civil Law countries at the five and ten percent levels respectively (t-values equal 2.76 and 2.04 respectively). See Table 10 above. 102 See Table 10 above.


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percent for countries with a Common Law heritage. Here, the difference between

Scandinavian countries on the one hand and countries with a French Civil Law heritage

or with a Common Law heritage on the other hand is statistically significant.103 Similar

findings hold with respect to “preference rules.” This is not surprising for preference

rules are additional powers that the bankruptcy statute provides the trustee with in order

to enable it to recover additional assets to the estate. Scandinavian countries score 50

percent on preference rules. German Civil Law countries score 38 percent. French Civil

Law countries score 31 percent. And Common Law countries score 16 percent. For the

most part, these differences are statistically significant.

Finally, countries adopt different rules with respect to “executory contracts” and

“debtor in possession financing.” Here, however, t-test analysis reveals that the observed

variations are random and are not determined by legal heritage.

C – THE PCI

The second component of the BI is PCI. In the next two sections, I analyze the

overall PCI scores and those that the surveyed countries have obtained on each one of

PCI’s components.

Table 11: PCI Scores

Countries\Indicators

Man

agem

ent O

uste

d

Res

tric

tion

s on

Fil

ing

Sta

y

Del

ay

Cre

dito

rs' P

arti

cipa

tion

Pri

orit

ies

Bes

t Int

eres

t

Pro

-Cre

dit

or

Ind

ex

Australia 100 100 75 32 100 50 100 80

103 The t-values are 2.47 and 3.03 respectively. See table 11.


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Canada 0 0 25 100 100 100 100 61

Hong Kong (China) 100 100 100 0 100 100 0 71

India 0 100 100 0 50 0 0 36

Ireland 0 0 50 43 50 100 0 35

Malaysia 0 100 100 33 50 100 0 55

Pakistan 0 100 100 0 50 100 0 50

Singapore 100 100 100 50 100 100 0 79

South Africa 100 100 25 50 50 100 100 75

Tanzania 0 100 100 0 50 0 0 36

Thailand 0 0 75 33 100 100 100 58

Uganda 0 100 100 0 50 0 0 36

U.K. 100 100 75 40 100 100 0 74

U.S.A. 0 0 100 17 100 100 100 60

English Origin 36 71 80 28 75 75 36 57

Algeria 0 0 100 0 100 0 100 43

Argentina 0 0 50 17 100 50 0 31

Belgium 0 0 50 17 50 0 0 17

Brazil 0 0 100 0 50 0 0 21

Cameroon 0 0 0 0 100 0 0 14

France 0 0 0 17 50 0 0 10

Greece 0 0 25 17 50 0 0 13

Haiti 100 100 0 0 50 0 100 50

Honduras 0 0 100 0 50 0 0 21

Indonesia 0 0 75 33 100 0 100 44

Italy 0 100 0 4 100 0 0 29

Jordan 0 100 100 0 50 0 0 36

Lebanon 0 100 100 0 50 0 0 36

Mexico 0 0 0 17 100 0 0 17

Morocco 0 0 0 0 50 0 0 7

Netherlands 0 0 100 100 100 50 100 64

Paraguay 0 100 100 46 0 0 0 35

Peru 0 0 25 0 50 0 0 11

Philippines 0 0 0 17 50 50 100 31

Romania 0 0 50 0 100 100 100 50

Russia 0 0 0 14 100 0 0 16

Senegal 0 0 0 0 100 0 0 14

Tunesia 0 0 0 33 50 0 0 12

Venezuela 0 0 100 8 100 0 100 44

French Origin 4 21 45 14 71 10 29 28

Austria 100 100 100 33 100 50 100 83

Croatia 100 100 100 17 100 100 100 88

Germany 100 100 100 0 100 50 100 79

Hungary 0 100 0 25 100 0 0 32

Japan 0 0 100 25 100 100 100 61

Korea 100 100 25 17 100 50 100 70

Poland 0 0 100 33 100 50 100 55

Slovenia 0 100 100 50 100 100 0 64

German Origin 50 75 78 25 100 63 75 67

Denmark 0 100 100 33 100 100 100 76

Finland 100 100 100 0 100 100 100 71


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Norway 0 100 50 17 100 100 0 52

Sweden 0 100 100 0 100 100 0 57

Scandinavian Origin 25 100 88 13 100 100 50 64

Sample Average 29 67 73 20 86 62 47 54


Common vs. civil law 1.46 1.92*** 1.81*** 1.67 -0.65 3.26* -0.38 2.43***

English vs. French origin 2.76* 3.46* 2.67** 1.71*** 0.44 5.86* 0.41 5.47*

English vs. German origin -0.63 -0.17 0.15 0.31

-2.70 **

0.70 -1.83 ***

-1.19

English vs. Scandinavian origin

0.38 -1.19 -0.46 1.05 -1.89 -1.14 -0.49 -0.76

French vs. German origin -3.58* -3.11*

-1.86 ***

-1.28 -2.80* -4.54* -2.42 ***

-5.85*

French vs. Scandinavian origin -1.50 -3.76*

-1.84 ***

0.14 -1.97 ***

-6.93* -0.81 -4.45*

German vs. Scandinavian origin

0.78 -1.05 -0.41 1.35 n.a. -2.07

** 0.82 0.22

* Significant at the one percent level; ** Significant at the two percent level; *** Significant at the 10 percent level

a. Analyzing PCI scores

Distinctively, French Civil Law countries provide the worst protection to creditors

in bankruptcy. The overall PCI sample average is 54 percent. Countries with a French

legal heritage score 28 percent. Germanic, Scandinavian, and Common Law countries

score 67, 64, and 57 percent respectively. The differences between countries with a

French Civil Law heritage on the one hand and all other groups of countries with a

different legal heritage on the other hand are statistically significant at the one percent

level. Countries with a French Civil Law heritage score consistently low on PCI. Only the

Netherlands, Romania, and Haiti score at or above 50 percent. The Netherlands obtains a

relatively high score of 64 percent, which could reflect in part the hybrid nature of its

legal institutions: although formally branded a French Civil Law country, the Netherlands

had also been under the influence of a distinct system of Roman and Dutch law.104 Haiti

and Romania score 50 percent on PCI. Haiti fares relatively well because of this 104 Paul Norman, IALS Library Research Guide: Netherlands, Institute of Advanced Legal Studies, University of London, available at http://ials.sas.ac.uk/library/guides/research/res_neth.htm#English (as of June 15, 2007).


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research’s methodology, which gives higher scores on PCI for countries that do not have

reorganization procedures. Indeed, the existence of a reorganization procedure is by

essence a pro-debtor and an anti-creditor right. As for Romania, it has recently

overhauled its bankruptcy rules under the auspices of the International Monetary Fund,

which is not known to particularly embrace French Civil Law concepts in its policy and

reform recommendations.105

Figure 3: PCI Scores by Legal Heritage

0

10

20

30

40

50

60

70

World Average French Civil

Law

Common Law Scandinavian

Civil Law

German Civil

Law

Various empirical studies distinguish the performance of French Civil Law

countries from the performance of France itself.106 These studies point to the lack of

reform in former French colonies as a possible explanation to the relatively weaker

performance that French civil law countries typically display.107 Here, however, the data

do not corroborate these arguments. France protects creditors the worst: France scores 10

percent on the PCI and ranks last only before Morocco’s score of seven percent. Note,

however, that this empirical study investigates bankruptcy statutes as enforced as of

January 2003. Since then, France has greatly reformed its bankruptcy regime with the

105 See DB04, supra note 24, at xvi-xvii 106 See, e.g., DB04, supra note 24, at 21. 107 Id. at xviii


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aim to improve creditors’ protection and participation in the collective proceedings.108

Today, France’s PCI score would equal 31 percent.

Except for Norway and Hungary, all countries with a Scandinavian and German

Civil Law heritage score higher than the sample average on PCI. Norway scores 52

percent, which is negligibly lower than the sample’s 54 percent average. To the contrary,

Hungary scores a low 32 percent on PCI. This atypical score for a country with a German

Civil Law heritage could be explained by Hungary’s communist past and its relatively

slower reform initiatives. Indeed, as of January 2003, Hungary had not yet drastically

overhauled its pre-cold war bankruptcy regime.109

Finally, there are important variations in the PCI scores of Common Law

countries. Australia, Singapore, South Africa, the U.K., and Hong Kong (China) score

above 70 percent.110 Uganda, Tanzania, India, and Ireland score below 40 percent.

Although Ireland obtains the lowest PCI score among Common Law countries, it still

scores far above the median PCI of countries with a French Civil Law heritage.

b. PCI’s Components

Legal heritage determines overall PCI scores. It also determines the observed

differences in some of PCI’s components. The first two PCI indicators inquire about

whether management is ousted upon filing for reorganization and whether the bankruptcy

statute imposes major restrictions on such filings. I have extensively highlighted the

108 See, e.g., Robert Weber, Can the Sauvegarde Reform Save French Bankruptcy Law?: A Comparative

Look at Chapter 11 and French Bankruptcy Law From an Agency Cost Perspective, 27 MICH. J. INT'L L. 257 (2005); Michael Haravon, The International Scene, French Overhaul Bankruptcy Regime, 24-8 ABIJ 32 (2005). 109 See e.g., Valéria Széplaki, Reform of the Hungarian corporate insolvency regulation and its financial

stability aspects, MNB BULLETIN 41 (December 2006) available at http://english.mnb.hu/Resource.aspx?ResourceID=mnbfile&resourcename=mnbsz_200612_szeplaki_en (as of June 15, 2007) 110 The scores are 80, 79, 75, 74, and 71 percent respectively.


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different approaches that countries have adopted with respect to these two bankruptcy

issues in section A above. Here I review the remaining five PCI indicators.

Scandinavian countries score the highest on the “stay” indicator (88 percent.) As

explained earlier, this means either that secured creditors are not automatically stayed in

reorganizations, or that the law adequately protects secured creditors’ rights when these

are stayed. Note that Scandinavian countries score also the highest on the “turnover

orders” indicator, which is a pro-debtor right. Hence, these countries protect both

creditors and debtors optimally in this respect. They provide policymakers with a good

example on how bankruptcy statutes can prevent debtors from abusing creditors’

contractual rights without negating debtors’ right to reorganize. Common and German

Civil Law countries score 80 and 78 percent respectively, slightly lower than

Scandinavian countries but still high above the sample’s overall average. The high scores

that these three legal families obtain are due, however, to two different approaches with

respect to staying creditors’ actions in bankruptcy. Typically, Scandinavian and German

Civil Law countries do not stay secured creditors, commonly called “separate satisfaction

creditors.”111 To the contrary, on average, courts in Common Law countries stay these

creditors but are prone to lift the stay when creditors’ rights are abused or not adequately

protected. However, there are important variations among Common Law countries. For

example, the U.S. and the U.K. score 100 and 75 percent respectively, whereas South

Africa and Canada score 25 percent each. French Civil Law countries rank distinctively

last. These countries stay secured creditors in bankruptcy and do not promptly lift it in

case creditors’ rights are abused or not adequately protected. Countries with a French

Civil Law heritage score on average 45 percent, which is 28 percentage points below the 111 See Azar, Bankruptcy Policy, supra note 22, at 49.


