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UNCITRAL United Nations Commission on International Trade Law Exit Strategy For SMEs – Macro- economic Relevance and Challenges Yan Liu IMF Legal Department December 18, 2013

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Page 1: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

Exit Strategy For SMEs – Macro-

economic Relevance and Challenges

Yan Liu

IMF Legal Department

December 18, 2013

Page 2: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

1. SMEs: Macro-Economic Relevance

2. SME Exit Strategies: Importance & Challenges

3. Preliminary Observations

Page 3: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

Page 4: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

• disadvantaged sector to growth sector

• shift in policy approach and regulatory structure

View on SMEs changed over time

• Vibrant: short-lived, innovative, aiming to attract investment and grow, easy exit → critical for labor absorption & growth

• Inert: long-lived, static, inability to grow because bureaucratic-legal obstacles, difficult exit → kills jobs and structural productivity deficit

Two types of SME markets

Page 5: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

SMEs EU Japan Latin

America

India

Company market

share

99.8%

99.7%

99%

95%*

Labor market

share

67%

69%

67%

40%

GDP share

60%

55%

30%

17%

(of industrial units)*

Page 6: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

SMEs in the Crisis Context

European Financial Crisis

• Household debt crisis- Unlike Latin American & Russian sovereign debt crises, or Asian corporate debt crisis

SMEs particularly exposed

• Examples: (2009 figures) • Finland: 17% SMEs declared solvency problems

• Italy & Spain: 25% increase of insolvency filings

• Ireland: SMEs created 172,000 jobs 2000-7

Current crisis highlights SME’s vulnerabilities

• Drop in revenue as business declines & late payments

• Income deterioration and personal wealth reduction

• Reduced access to credit as banks tighten lending

• Lack of effective rehabilitation due to weak legal/regulatory framework

Page 7: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

Macro-economic Relevance

Drain on growth as consumers cut back on spending

Banks weaken as NPLs increase, capital erode, uncertainties

increase

Mortgage debt and dropping real

estate prices protract recession

Public debt enhanced risk

sustainability (due to possible bank recapitalization

costs or “bail-out” schemes for

certain sectors (e.g., mortgages,

SMEs)

SME & Private debt impedes

recovery

Page 8: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

Page 9: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

SMEs – Building Blocks

Market Entry:

Encourage entrepreneurship

• Low bureaucratic thresholds

• Low cost

• Short time

Foster Growth:

Access to credit & business continuity

• Ease in licensing

• Access to credit

• Fiscal facilities

Market Exit:

Critical to Efficient & Entrepreneurial Market

• Sustains entrepreneurial capital

• Encourages innovation and risk taking

• Aims at business continuity

Page 10: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

Key Challenges to SME Exit

• No special legal framework due to different definitions of SMEs Definitional issues

• common restructuring regimes depend on new credit, which SMEs typically do not have access to

Access to credit constraints

• Lack of adequate tax incentives for distressed SMEs Fiscal constraints

• Lack of robust insolvency framework to support fresh start for entrepreneurs or early rescue for viable SMEs

Constraints on Early Rescue

• SMEs typically secure business ventures with personal guarantees and mortgages; business and personal assets are mixed

Special Guarantee Regime

• Social and political considerations impact exit strategy for SMEs Social & Political Considerations

Page 11: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

SMEs Corporate Insolvency Procedure

Applicability many SMEs are not

incorporated

Complexity procedures are too complex, rigid and lengthy for SMEs

Commercially unviable

Difficulties to get new financing, complications

of personal guarantees/mortgage

aspect, limited possibilities for

commercial/financial downsizing

Weak business continuity

procedures tend to be geared towards

liquidation

UNCITRAL Guide has provided useful guidance that can be further developed

and tailored for SMEs. Limitations are:

Page 12: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

SME: Personal Insolvency Procedure

Applicability

limited to individuals and sometimes small firms, but not to partnerships

and other unincorporated entities

Formalism mostly court based procedures with costs and delays

Weak business continuity

lack of effective restructuring

procedure, no fresh start in all cases, lengthy discharge

period

No International Best Practices exist, but cross-country experience provides guidance.

Page 13: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

SMEs: Out-of-Court Regime

• May be selectively applied to SMEs

INSOL Principles

• Special out-of-