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overall sample average (73 percent). The differences between French Civil Law countries

on the one hand and all other groups of countries with a different legal heritage on the

other hand are statistically significant.

Scandinavian and German Civil Law countries score a perfect 100 percent with

respect to “creditors’ participation” in bankruptcy. Common Law countries rank second

at 75 percent, and French civil law countries rank third at 71 percent. Common Law

countries rank lower than Scandinavian and German Civil Law countries because some

Common Law countries do not provide for a creditors’ committee in reorganization. This

is typically so because some of these countries, such as Malaysia, Pakistan, Tanzania, and

Uganda do not provide for elaborate reorganization procedures which could be seen as a

system-bias toward creditors. To the contrary, some French Civil Law countries, such as

France (before 2005), Paraguay, and Tunisia score 50 percent or less on “creditors’

participation” because their statutes allow the bankruptcy court to adopt a reorganization

plan without a previous creditors’ vote in a general creditors’ meeting. This could be seen

as a system-bias toward debtors. Hence, the relatively similar score on “creditors’

participation” between Common and French Civil Law hides in fact important

ideological and methodological differences between the two legal families. The

differences between countries with a French Civil Law heritage and those with a

Scandinavian or a German Civil Law heritage are statistically significant. The difference

is also statistically significant between countries with a Common Law heritage and those

with a German Civil Law heritage.

One hundred percent of Scandinavian countries respect the absolute priority of

secured creditors in bankruptcy. Common Law countries score 75 percent on the absolute


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priority indicator. German Civil Law countries score 63 percent. And French Civil Law

countries score last at only 10 percent. The differences between French civil law

countries on the one hand, and all other groups of countries with a different legal heritage

on the other hand are statistically significant at the one percent level. The difference

between German and Scandinavian civil law countries is significant at the five percent

level.

In 75 percent of the surveyed German Civil Law countries, courts cannot confirm

a reorganization plan against the will of dissenting creditors when these are not made

under the plan at least as better off as if the debtor were immediately liquidated. Fifty

percent of Scandinavian countries, 36 percent of Common Law countries, and only 29

percent of French Civil Law countries adopt a similar approach. The difference between

countries with a German Civil Law heritage and countries with a French Civil Law

heritage is statistically significant at the five percent level. The difference between

countries with a German Civil Law heritage and countries with a Common Law heritage

is significant at the ten percent level.

Finally, Common Law countries have the best “certainty scale” in bankruptcy (28

percent). German Civil Law countries score 25 percent. French Civil Law countries score

14 percent. And Scandinavian countries score only 13 percent. The difference between

Common Law countries and French Civil Law countries is statistically significant.

D – TESTING OTHER EXOGENOUS DETERMINANTS OF BANKRUPTCY LAW

I have highlighted above the important role that legal heritage plays in

determining bankruptcy laws. Yet other factors than legal heritage could explain the

observed differences in bankruptcy rules worldwide. For example, the wealth of a nation,


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as reflected by its per capita income, could play an important role in shaping bankruptcy

policy. Cultural factors, such as religion, could also greatly impact a country’s regulatory

choices. These alternative explanations could weaken, or even cancel, the explanatory

power of legal heritage. Tables 6, 7, and 8 below test this possibility.

Per capita income (GDP/K) is an important determinant of bankruptcy policy.

Without controlling for religion, GDP/K correlates with BI at the one percent level.

Column three of table 12 suggests that a one unit change in GDP/K increases BI by a

sizeable 10.5 percent. After controlling for religion in column one, the correlation

between GDP/K and BI remains statistically significant at the five percent level.

Similarly, culture is an important determinant of bankruptcy policy. Noticeably, Catholic

countries tend to have on average a 9.5 percent lower BI score. Muslim countries tend to

have even lower BI scores (10.7 percent.) However, neither GDP/K nor religion cancel or

significantly affect legal heritage as a determinant of bankruptcy law.

Table 12: Regressions Results with BI as a Dependent Variable

Ind. V \ Dep. V BI BI BI GDP/K 5.094 ** 7.238 * 10.509 * (2.230) (2.014) (1.913) Civil Law -7.577 ** (2.847) Fr. Civil -7.759 ** -11.092 * (3.293) (2.821) Ger. Civil -0.729 -1.519 (3.93) (3.765) Scand. Civil -1.936 2.463 (5.521) (4.989) Catholic -9.489 ** (4.695)


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Orthodox -9.918 (6.709) Muslim -10.683 *** (5.398) Buddhist -0.635 (5.574) Other Religions -12.501 *** (6.283) Constant 39.285 * 25.113 * 12.944 *** (10.115) (7.811) (7.515) Observation No. 50 50 50 Adj. R-Square 53% 51% 41%

* Significant at the one percent level; ** Significant at the two percent level; *** Significant at the 10 percent level; Numbers in parenthesis are standard error.

Replacing BI with its two components in tables 13 and 14 respectively

corroborates the findings highlighted earlier. First, institutional differences, such as legal

heritage, or cultural differences, such as religion, do not determine PDI scores. Table 13

column two shows that GDP/K and PDI correlate positively at the 10 percent level.

Hence, richer countries seem able to better protect the going concern value of debtors

than poorer countries. However, the overall fit of the regression in table 13 column 2 is

negligible; the regression’s adjusted R square is 8 percent only.

Table 13: Regression Results with PDI as a Dependent Variable

Ind. V \ Dep. V PDI PDI PDI GDP/K 5.953 7.240 *** 4.940 (4.38) (3.689) (3.324) Civil Law 2.369 (4.947)


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Fr. Civil 6.478 5.792 (6.468) (5.168) Ger. Civil -10.354 -9.138 (7.72) (6.898) Scand. Civil 4.455 4.096 (10.844) (9.14) Catholic -1.096 (9.222) Orthodox 0.638 (13.177) Muslim -3.296 (10.603) Buddist 6.878 (10.948) Other Religions -5.344 (12.34) Constant 25.276 19.767 28.322 ** (19.866) (14.311) (13.058) Observation No. 50 50 50 Adj. R-Square -1% 8% 1%


Legal heritage is a strong determinant of PCI. PCI correlates with Civil Law.

Specifically, PCI negatively correlates with French Civil Law at the one percent level in

all three regressions shown in table 14 below. For example, column 2 shows that French

Civil Law countries tend to have 28 percent lower PCI scores on average. Here too,

religion plays a significant role. Catholicism and Islam negatively correlate with PCI at

the 10 percent level. However, per capita income loses its statistical significance when


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one controls for religion and for legal origins (column one). It is significant at the 10

percent level only when the three sub-categories of Civil Law countries are taken into

account in the second regression (column two). Evidently, institutions and culture, not

wealth, seem to be the strongest determinants of creditors’ protection in bankruptcy.

Table 14: Regression Results with PCI as a Dependent Variable

Ind. V \ Dep. V PCI PCI PCI GDP/K 4.233 7.233 *** 16.076 * (4.36) (3.82) (4.119) Civil Law -17.518 * (6.129) Fr. Civil -21.994 * -27.974 * (6.438) (5.351) Ger. Civil 8.903 6.107 (7.684) (7.143) Scand. Civil -8.320 0.837 (10.794) (9.464) Catholic -17.881 *** (9.179) Orthodox -20.466 (13.116) Muslim -18.070 *** (10.553) Buddhist -8.147 (10.897) Other Religions -19.661 (12.282) Constant 53.303 * 30.467 ** -2.431 (19.774) (14.818) (16.179) Observation No. 50 50 50 Adj. R-Square 54% 54% 30%


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SECTION IV – BANKRUPTCY LAW: A DETERMINANT OF FINANCIAL

DEVELOPMENT THROUGH ITS EFFECT ON THE SUPPLY OF CREDIT AND

LENDING RATES

The earlier section uncovers institutional and cultural determinants of bankruptcy

rules worldwide. In this section, I investigate the effects that different bankruptcy policies

have on financial development, and specifically, on the supply of private credit and the

private lending rate. Scholars and policy makers are unanimous in promoting regulatory

and economic policies that encourage the availability of capital at low cost. Hence,

efficient bankruptcy rules are those that encourage lending at lower prices.

The analysis highlights the benefits of scoring high on BI. High BI scores

correlate with higher ratios of private credit to GDP, higher recovery rates in bankruptcy,

and lower lending rates. Countries that wish to reform their bankruptcy regime can adopt

the Bankruptcy Index as a road-map toward efficiency. The analysis also reveals that

erring toward privileging creditors in bankruptcy is rarely wrong (high PCI, low PDI).

Privileging debtors in bankruptcy at the expense of creditors is always inefficient (high

PDI, low PCI). Finally, adopting a balanced approach whereby the statute preserves the

going concern value of the debtor by giving it enough powers to reorganize without

excessively expropriating creditors’ pre-bankruptcy contractual rights remains the

optimal approach (high PDI and PCI scores). Moreover, BI is a better determinant of

financial development than LLSV’s CRI; judicial bargaining seems a superior method to

dealing with financial distress than auction bankruptcy.


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A – THE BANKRUPTCY INDEX (BI) IS A STRONG DETERMINANT OF FINANCIAL

DEVELOPMENT

To measure the impact of various bankruptcy rules (BI) on the ratio of private

credit to GDP, I borrow with minor adaptations the now accepted econometric model of

LaPorta et al. (1997).112 I control for GDP, which measures the overall size of the

economy. The economy’s size matters because the efficient functioning of credit

institutions requires fixed investments and fixed costs that only larger economies can

afford. I control for per-capita-income growth averaged over the 1999-2004 period.

Economies that are rapidly expanding face higher demand for credit. Because growth is

cyclical and sensitive to externalities, I average it over a five year period in order to avoid

punctual growth-rates that could unwarrantedly bias the regressions’ results. I control for

inflation, which negatively affect the supply of credit. Inflation increases the cost of

capital in a continuous and unpredictable pattern that makes it harder for creditors to plan

ahead and pushes them to simply retract from lending. I also control for the availability of

information on borrowers. Creditors are more willing to finance entrepreneurs when they

can collect information on the entrepreneur’s reliability and credit history. Finally, I

control for the efficiency of the judiciary. Typically, creditors are willing to cheaply lend

more money if they are certain that they can enforce their contracts in courts promptly.

Table 15 lists the results of this regression. BI strongly correlates with the ratio of

private credit to GDP (PCr/GDP.) The correlation is significant at the one percent level.

Countries that score higher on BI have higher credit supply relative to their economy’s

size. A one percent increase in BI increases PCr/GDP by 1.29 percent. The overall

112 The model was also used in Djankov et al. Private Credit in 129 Countries, supra note 17, and Djankov et al., Debt Enforcement, supra note 85.


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regression is robust with an adjusted R square of 62 percent. PCr/GDP correlates

significantly with the size of the economy (GDP), Contract Enforcement, Information,

and Inflation. The longer it takes to enforce a contract in court, the lesser are lenders

willing to extend credit. This is also the case for inflation. To the contrary, the more

information on debtors is available to creditors, the higher is the ratio of private credit to

GDP.

Table 15: Determinants of PCr/GDP With BI as an Independent Variable

Dep. V. \ Ind. V. GDP GDP/K Growth

Infl. Info. Contr. Enf. (t)

BI Constant

PCr/GDP 11.10 *** 0.36 -2.32 * 26.78 *** -53.78 * 1.29 * 8.77

(6.54) (2.90) (0.75) (14.92) (17.45) (0.44) (87.63)

Observation No. 50

Adj. R-Square 62% * Significant at the one percent level; ** Significant at the two percent level; *** Significant at the 10 percent level; Numbers in parenthesis are standard error. The benefits of scoring high on BI are not limited to increasing the credit supply.

Taking the same earlier regression, I replace the ratio of private credit to GDP by another

dependent variable: “Recovery Rate.” Again, Recovery Rates and BI correlate

significantly at the five percent level; creditors in countries where BI is higher recover

more in bankruptcy. The overall regression is strong with an adjusted R square of 69

percent. Here too, Recovery Rates correlate with the size of the economy (GDP),

Contract Enforcement, and Inflation. The longer it takes to enforce a contract in courts,

the lower is creditors’ overall recovery. The same applies to inflation. However,

information loses its significance in this regression. Logically, information is an ex-ante,

not an ex-post, indicator. Upon financial distress, information with respect to the credit


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worthiness of the debtor is not relevant because the debtor is now bankrupt and creditors

have already extended their loans.

Table 16: Determinants of Recovery Rates With BI as an Independent Variable



BI Constant

Recovery Rate 5.99 *** -0.22 -1.56 * 3.70 -50.46 * 0.60 ** 83.80 ***

(3.51) (1.55) (0.40) (8.00) (9.35) (0.24) (46.98)

Observation No.

50

Adj. R-Square 69%

* Significant at the one percent level; ** Significant at the two percent level; *** Significant at the 10 percent level; Numbers in parenthesis are standard error. I rerun the same regression described above but replace “Recovery Rate” with the

banks’ “Lending Rate” to the private sector. Again, Lending Rate and BI correlate. The

higher is the bankruptcy index, the cheaper is the cost of capital.113 Here, however, the

results are weaker. The correlation between Lending Rate and BI is significant at the ten

percent level, and the adjusted R square of the regression is only 32 percent.

Paradoxically, all the other independent variables in the regression except GDP lose their

significance. The bigger the size of the economy is, the lower interest rates tend to be.

Table 17: Determinants of Lending Rates with BI as an Independent Variable



BI Constant

Lending Rate -3.69 *** -0.93 0.39 1.63 5.56 -0.24 *** 48.45 ***

(2.11) (0.93) (0.24) (4.81) (5.63) (0.14) (28.26)

Observation No. 50

Adj. R-Square 32%

113 One unit increase in BI decreases lending rates by 0.3 percent.


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B – WHAT BANKRUPTCY RULES BETTER DETERMINE FINANCIAL DEVELOPMENT:

PRO-CREDITOR OR PRO-DEBTOR RULES?

The above analysis highlights the benefits of scoring high on BI. High BI scores

correlate with higher ratios of private credit to GDP, higher recovery rates in bankruptcy,

and lower lending rates. However, BI is not a homogeneous index. It is the sum of two

independent indexes with opposite aims: the PDI and the PCI. Ideally, bankruptcy

statutes are able to balance these two opposite goals: protect the going concern value of

the debtor without excessively expropriating creditors’ pre-bankruptcy contractual

entitlements. In other words, ideal bankruptcy statutes score relatively high on both PDI

and PCI. Statutes that score relatively low on both PDI and PCI score relatively low on

BI and yield inefficient financial outcomes. But a bankruptcy statute can be unbalanced.

For example, it can maximize its PCI score at the expense of its PDI score; it can

excessively empower creditors at the expense of debtors. To the contrary, a bankruptcy

statute can maximize its PDI score at the expense of its PCI score; it can privilege debtors

at the expense of their creditors. In this section, I investigate these scenarios: is it efficient

for a bankruptcy statute to bias its goals toward protecting creditors at the expense of

debtors or vice versa? To answer this query, I rerun the three regressions described in

Section A above but replace BI by its two components, PDI and PCI, once at a time. The

aim is to analyze the effects on financial development that each component of BI, taken

alone, yields.

The ratio of private credit to GDP positively correlates with PCI at the one

percent level (Table 18, column 1). A one unit increase in PCI increases PCr/GDP by


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0.75 percent. The overall regression is robust with an adjusted R square of 67 percent. All

the other controls in the regression, except Per-Capita-Income Growth, correlate with

PCr/GDP. The larger the economy, the higher is credit supply. Similarly, the more

information on borrowers is available to creditors, the higher is the supply of credit. Also,

lower inflation rates and prompter contractual enforcement positively affect PCr/GDP.

Table 18 column 2 shows opposite results when PDI replaces PCI in the same regression.

Here, PCr/GDP negatively correlates with PDI; the more pro-debtor is the bankruptcy

statute, the lesser is the credit supply. A one unit increase in PDI decreases the ratio of

private credit to GDP by 0.54 percent. The regression’s overall fitness is relatively

weaker with an adjusted R square of 57 percent.

Table 18: Determinants of PCr/GDP with PDI and PCI as Independent Variables

Ind. V \ Dep. V PCr/GDP PCr/GDP

GDP 14.80 ** 23.02 *

(5.59) (6.59)

GDP/K Growth 0.73 0.64 (2.69) (3.07)

Infl. -2.19 * -2.34 * (0.70) (0.79)

Info. 33.51 ** 37.22 ** (13.78) (16.01)

Contr. Enf. (t) -52.68 * -65.70 * (16.09) (17.99)

PCI 0.75 * (0.18)

PDI -0.54 *** (0.32)

Constant -16.17 -16.98 (81.51) (93.36)

Observation No. 50 50


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Adj. R-Square 67% 57% * Significant at the one percent level; ** Significant at the two percent level; *** Significant at the 10 percent level; Numbers in parenthesis are standard error. Similarly, Recovery Rate and PCI positively correlate at the five percent level of

significance (table 19). A one-percent-increase in PCI increases the overall creditor

recovery rate by 0.25 cents on the dollar. To the contrary, Recovery Rate and PDI do not

correlate significantly. Moreover, the relationship between Recovery Rate and PDI seems

negative, which suggests that higher PDI scores lower creditors’ overall recovery.

Table 19: Determinants of Recovery Rates with PCI and PDI as Independent Variables

Ind. V \ Dep. V Recovery

Rate

Recovery Rate

GDP 8.31 ** 10.03 *

(3.25) (3.57)

GDP/K Growth -0.09 -0.20 (1.57) (1.66)

Infl. -1.53 * -1.60 * (0.41) (0.43)

Info. 6.60 6.30 (8.02) (8.69)

Contr. Enf. (t) -51.57 * -55.77 * (9.37) (9.76)

PCI 0.25 ** (0.11)

PDI -0.03 (0.17)

Constant 74.57 * 79.64 (47.45) (50.64)

Observation No. 50 50

Adj. R-Square 69% 65%


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C – SHOULD BANKRUPTCY LAW EXCESSIVELY PROTECT CREDITORS AT THE

EXPENSE OF DEBTORS’ CHANCE TO REORGANIZE?

The analysis in Section B reveals that erring toward privileging creditors in

bankruptcy is rarely a wrong policy choice (high PCI, low PDI). To the contrary,

privileging debtors in bankruptcy at the expense of creditors is rarely efficient (high PDI,

low PCI). Then, should policymakers bother in devising a comprehensive bankruptcy

statute that takes into account the rights of both creditors and debtors? The results of

section B above make theoretically possible the affirmation that an optimal bankruptcy

statute focuses exclusively on creditors’ rights (secured and unsecured, PCI) at the

expense of debtors (PDI). Section B’s results could also support the views of the

proponents of auction bankruptcies; an optimal bankruptcy statutes empowers secured

creditors with enough power to grab debtors’ assets and auction them on the market

(CRI). To answer these questions, I study in this section the effects that BI, PCI, and CRI

have on the financial indicators described above. Overall, BI is a better determinant of

financial development than PCI taken on its own. It is also superior to CRI.

BI, PCI, and CRI positively correlate with the ratio of private credit to GDP at the

one percent level of significance (table 20, column 1, 2, and 3 respectively). However,

CRI determines more robustly PCr/GDP (t-value 5.72) than do PCI (t-value 4.07) or BI

(t-value 2.90). Moreover, the robustness of the overall regression is superior with CRI

(adj. R2 74 percent) and PCI (adj. R2 67 percent) than with BI (adj. R2 62 percent). This

slightly superior statistical performance of CRI and PCI is tempered by the fact that BI is

a more complex and a larger indicator. Overall, BI is the combination of 46 indexes and


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indicators. CRI is the sum of four indicators only. PCI is the sum of 16 indexes and

indicators. The complexity of BI makes this indicator more sensitive to statistical errors

and renders its outstanding performance in the above regressions even more impressive;

BI correlates significantly with PCr/GDP at the one percent level with a robust t-value of

2.90. Hence, if BI is not statistically superior to CRI and PCI, it is also true that the

CRI’s and PCI’s statistical performance is not superior enough to BI’s performance in

order to conclude that bankruptcy statutes should exclusively protect creditors, or should

mimic auction bankruptcies. This is especially true when one notes that BI is an

economically superior determinant of the ratio of private credit to GDP. A one percent

increase in BI increases PCr/GDP by 1.29 units whereas a similar increase in CRI or PCI

causes the same ratio to increase only by 0.57 and 0.75 respectively. BI impacts the

supply of credit forty percent more than CRI and PCI respectively.

Table 20: Comparing BI, CRI, and PCI’s effect on PCr/GDP

Ind. V \ Dep. V PCr/GDP PCr/GDP PCr/GDP

GDP 11.10 *** 16.00 * 14.80 **

(6.54) (4.89) (5.59)

GDP/K Growth 0.36 0.79 0.73 (2.90) (2.39) (2.69)

Infl. -2.32 * -2.44 * -2.19 * (0.75) (0.62) (0.70)

Info. 26.78 *** 39.15 * 33.51 ** (14.92) (12.28) (13.78)

Contr. Enf. (t) -53.78 * -55.82 * -52.68 * (17.45) (14.10) (16.09)

BI 1.29 * (0.44)

CRI 0.73 * (0.13)


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PCI 0.75 *

(0.18)

Constant 8.77 -24.39 -16.17 (87.63) (72.32) (81.51)

Observation No. 50 50 50

Adj. R-Square 62% 74% 67% * Significant at the one percent level; ** Significant at the two percent level; *** Significant at the 10 percent level; Numbers in parenthesis are standard error. Results are more conclusive when one compares the role that BI, CRI, and PCI

play in determining creditors’ recovery (table 21) and banks’ private lending rates (table

22). Here, BI is superior both statistically and economically.

BI correlates with Recovery Rate at the five percent level. Its t-value is 2.52, and

the regression’s adjusted R square is 69 percent. CRI does not significantly correlate with

Recovery Rate. Unequivocally, BI is statistically superior to CRI as a determinant of

creditors’ recovery rate. It is also economically superior. Indeed, a one-percent increase

in BI increases creditors’ recovery rate by 0.6 cents on the dollar. A similar increase in

CRI improves creditors’ recovery rate by only 0.13 cents on the dollar. This is 4.6 times

lower than the effect that BI generates.

PCI correlates significantly with Recovery Rate at the five percent level too. Its t-

value is 2.34, and the regression’s adjusted R square is 69 percent. Statistically, this is

quite identical to BI’s performance. However, BI is economically more significant than

PCI. A one percent increase in PCI improves creditors’ recovery rate by only 0.25 cents

on the dollar. This is two times lower than BI’s effect.

Table 21: Comparing BI, CRI, and PCI’s effects on Recovery Rates

Ind. V \ Dep. V Recovery

Rate

Recovery Rate

Recovery

Rate


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GDP 5.99 *** 9.24 * 8.31 **

(3.51) (3.32) (3.25)

GDP/K Growth -0.22 -0.14 -0.09 (1.55) (1.62) (1.57)

Infl. -1.56 * -1.61 * -1.53 * (0.40) (0.42) (0.41)

Info. 3.70 7.33 6.60 (8.00) (8.35) (8.02)

Contr. Enf. (t) -50.46 * -54.09 * -51.57 * (9.35) (9.58) (9.37)

BI 0.60 ** (0.24)

CRI 0.13 (0.09)

PCI 0.25 ** (0.11)

Constant 83.80 75.96 74.57 (46.98) (49.15) (47.45)

Observation No. 50 50 50

Adj. R-Square 69% 66% 69% * Significant at the one percent level; ** Significant at the two percent level; *** Significant at the 10 percent level; Numbers in parenthesis are standard error. Finally, BI negatively correlates with Lending Rates. CRI and PCI do not. Even if

they did, BI determines banks’ private lending rates at least twice as much as PCI and

three times more than CRI.

Table 22: Comparing BI, CRI, and PCI’s effect on Lending Rates

Ind. V \ Dep. V Lending

Rate

Lending Rate

Lending

Rate

GDP -3.69 *** -4.90 ** -4.66 ***

2.11 1.93 1.95

GDP/K Growth -0.93 -0.97 -0.98


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0.93 0.94 0.94

infl. 0.39 0.41 *** 0.38 0.24 0.24 0.24

Info. 1.63 -0.05 0.47 4.81 4.85 4.82

Contr. Enf. (t) 5.56 6.76 6.11 5.63 5.56 5.63

BI -0.24 *** 0.14

CR -0.07 0.05

PCI -0.09 0.06

Constant 48.45 52.39 *** 52.04 *** 28.26 28.53 28.50

Observation No. 50.00 50.00 50.00

Adj. R-Square 0.32 0.30 0.31 * Significant at the one percent level; ** Significant at the two percent level; *** Significant at the 10 percent level; Numbers in parenthesis are standard error.

CONCLUSION

Scholars have long debated the usefulness of judicial bargaining in financial

distress. Some claimed that such proceedings, modeled on the U.S. Bankruptcy Code, are

costly and lengthy. Other claimed that such proceedings are inefficient for they invariably

lead to the violation of the absolute priority rule and open the door to forum shopping and

the abuse of creditors’ entitlements. To avoid these inefficiencies, an important literature

focused on privileging creditors’ rights, sometime at the expense of other rules that

enable debtors to reorganize. By giving secured creditors enough powers to grab their

debtors’ assets, bankruptcy law would put the fate of the estate between the hands of the

“true” residual owners who have the right incentives to maximize the debtor’s value by


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auctioning the debtor on an infallible market and by dividing the proceeds among

themselves following strict priority rules.114 The LaPorta et al. Creditors’ Right index

(CRI), which is an index that measures the grab power of secured creditors, became a

reference for efficient bankruptcy and creditors’ right reform. It is adopted by prestigious

international development organizations such as the World Bank and the International

Financial Corporation.

Studies have shown that auction bankruptcy is neither cheaper nor superior to

collective procedures involving judicial bargaining.115 This paper adds to the literature by

showing that auction bankruptcy is not a better determinant of financial development.

While protecting creditors is always the right policy choice that enhances the supply of

credit, a carefully crafted bankruptcy statute that balances the rights of creditors and

debtors equally promote credit availability. In addition, such collective procedure

provides creditors with higher recovery rates in financial distress and significantly lowers

the cost of capital. There is no evidence that auction bankruptcy does the same. Overall,

efficient collective procedures are more equitable and more conductive to financial

development than divisive auction bankruptcies. The Bankruptcy Index that this paper

proposes provides policymakers with a detailed road-map for drafting such efficient

bankruptcy statutes.

114 See Baird, The Uneasy Case for Corporate Reorganization, supra note 7; See also, Djankov et al., Debt

Enforcement, supra note 85. 115 See Azar, Agenda for Further Research, supra note 20.

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APPENDIX A – BANKRUPTCY SURVEY

Please follow carefully the instructions given below: • To the best of your ability, always answer by “Yes” or “No” following court majority

opinion. When Not Applicable, just check “No”. Please do not leave blanks. Please do not click both Yes and No for the same question.

• If there are two different insolvency procedures in your countries, one for small companies and one for bigger companies, please answer based on the procedure that governs the bankruptcies of bigger companies.

• A Trustee is the person designated by the court or any other entity to manage the Debtor (a company) through bankruptcy. When no trustee is appointed and management stays in control, trustee means management. When both management and a trustee share control of the failing company, trustee means the one that has the standing to take the described set of actions.

• All 10 questions (number 3 to number 13) are independent. Each question starts by describing a case applicable to the whole question. Each sub-question (a, b, c, etc.) is independent and presents further assumptions applicable only to its own set of questions (i, ii, iii, etc.).

• If a unitary insolvency proceeding exists in your country (i.e., Debtor files for bankruptcy and after a given observation period, court decides whether the firm should be liquidated or reorganized): “In liquidation” means the decision to “liquidate” was reached by the court. New circumstances came into light, however, and the trustee takes the described move in court and presents its request. The same is true for “in Reorganization”

A - Preserving the Going Concern Value – Maximizing the Value of the Estate

1. Debtor, a car manufacturer, files for liquidation. Trustee realizes that the car industry is

facing a temporary downturn. Trustee thinks that if Debtor stays in business for another 6 to 12 months, Debtor’s assets can be liquidated at a higher price. Trustee asks the court for the power to manage the Estate.

i) Will the trustee, in practice, take such initiative? Y N ii) If Trustee is right, will the court most likely allow the Trustee to postpone the

sale of assets for such a period of time? Y N

iii) Debtor has three factories (f1, f2 and f3). Trustee proves that returns are higher if: f1 is sold privately as a going concern to Buyer 1, f2 is sold piecemeal in a public auction, and f3 is managed for another 6 months before being sold. If Trustee is right, will the court most likely allow the trustee to implement this hybrid scheme in liquidation? Y N

Additional Comments if any: [ ] 2. Debtor defaults on a $50,000 tax payment due to Government (G) and on a $100,000 loan

(secured by a mortgage on a building) due to Secured Creditor (SC). On January 1, 2004, the court allows G to levy on Debtor’s assets (i.e., equipment) and grants SC the permission to foreclose on the building. The equipments and building are immediately seized in preparation for the public auction to be held on January 15, 2004. On January 14, Debtor files for bankruptcy. Debtor’s value is much higher as a going-concern than if sold piecemeal. Trustee moves in court to stop the public auction, requests the immediate turnover of the equipment and the control of the building. G and SC refuse.


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a. Will Trustee most likely prevail against G: 1) In liquidation? Y N 2) In Reorganization? Y N

b. Will Trustee most likely prevail against SC: 1) In liquidation? Y N 2) In reorganization? Y N

Additional Comments if any: [ ]

3. Creditor is contractually obligated to deliver fuel oil to Debtor on January 1 and February 1, 2004. A $10,000 payment should be made two weeks after each delivery. Contract expressly stipulates that: (1) Creditor cannot be obliged to deliver fuel to any party other than Debtor under this contract and (2) in the event of Debtor’s default Creditor has the discretion to declare the contract null and void. Two weeks after the first fuel delivery, Debtor defaults and files for Bankruptcy. Debtor’s value is much higher as a going-concern than if sold piecemeal. a. Suppose that during this period, fuel prices decrease dramatically. Trustee wishes to

purchase fuel from another supplier at the current cheaper prices. Trustee moves in court to cancel its contractual obligations on the second fuel delivery. Creditor replies that the contract should be honored. i) Will the Trustee most likely prevail: 1) in Liquidation? Y N

2) in Reorganization: Y N ii) Is Creditor eligible for damages for breach of contract? Y N . If Yes, are these damages given priority over other pre-bankruptcy unsecured debt? Y N

b. Suppose that during this period, fuel prices increase dramatically. Creditor wishes to sell its fuel at the higher market price and refuses to make the second fuel delivery citing it discretionary powers under the contractual “no-default” provision. Trustee moves in court to compel Creditor to deliver the February 1st fuel. i) If the Trustee provides adequate assurances and guarantees of future

performance, will Trustee most likely prevail: 1) In Liquidation? Y N 2) In Reorganization? Y N

c. Suppose that during this period, fuel prices increase dramatically. Debtor sold its oil business and doesn’t need fuel delivery anymore. Debtor owes Potential Buyer (PB) $10,000. PB wishes to profit from the low fuel price stipulated in Debtor’s Contract with Creditor. PB agrees to forgive Debtor’s debt if Debtor assigns Contract to PB (i.e., PB will replace Debtor in its contract with Creditor; Creditor should make the February 1 delivery directly to PB and PB should directly pay Creditor the contractual price). Trustee moves in court to assign Contract. Creditor invokes the contractual “no assignment clause” and opposes Trustee’s move. i) If the Trustee provides adequate assurances and guarantees of future

performance, will Trustee most likely prevail in assigning the contract to PB: 1) In liquidation? Y N 2) In reorganization? Y N

d. Will the Trustee, in practice, take such initiatives (as described in a, b and c above): 1) in Liquidation? Y N 2) in Reorganization: Y N



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4. Creditor delivers wood to Debtor since 10 years based on a year by year contract. Creditor fulfilled its obligations under the 2003 contract and the parties have not yet negotiated a new contract for 2004. Debtor files for Bankruptcy on January 1, 2004 and Creditor refuses to renew the contract of wood delivery for 2004. “You are now high risk and I prefer not to deal with you”, Creditor said. Debtor searches for other wood providers but could not find a willing supplier. Wood delivery is crucial for the debtor to keep functioning and Debtor’s value is much higher as a going-concern than if sold piecemeal. The trustee moves in court to compel Creditor to supply woods under a new contract. a. If the Trustee provides adequate assurances and guarantees of future performance, will

Trustee most likely prevail 1) In Liquidation? Y N 2) In Reorganization? Y N Additional Comments if any: [ ]

5. Debtor owns a ski resort. Creditor (SC) has a mortgage on one lot of Land (L). A good faith dispute over the validity of the mortgage opposes Debtor to SC and litigation is pending in court. No judgment has yet been issued (or will be issued in the near future) and parties have equal chance to win or lose. Today Debtor files for Bankruptcy. Debtor’s value is much higher as a going-concern than if sold piecemeal. a. To increase Debtor’s cash flow, Trustee wishes to sell L. Potentials Buyer (PB) won’t

buy unless the land is sold free and clear of any competing interest. Trustee asks the court for the permission to transfer ownership of L to PB free and clear of SC’

mortgage. Debtor proves that this is essential for keeping it in business. SC refuses vehemently: i) If Trustee adequately protects SC potential interest (i.e., segregates the proceeds

of this sale in a protected independent account until the final resolution of the litigation regarding the validity of the mortgage, etc.), will it most likely prevail to sell L free of SC’ interest: 1) In liquidation? Y N 2) In reorganization? Y N

b. To keep operating and to benefit from the cyclical ski season underway, Debtor urgently needs a fresh inflow of $1 million dollars. New Creditor 1 (NC1) is willing to provide fresh credit only if it gets a senior mortgage on L. Debtor proves in court that 1) it can repay this new loan in two years, and 2) that no other creditor is willing to provide new credit. CA vehemently objects to trustee’s demands. (i) If Trustee adequately protects SC potential interest (e.g., gives CA two senior

mortgages on two cheaper lands with a total price that equals the price of L, etc.) will it most likely prevail in granting NC1 a senior mortgage on L: 1) In liquidation? Y N 2) In reorganization? Y N

(ii) Suppose that CA proves in court that New Creditor 2 (NC2) was ready to lend Debtor $1 million dollars on an unsecured basis, but with an interest rate that is higher than the one charged by NC1. Trustee dealt with NC1 to save some interest. Would the Trustee most likely prevail in this case? Y N

ii) Suppose that NC1 agrees to grant its loan on an unsecured basis only if it gets absolute priority and ranks before all unsecured claims (including administrative expanses, taxes, post-petition debt, etc.). Trustee wishes to grant this priority. Could he do that: 1) In liquidation? Y N 2) In Reorganization? Y N


6. In practice, the trustee is seen as the champion of the unsecured creditor and the foe of secured creditor: T F


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7. Debtor grants Creditor (SC) a mortgage on its only asset (Hotel) with the knowledge and consent of all its unsecured creditors (UC). SC does not perfect its interest, however, until 1 day after Debtor files for bankruptcy. Trustee moves in court to void the mortgage, claiming SC does not have priority over UC. SC replies that all UC knew and agreed to the security agreement between itself and Debtor and that it should be paid in priority from the proceeds of the Hotel sale. a. Will the Trustee most likely prevail? Y N b. Suppose that SC proves in court that Trustee himself knew and agreed to the mortgage

before Debtor files for Bankruptcy. Will the Trustee most likely prevail in this case? Y N

Additional Comments if any: [ ] 8. Company A (CA) wishes to purchase Hotel. To raise the required funds, CA joins Partners 1,

2, and 3 in forming “Partnership” (P). Using P’s funds, CA purchases Hotel and transfers its ownership to its own name (CA perfects the sale and records the transaction in its own name in the real estate registry). Six months after the purchase, CA files for bankruptcy. Trustee moves in court to confirm that Hotel is part of CA’s estate. Partners 1, 2 and 3 object vehemently, claiming that Hotel was registered fraudulently in CA’s name and that it truly belongs to Partnership P. a. Will the Trustee most likely prevail? Y N b. Will the Trustee, in practice, take such initiative? Y N


9. Debtor owns (1) a Building worth $5M and (2) has $12M cash in Bank. Debtor owes $10M to Creditor A (secured by a mortgage on Building) and $20M to Creditor B (unsecured). Debtor is insolvent with liability exceeding its assets. Debtor genuinely thinks that by paying Creditor A in full, Debtor will save on interest payments and its financial situation will improve. On January 1, 2004, Debtor pays Creditor A $10M. It is proven that Creditor A was not at all aware of Debtor financial situation and did not push for such payment. Debtor financial situation does not go, however, as planned and Debtor files for bankruptcy on March 1, 2004. Trustee moves in court to avoid at least some of the Jan. 1 payment to CA. a. Will he most likely prevail? Y N b. Would Trustee most likely prevail if the building were valued at $10M instead of $5M?

Y N c. Would your answer to question 11(a) above change, if Creditor A’s loan was

contractually due on January 1, 2004 (the same date Debtor made the payment)? Y N

Additional Comments if any: [ ] B – Avoiding Forum Shopping: Protecting Pre-Bankruptcy Contractual Agreements and Creating the Right Incentives

10. Bank lends Debtor $1.5M secured by a mortgage on Debtor’s Hotel. The loan agreement states that Debtor will not be liable beyond the market value of the Hotel in case of default (non-recourse loan). Debtor also owes $300,000 to unsecured creditors. On January 1, 2004, Debtor is insolvent and files for bankruptcy. a. Debtor’s value is much higher as a going-concern than if sold piecemeal and Debtor

proposes to restructure its business. Suppose that the tourism market is experiencing a strong downturn and Hotel is valued at only $1M: i) What is the value of Bank’s allowed claim in this bankruptcy procedure:

$1M or $1.5M ?


Ziad Raymond Azar

98

ii) If your answer is $1.5M, can the Bank elect to vote in two creditors committees; as a secured creditor for the $1M loan and as an unsecured creditor for the remaining $0.5M? Y N N/A

iii) Bank opposes Debtor’s plan. Debtor moves in court to cash out Bank by paying it the estimated market value of the Hotel ($1M). Bank, taking all required legal actions (if any), refuses the $1M cash-out and answers in court that it must be paid the full $1.5M or be given control over the Hotel itself. Who will most likely prevail? Debtor

Bank iv) It is proven in court that Hotel is depreciating $1,000 per month. Is Bank legally

entitled, among other things, to protection against depreciation? Y N

v) Suppose that Debtor pays $1,000 per month to Bank and takes all other required steps to fully protect Bank’s interest in Hotel. Bank, however, proves in court that Debtor’s plan to stay in business can succeed without the use of and the need for Hotel. Bank asks the court to grant it authorization to foreclose on the Hotel and cash the proceeds. If Bank is right, will it likely prevail? Y N

vi) Since January 1, 2004, there is an unusual surge in inflation that is expected to last. Bank requests that Debtor’s reorganization plan provide for the payment of a higher interest rate that would preserve Hotel’s present value (as of the effective date of the plan). Is the Bank legally entitled, among other things, to protect the present value of its collateral? Y N

vii) If Debtor does not protect Bank against the depreciation of Hotel (i.e., pay $1,000 per month or equivalent measures), will the court grant Bank permission to foreclose on its collateral, even though the later is essential for Debtor’s successful reorganization? Y N

Additional Comments if any: [ ] b. Suppose that, contrary to the facts above, Debtor’s going concern value is lower than the

value of its assets if sold piecemeal. Debtor stopped paying interest on its loans since January 1, 2004, the day it filed for liquidation. Four months later (June 1), cash proceeds from the liquidation of Debtor’s assets are to be distributed among creditors. If Debtor had stayed in business and had not defaulted, Bank and unsecured creditors would have each earned an extra $100,000 in interests (from January 1, to June 1, 2004). i) Suppose Hotel sold for $1.6M and this is Debtor’s only assets. Bank claims it

should be paid, in priority, the full $1.6M ($1.5M for the secured principal and $100,000 for the unpaid interests). Unsecured creditors refuse this logic saying that the $100,000 should compensate part of their unpaid loans? Will Bank most likely prevail in court? Y N

ii) Suppose that Bank also had a security interest in Hotel’s “proceeds, product, offspring and profits” and Hotel was sold for $1M. From January 1 to June 1, 2004 (while liquidating), Hotel generated $100,000 in room revenue. Bank moves in court to assert its right to cash, in priority (before unsecured creditors), at least some of these revenues as “proceeds” of its collateral. Debtor and unsecured creditors oppose this move. Will Bank most likely prevail? Y N



Ziad Raymond Azar

99

11. Debtor has $17M in assets and $18M in liability. Secured Creditors (SC), Senior Unsecured Creditors (SUC), and Junior Unsecured Creditors (JUC), hold each a $6M claim against Debtor. Debtor defaults on its interest payments to all its creditors and files for Bankruptcy. Debtor proposes the following plan to restructure its business: (1) Pay $6M to each of SC and SUC, (2) Pay pre-petition arrear interests, including potential damages only to SC (but not to SUC and JUC), (3) Pay JUC with newly issued preferred stock shares worth $3M. Debtor’s shareholders (SH) keep common stock shares worth $2M. Debtor divides its creditors in three classes for voting purposes: SC, SUC, and JUC. a. Do creditors vote individually in one mass or are they required by law to vote by class?

Individually by Class They don’t vote at all b. If creditors don’t vote, please briefly describe (in a two paragraph) how is the

reorganization plan adopted? [ ] c. A class is deemed to have accepted the plan if both a majority in value ($ amount) and a

majority of claim (number of debt claims) is achieved? T F N/A d. Tom, an SUC, lent Debtor money on January 1, February 1 and March 1, 2004 under

three different loan agreements. How many claims (for voting purposes) does Tom hold in the SUC class? 3 claims 1 claim N/A

e. Which class of creditors is legally required to vote on Debtor’s plan described above?(check more than on if applicable): a) SC b) SUC c) JUC d) all none

f. Suppose that all, but JUC, accept the plan. JUC considers the plan unfair. Will the court most likely uphold this plan against the will of the JUC class? Y N

g. To address JUC concerns, Debtor presents a new plan. Suppose that, everything else equal, the plan proposes to pay JUC $5M of preferred stock shares. Debtor’ SH will bring out of pocket fresh capital ($1M) and will bid for 100% of common stock shares. No one else can compete with Debtor’s existing SH and bid for these shares. It is proven in court that the price paid by SH is fair. The JUC class, however, refuses the plan. It states that the price paid by SH to keep their ownership is fair but is not the best and that new investors should be allowed to compete with old SH and bid for common stock. Will the court most likely uphold the plan against the will of JUC class? Y N

h. Debtor realizes that if JUC claims are divided into two classes, JUC1 and JUC2, both classes will accept Debtor’s plan (the required majority in both classes could be reached). JUC1 will include JUC creditors who lent money to Debtor before January 1, 1999 and JUC2 will include those who lent money to Debtor after that date. The stated date is arbitrary and there is no administrative convenience in such division. Some JUC creditors move in court to attack this classification as unfair. Will the court most likely uphold Debtor’s classification? Y N

i. If the court upholds a reorganization plan against the will of the Secured Creditors, will the secured creditors be bound by the adopted plan? Y N

Thank you for completing the Survey. Your contribution to this study will be gratefully acknowledged.


Ziad Raymond Azar

100

APPENDIX B – DATA AND REGRESSION TABLES

TABLE 1 – DATA

Co

un

trie

s\In

dic

ato

rs

PD

I

PC

I

BI

CR

I

GD

P

GD

PK

GD

P/K

/GR

Infl

Co

ntE

nf(

t)

info

reco

ver

y

PC

r/G

DP

Lra

tes

En

g

Fr

Gr

Sca

n

Civ

il

pro

test

cath

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ox

mu

sl

bu

dh

t

Oth

er R

elig

ion

s

Algeria 61.04 42.86 51.95 25 10.83 3.32 2.61 10.39 2.60 0 41.7 11.45 8.00 0 1 0 0 1 0 0 0 1 0 0

Argentina 58.54 30.95 44.75 25 11.14 3.56 -

1.28 9.85 2.72 1 27.3 10.50 6.78 0 1 0 0 1 0 1 0 0 0 0

Australia 32.60 79.51 56.06 75 11.69 4.39 2.05 3.41 2.23 1 80 105.72 8.85 1 0 0 0 0 1 0 0 0 0 0 Austria 36.04 83.33 59.69 75 11.38 4.47 1.51 1.73 2.55 1 72.5 105.22 4.12 0 0 1 0 1 0 1 0 0 0 0 Belgium 66.56 16.67 41.61 50 11.47 4.46 1.79 2.12 2.28 1 86.6 73.02 6.70 0 1 0 0 1 0 1 0 0 0 0 Brazil 49.27 21.43 35.35 25 11.72 3.45 0.86 11.61 2.78 1 0.2 35.15 55.08 0 1 0 0 1 0 1 0 0 0 0 Cameroon 61.35 14.29 37.82 0 10.07 2.86 2.11 0.77 2.84 1 23.5 8.89 18.00 0 1 0 0 1 0 0 0 0 0 1 Canada 71.15 60.71 65.93 25 11.92 4.42 2.54 3.10 2.54 1 89.6 84.84 4.00 1 0 0 0 0 0 1 0 0 0 0 Croatia 7.81 88.10 47.95 75 10.43 3.79 3.53 3.28 2.68 0 28.6 57.43 11.75 0 0 1 0 1 0 1 0 0 0 0 Denmark 56.88 76.19 66.53 75 11.30 4.57 1.40 1.91 2.10 1 59.1 160.28 5.1 0 0 0 1 1 1 0 0 0 0 0 Finland 41.77 71.43 56.60 25 11.19 4.48 2.72 0.28 2.41 1 87.8 68.74 3.545 0 0 0 1 1 1 0 0 0 0 0 France 69.17 9.52 39.35 0 12.24 4.44 1.74 1.59 2.20 1 45.7 90.79 4.26 0 1 0 0 1 0 1 0 0 0 0 Germany 32.50 78.57 55.54 75 12.37 4.45 1.26 0.57 2.43 1 50.3 112.35 5.135 0 0 1 0 1 1 0 0 0 0 0 Greece 59.17 13.10 36.13 25 11.22 4.18 3.77 3.45 2.52 1 44.7 78.47 5.405 0 1 0 0 1 0 0 1 0 0 0

Haiti 35.21 50.00 42.60 50 9.52 2.60 -

1.54 26.96 2.57 1 3.4 14.90 34.08 0 1 0 0 1 0 1 0 0 0 0

Honduras 44.06 21.43 32.75 50 9.84 3.00 0.44 7.69 2.73 1 21.5 40.92 19.88 0 1 0 0 1 0 1 0 0 0 0 Hong Kong (China)

31.04 71.43 51.24 100 11.26 4.42 3.77 -4.99 2.32 1 81.2 150.23 5.00 1 0 0 0 0 0 0 0 0 0 1

Hungary 31.15 32.14 31.64 25 10.87 3.87 4.66 5.62 2.54 1 37.9 46.61 12.82 0 0 1 0 1 0 1 0 0 0 0 India 33.65 35.71 34.68 50 11.79 2.76 4.48 4.21 2.89 0 12.2 37.10 10.92 1 0 0 0 0 0 0 0 0 0 1 Indonesia 41.88 44.05 42.96 50 11.35 3.02 2.57 5.89 2.76 1 10.6 23.37 14.12 0 1 0 0 1 0 0 0 1 0 0


Ziad Raymond Azar

101 Ireland 55.00 34.69 44.85 25 11.10 4.49 5.33 2.55 2.34 1 87.9 136.93 2.57 1 0 0 0 0 0 1 0 0 0 0 Italy 51.15 29.17 40.16 50 12.14 4.38 1.39 2.78 3.14 1 39.8 87.39 4.64 0 1 0 0 1 0 1 0 0 0 0 Japan 56.88 60.71 58.79 50 12.66 4.55 0.85 -1.74 2.08 1 92.6 98.06 1.77 0 0 1 0 1 0 0 0 0 1 0 Jordan 27.19 35.71 31.45 25 10.05 3.31 2.68 3.67 2.53 1 25.8 70.87 8.26 0 1 0 0 1 0 0 0 1 0 0 Korea 44.38 70.24 57.31 75 11.80 4.11 5.43 2.69 2.12 1 81.3 97.05 5.90 0 0 1 0 1 0 0 0 0 1 0 Lebanon 24.69 35.71 30.20 100 10.30 3.75 2.01 3.05 2.86 1 16.9 73.20 10.81 0 1 0 0 1 0 0 0 1 0 0 Malaysia 39.90 54.76 47.33 75 11.02 3.63 3.19 4.87 2.57 1 38.6 124.80 6.05 1 0 0 0 0 0 0 0 1 0 0 Mexico 57.08 16.67 36.88 0 11.83 3.82 1.60 7.30 2.62 1 64.4 16.56 7.22 0 1 0 0 1 0 1 0 0 0 0 Morocco 65.21 7.14 36.18 25 10.64 3.17 1.79 0.70 2.58 1 34.5 55.45 11.50 0 1 0 0 1 0 0 0 1 0 0 Netherlands 45.63 64.29 54.96 75 11.68 4.47 1.05 2.07 2.15 1 86.3 166.25 2.75 0 1 0 0 1 0 1 0 0 0 0 Norway 67.29 52.38 59.84 50 11.34 4.68 1.42 3.65 2.19 1 87.6 90.26 4.04 0 0 0 1 1 1 0 0 0 0 0 Pakistan 35.31 50.00 42.66 25 10.92 2.75 1.58 6.12 2.77 1 38.1 29.99 6.08 1 0 0 0 0 0 0 0 1 0 0

Paraguay 35.10 35.16 35.13 25 9.82 3.04 -

1.23 13.76 2.56 1 8.5 15.43 33.54 0 1 0 0 1 0 1 0 0 0 0

Peru 37.81 10.71 24.26 0 10.79 3.35 1.37 4.00 2.61 1 31.6 18.71 14.49 0 1 0 0 1 0 1 0 0 0 0 Philippines 56.35 30.95 43.65 25 10.97 3.06 2.39 4.84 2.72 1 3.8 34.84 10.08 0 1 0 0 1 0 1 0 0 0 0 Poland 69.58 54.76 62.17 25 11.34 3.76 3.60 2.21 3.00 1 26.7 27.75 7.56 0 0 1 0 1 0 1 0 0 0 0 Romania 48.54 50.00 49.27 25 10.75 3.42 4.87 17.64 2.53 1 6.8 10.01 18.52 0 1 0 0 1 0 0 1 0 0 0 Russia 55.42 16.33 35.87 50 11.63 3.48 7.16 16.05 2.39 0 26.1 24.59 11.40 0 1 0 0 1 0 0 1 0 0 0 Senegal 49.38 14.29 31.83 0 9.81 2.76 2.11 1.33 2.79 1 11.7 21.17 60.00 0 1 0 0 1 0 0 0 1 0 0 Singapore 32.60 78.57 55.59 75 10.99 4.37 3.77 1.39 1.96 1 91.3 121.86 5.30 1 0 0 0 0 0 0 0 0 1 0 Slovenia 46.46 64.29 55.37 75 10.42 4.12 3.62 4.25 3.08 1 42.4 46.29 8.65 0 0 1 0 1 0 1 0 0 0 0 South Africa 50.63 75.00 62.81 75 11.17 3.51 1.99 5.20 2.61 1 31.8 141.73 11.29 1 0 0 0 0 1 0 0 0 0 0 Sweden 61.56 57.14 59.35 25 11.46 4.51 2.56 1.46 2.32 1 72.3 105.95 4.00 0 0 0 1 1 1 0 0 0 0 0 Tanzania 36.15 35.71 35.93 50 10.05 2.50 3.86 4.86 2.49 0 22 7.64 13.92 1 0 0 0 0 0 0 0 1 0 0 Thailand 71.67 58.33 65.00 50 11.17 3.37 4.01 2.47 2.61 1 43.4 87.64 5.50 1 0 0 0 0 0 0 0 0 1 0 Tunesia 72.50 11.90 42.20 0 10.39 3.39 3.74 2.49 2.06 1 51 65.08 8 0 1 0 0 1 0 0 0 1 0 0 Uganda 36.15 35.71 35.93 50 9.82 2.38 2.44 7.85 2.50 0 41 5.99 20.60 1 0 0 0 0 0 1 0 0 0 0 United Kingdom 35.73 73.57 54.65 100 12.27 4.49 2.32 2.68 2.41 1 85.8 155.29 4.40 1 0 0 0 0 1 0 0 0 0 0 United States 92.19 59.52 75.86 25 13.06 4.60 1.94 2.24 2.44 1 69.1 163.64 4.34 1 0 0 0 0 1 0 0 0 0 0

Venezuela 48.23 44.05 46.14 75.00 10.99 3.57 -

1.42 33.06 2.64 1 4.9 11.33 18.50 0 1 0 0 1 0 1 0 0 0 0


Ziad Raymond Azar

102

TABLE II – BANKRUPTCY INDEX IN DETAIL

Co

un

trie

s\In

dic

ato

rs

Ma

nag

emen

t N

ot

Ou

sted

No

Res

tric

tio

ns

on

fil

ing

Pos

tpon

ing

Sal

e in

Liq

uida

tion

Eff

icie

nt S

ale

in L

iqui

dati

on

Eff

icie

nt

Sa

le P

roce

du

res

Liq

uida

tion:

Tur

nove

r O

rder

A

gain

st G

over

nmen

t

Reo

rgan

izat

ion:

Tur

nove

r O

rder

A

gain

st G

over

nmen

t

Liq

uida

tion:

Tur

nove

r O

rder

A

gain

st S

ecur

ed C

redi

tor

Reo

rgan

izat

ion:

Tur

nove

r O

rder

A

gain

st S

ecur

ed C

redi

tor

Tu

rno

ver

Ord

ers

Reo

rgan

izat

ion:

Rej

ecti

ng

Exe

cuto

ry C

ontr

acts

Dam

ages

: No

Pri

ority

Liq

uida

tion:

Ass

umpt

ion

with

C

ance

llat

ion

Cla

use

Reo

rgan

izat

ion:

Ass

umpt

ion

with

C

ance

llat

ion

Cla

use

Liq

uida

tion:

Ass

ignm

ent w

ith N

O

Ass

ignm

ent C

laus

e

Reo

rgan

izat

ion:

Ass

ignm

ent w

ith

No

Ass

ignm

ent C

laus

e

Liq

uida

tion:

Com

pell

ing

Con

trac

tual

Rel

atio

ns

Reo

rgan

izat

ion:

Com

pell

ing

Con

trac

tual

Rel

atio

n

Ex

ecu

tory

Con

tra

cts

Liq

uida

tion:

Sel

l Fre

e an

d C

lear

of

Pre

viou

s L

ien

Reo

rgan

izat

ion:

Sel

l Fre

e an

d C

lear

of

Pre

viou

s L

ien

Australia 0 0 1 1 100 1 1 0 0 50 0 1 0 0 0 0 0 0 13 1 1 Canada 100 100 1 1 100 1 1 0 1 75 1 1 1 1 1 1 0 1 88 1 1 Hong Kong (China) 0 0 1 1 100 1 0 1 0 50 1 1 0 0 0 0 0 0 25 1 1 India 100 0 1 1 100 0 0 0 0 0 0 1 0 0 0 0 0 0 13 1 0 Ireland 100 100 1 1 100 1 1 0 1 75 1 1 0 0 0 0 0 0 25 0 0 Malaysia 100 0 1 1 100 1 0 1 0 50 0 1 0 0 0 0 0 0 13 1 0 Pakistan 100 0 1 1 100 0 1 0 1 50 0 1 0 0 0 0 0 0 13 0 0 Singapore 0 0 1 1 100 1 1 0 1 75 0 1 0 0 0 0 0 0 13 0 1 South Africa 0 0 1 1 100 1 1 1 1 100 1 1 1 1 1 1 0 0 75 0 0 Tanzania 100 0 1 1 100 0 0 0 0 0 0 1 0 0 0 0 0 0 13 1 0 Thailand 100 100 1 1 100 1 1 0 1 75 1 1 0 0 0 0 0 0 25 1 1 Uganda 100 0 1 1 100 0 0 0 0 0 0 1 0 0 0 0 0 0 13 1 0 U.K. 0 0 1 1 100 1 1 1 1 100 0 1 0 0 0 0 0 0 13 1 1 U.S.A. 100 100 1 1 100 1 1 1 1 100 1 1 1 1 1 1 0 1 88 1 1

English Origine Average 64 29 1 1 100 1 1 0 1 57 0 1 0 0 0 0 0 0 30 1 1

Algeria 100 100 1 1 100 0 0 0 0 0 1 1 0 0 0 0 0 0 25 1 1 Argentina 100 100 0 1 50 0 1 0 0 25 1 1 1 1 1 1 0 0 75 1 1 Belgium 100 100 1 1 100 1 1 0 1 75 0 1 0 1 1 1 0 1 63 1 1 Brazil 100 100 1 0 50 1 0 1 0 50 0 1 0 0 0 0 0 0 13 1 0 Cameroon 100 100 1 1 100 0 0 0 0 0 1 1 1 1 1 1 0 1 88 1 1 France 100 100 1 1 100 1 1 1 1 100 1 1 1 1 0 1 0 1 75 0 1 Greece 100 100 1 1 100 0 1 0 1 50 0 1 0 1 0 0 0 0 25 1 1 Haiti 0 0 0 0 0 1 1 1 1 100 1 1 0 0 0 0 0 0 25 1 1 Honduras 100 100 1 1 100 0 0 0 0 0 0 1 0 0 0 0 0 0 13 0 0


Ziad Raymond Azar

103 Indonesia 100 100 0 1 50 0 0 0 0 0 1 1 0 0 0 0 0 0 25 0 0 Italy 100 0 1 1 100 1 1 1 1 100 0 1 0 0 0 0 0 0 13 1 0 Jordan 100 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 13 0 0 Lebanon 100 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 13 0 0 Mexico 100 100 1 1 100 0 0 0 0 0 1 1 1 1 0 0 0 0 50 1 0 Morocco 100 100 1 1 100 0 0 0 0 0 1 1 1 1 1 1 0 0 75 0 0 Netherlands 100 100 1 1 100 0 0 0 0 0 1 1 0 0 0 0 0 0 25 0 0 Paraguay 100 0 0 1 50 0 0 0 0 0 0 1 0 0 0 0 0 0 13 1 1 Peru 100 100 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 13 0 0 Philippines 100 100 0 1 50 0 1 0 1 50 1 1 0 1 0 0 0 0 38 1 1 Romania 100 100 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 25 0 0 Russia 100 100 1 0 50 0 0 0 0 0 1 1 1 1 0 0 0 0 50 1 1 Senegal 100 100 1 1 100 0 0 0 0 0 1 1 0 0 0 0 0 0 25 0 0 Tunesia 100 100 1 1 100 1 1 1 1 100 1 1 1 1 0 0 0 0 50 0 0 Venezuela 100 100 1 0 50 0 0 0 0 0 0 1 0 0 0 0 0 0 13 1 1 French Origin Average 96 79 1 1 65 0 0 0 0 27 1 1 0 0 0 0 0 0 35 1 0 Austria 0 0 1 1 100 0 0 0 0 0 1 1 0 0 0 0 0 0 25 1 1 Croatia 0 0 0 1 50 0 0 0 0 0 0 1 0 0 0 0 0 0 13 0 0 Germany 0 0 0 1 50 1 1 0 0 50 1 1 1 1 0 0 0 0 50 0 0 Hungary 100 0 1 1 100 0 0 0 0 0 0 1 0 0 0 0 0 0 13 1 0 Japan 100 100 0 1 50 0 0 0 0 0 1 1 0 0 0 0 0 0 25 1 1 Korea 0 0 1 1 100 0 1 0 1 50 1 1 1 1 1 1 0 0 75 0 0 Poland 100 100 1 1 100 1 1 1 1 100 1 1 1 1 0 0 0 0 50 1 0 Slovenia 100 0 1 1 100 0 0 0 0 0 1 1 0 0 0 0 0 0 25 1 0 German Origin Average 50 25 1 1 81 0 0 0 0 25 1 1 0 0 0 0 0 0 34 1 0 Denmark 100 0 1 1 100 1 1 1 1 100 0 1 1 0 0 0 0 0 25 0 0 Finland 0 0 0 0 0 1 1 1 1 100 0 1 1 1 0 0 0 0 38 1 0 Norway 100 0 1 1 100 1 1 1 1 100 1 1 1 1 1 1 0 0 75 1 1 Sweden 100 0 1 1 100 1 1 1 1 100 1 1 1 1 0 0 0 1 63 0 0 Scandinavian Origin Average

75 0 1 1 75 1 1 1 1 100 1 1 1 1 0 0 0 0 50 1 0


Ziad Raymond Azar

104

Co

un

trie

s\In

dic

ato

rs

Liq

uida

tion:

Com

pell

ing

Col

late

ral S

ubst

ituti

on

Reo

rgan

izat

ion:

Com

pell

ing

Col

late

ral S

ubst

ituti

on

Liq

uida

tion:

New

Loa

n w

ith

Adm

inis

trat

ive

Sup

er P

rior

ity

Reo

rgan

izat

ion:

New

Loa

n w

ith

Adm

inis

trat

ive

Sup

er P

rior

ity

Deb

tor

in P

oss

essi

on

Fin

an

cin

g

Tru

stee

foe

of

Sec

ured

Cre

dito

rs

Liq

uida

tion:

Per

fect

ion

Aft

er

Fil

ing

is N

ot V

alid

Reo

rgan

izat

ion:

Per

ferc

tion

Aft

er

Fil

ing

is N

ot V

alid

Est

ate

has

the

pow

ers

of a

bon

a fi

de p

urch

aser

in li

quid

atio

n

Est

ate

has

the

pow

ers

of a

bon

a fi

de p

urch

aser

in r

eorg

aniz

atio

n

Tru

stee

's P

ow

ers

Pre

fere

nce:

Vol

unta

ry b

ona

fide

pa

ymen

t to

Uns

ecur

ed C

redi

tors

is

avoi

dabl

e in

liqu

idat

ion

Pre

fere

nce:

Vol

unta

ry b

ona

fide

pa

ymen

t to

Uns

ecur

ed C

redi

tors

is

avoi

dabl

e in

reo

rgan

izat

ion

Pre

fere

nce:

Inv

olun

tary

Pay

men

t to

Uns

ecur

ed C

redi

tors

is

avoi

dabl

e in

liqu

idat

ion

Pre

fere

nce:

Inv

olun

tary

Pay

men

t to

Uns

ecur

ed C

redi

tors

is

avoi

dabl

e re

orga

niza

tion

Pre

fere

nce

GO

ING

CO

NC

ER

N I

ND

EX

Ma

nag

emen

t O

ust

ed

Res

tric

tio

ns

on

Fil

ing

No

Aut

omat

ic S

tay

on S

ecur

ed

Cre

dito

rs in

reo

rgan

izat

ion?

Sta

y E

quiv

alen

t

Australia 0 0 0 0 33 0 1 1 0 0 40 1 0 0 0 25 33 100 100 0 1 Canada 1 1 0 0 67 0 1 1 0 0 40 0 0 0 0 0 71 0 0 0 0 Hong Kong (China) 0 0 0 0 33 0 1 1 0 0 40 0 0 0 0 0 31 100 100 0 1 India 0 0 0 0 17 0 1 0 1 0 40 0 0 0 0 0 34 0 100 1 1 Ireland 0 0 0 0 0 0 1 1 0 0 40 0 0 0 0 0 55 0 0 0 1 Malaysia 0 0 0 0 17 0 1 0 1 0 40 0 0 0 0 0 40 0 100 1 1 Pakistan 0 0 0 0 0 0 1 0 0 0 20 0 0 0 0 0 35 0 100 1 1 Singapore 0 1 0 0 33 0 0 0 1 1 40 0 0 0 0 0 33 100 100 0 1 South Africa 0 0 0 0 0 0 1 1 1 1 80 1 1 0 0 50 51 100 100 0 0 Tanzania 0 0 0 0 17 0 1 0 1 1 60 0 0 0 0 0 36 0 100 1 1 Thailand 0 0 0 0 33 0 1 1 0 0 40 1 1 1 1 100 72 0 0 0 1 Uganda 0 0 0 0 17 0 1 0 1 1 60 0 0 0 0 0 36 0 100 1 1 U.K. 0 0 0 0 33 0 1 1 0 0 40 0 0 0 0 0 36 100 100 0 1 U.S.A. 1 1 1 1 100 1 1 1 1 1 100 1 1 0 0 50 92 0 0 0 1

English Origine Average 0 0 0 0 29 0 1 1 1 0 49 0 0 0 0 16 47 36 71 0 1

Algeria 0 0 0 0 33 0 1 1 1 1 80 1 1 0 0 50 61 0 0 1 1 Argentina 0 0 0 0 33 0 1 0 1 1 60 1 0 0 0 25 59 0 0 0 1 Belgium 0 1 0 0 50 0 1 0 0 0 20 1 0 0 0 25 67 0 0 0 1 Brazil 0 0 0 0 17 0 1 0 1 0 40 1 0 0 0 25 49 0 0 1 1 Cameroon 0 0 0 0 33 1 0 0 0 0 20 1 1 0 0 50 61 0 0 0 0 France 0 1 0 0 33 0 0 0 1 0 20 1 0 0 0 25 69 0 0 0 0 Greece 0 0 0 0 33 0 0 0 1 1 40 1 0 0 0 25 59 0 0 0 0 Haiti 1 1 0 0 67 0 1 1 0 0 40 1 1 0 0 50 35 100 100 0 0 Honduras 0 0 0 0 0 0 1 1 0 0 40 0 0 0 0 0 44 0 0 1 1 Indonesia 0 0 0 0 0 1 0 0 1 1 60 0 0 0 0 0 42 0 0 0 1 Italy 0 0 0 0 17 0 1 1 1 1 80 0 0 0 0 0 51 0 100 0 0 Jordan 0 0 0 0 0 0 1 1 1 1 80 1 0 0 0 25 27 0 100 1 1 Lebanon 0 0 0 0 0 0 1 1 1 0 60 1 0 0 0 25 25 0 100 1 1


Ziad Raymond Azar

105 Mexico 0 0 0 0 17 0 0 0 1 1 40 1 1 0 0 50 57 0 0 0 0 Morocco 0 1 0 0 17 0 1 1 1 1 80 1 1 0 0 50 65 0 0 0 0 Netherlands 0 0 0 0 0 0 1 0 1 0 40 0 0 0 0 0 46 0 0 1 1 Paraguay 0 0 0 0 33 1 0 0 1 1 60 1 0 0 0 25 35 0 100 1 1 Peru 0 0 0 0 0 0 0 0 1 1 40 1 1 0 0 50 38 0 0 0 0 Philippines 0 0 0 0 33 1 1 0 1 1 80 0 0 0 0 0 56 0 0 0 0 Romania 1 1 0 0 33 0 1 1 1 1 80 1 1 0 0 50 49 0 0 0 1 Russia 0 0 0 0 33 1 0 0 1 1 60 1 1 0 0 50 55 0 0 0 0 Senegal 0 0 0 0 0 1 0 0 0 0 20 1 1 0 0 50 49 0 0 0 0 Tunesia 0 0 0 0 0 0 1 1 1 1 80 1 1 0 0 50 73 0 0 0 0 Venezuela 0 0 0 0 33 0 0 0 1 1 40 1 1 0 0 50 48 0 0 1 1 French Origin Average 0 0 0 0 22 0 1 0 1 1 53 1 0 0 0 31 51 4 21 0 0 Austria 0 0 0 0 33 0 1 1 1 1 80 1 1 0 0 50 36 100 100 1 1 Croatia 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8 100 100 1 1 Germany 0 0 0 0 0 1 1 1 0 0 60 1 1 0 0 50 33 100 100 1 1 Hungary 0 0 0 0 17 0 0 0 1 0 20 0 0 0 0 0 31 0 100 0 0 Japan 0 1 0 0 50 0 1 1 1 1 80 1 1 0 0 50 57 0 0 1 1 Korea 0 0 0 0 0 0 1 1 1 1 80 1 1 0 0 50 44 100 100 0 0 Poland 0 0 0 0 17 0 0 0 1 1 40 1 1 0 0 50 70 0 0 1 1 Slovenia 0 0 0 0 17 0 1 1 1 1 80 1 1 0 0 50 46 0 100 1 1 German Origin Average 0 0 0 0 17 0 1 1 1 1 55 1 1 0 0 38 41 50 75 1 1 Denmark 0 0 0 0 0 0 1 1 1 1 80 1 1 0 0 50 57 0 100 1 1 Finland 0 1 1 1 67 0 1 1 1 1 80 1 1 0 0 50 42 100 100 0 1 Norway 0 0 0 0 33 0 1 1 1 1 80 1 1 0 0 50 67 0 100 0 1 Sweden 0 0 0 0 0 0 1 1 1 1 80 1 1 0 0 50 62 0 100 1 1 Scandinavian Origin Average

0 0 0 0 25 0 1 1 1 1 80 1 1 0 0 50 57 25 100 1 1


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Australia 1 1 1 0 1 75 32 1 1 100 1 0 50 100 80 56

Canada 0 0 1 0 0 25 100 1 1 100 1 1 100 100 61 66

Hong Kong (China) 1 1 1 1 1 100 0 1 1 100 1 1 100 0 71 51

India na na na na na 100 0 1 0 50 0 0 0 0 36 35

Ireland 1 1 0 0 1 50 43 1 0 50 1 1 100 0 35 45

Malaysia na na na na na 100 33 1 0 50 1 1 100 0 55 47

Pakistan na na na na na 100 0 1 0 50 1 1 100 0 50 43

Singapore 1 1 1 1 1 100 50 1 1 100 1 1 100 0 79 56

South Africa 0 0 0 0 1 25 50 1 0 50 1 1 100 100 75 63

Tanzania na na na na na 100 0 1 0 50 0 0 0 0 36 36

Thailand 1 0 1 1 1 75 33 1 1 100 1 1 100 100 58 65

Uganda na na na na na 100 0 1 0 50 0 0 0 0 36 36

U.K. 1 0 1 1 1 75 40 1 1 100 1 1 100 0 74 55

U.S.A. 1 1 1 1 1 100 17 1 1 100 1 1 100 100 60 76

English Origine Average 0 0 1 0 1 80 28 1 1 75 1 1 75 36 57 52

Algeria na na na na na 100 0 1 1 100 0 0 0 100 43 52

Argentina 1 1 0 0 1 50 17 1 1 100 1 0 50 0 31 45

Belgium 1 0 1 0 1 50 17 1 0 50 0 0 0 0 17 42

Brazil na na na na na 100 0 1 0 50 0 0 0 0 21 35

Cameroon 0 0 0 0 0 0 0 1 1 100 0 0 0 0 14 38

France 0 0 0 0 0 0 17 0 1 50 0 0 0 0 10 39

Greece 0 1 0 0 0 25 17 1 0 50 0 0 0 0 13 36

Haiti 0 0 0 0 0 0 0 1 0 50 0 0 0 100 50 43

Honduras na na na na na 100 0 0 1 50 0 0 0 0 21 33

Indonesia 1 1 1 1 0 75 33 1 1 100 0 0 0 100 44 43

Italy 0 0 0 0 0 0 4 1 1 100 0 0 0 0 29 40

Jordan 0 0 0 0 0 100 0 1 0 50 0 0 0 0 36 31

Lebanon na na na na na 100 0 1 0 50 0 0 0 0 36 30


Ziad Raymond Azar

107 Mexico 0 0 0 0 0 0 17 1 1 100 0 0 0 0 17 37

Morocco 0 0 0 0 0 0 0 0 1 50 0 0 0 0 7 36

Netherlands na na na na na 100 100 1 1 100 1 0 50 100 64 55

Paraguay na na na na na 100 46 0 0 0 0 0 0 0 35 35

Peru 0 1 0 0 0 25 0 1 0 50 0 0 0 0 11 24

Philippines 0 0 0 0 0 0 17 1 0 50 1 0 50 100 31 44

Romania 1 0 1 0 1 50 0 1 1 100 1 1 100 100 50 49

Russia 0 0 0 0 0 0 14 1 1 100 0 0 0 0 16 36

Senegal 0 0 0 0 0 0 0 1 1 100 0 0 0 0 14 32

Tunesia 0 0 0 0 0 0 33 0 1 50 0 0 0 0 12 42

Venezuela na na na na na 100 8 1 1 100 0 0 0 100 44 46

French Origin Average 0 0 0 0 0 45 14 1 1 71 0 0 10 29 28 39

Austria na na na na na 100 33 1 1 100 1 0 50 100 83 60

Croatia na na na na na 100 17 1 1 100 1 1 100 100 88 48

Germany na na na na na 100 0 1 1 100 1 0 50 100 79 56

Hungary 0 0 0 0 0 0 25 1 1 100 0 0 0 0 32 32

Japan na na na na na 100 25 1 1 100 1 1 100 100 61 59

Korea 0 1 0 0 0 25 17 1 1 100 1 0 50 100 70 57

Poland na na na na na 100 33 1 1 100 1 0 50 100 55 62

Slovenia na na na na na 100 50 1 1 100 1 1 100 0 64 55

German Origin Average 0 0 0 0 0 78 25 1 1 100 1 0 63 75 67 54

Denmark na na na na na 100 33 1 1 100 1 1 100 100 76 67

Finland 1 1 1 1 1 100 0 1 1 100 1 1 100 100 71 57

Norway 1 0 1 0 1 50 17 1 1 100 1 1 100 0 52 60

Sweden na na na na na 100 0 1 1 100 1 1 100 0 57 59

Scandinavian Origin Average 0 0 1 0 1 88 13 1 1 100 1 1 100 50 64 61

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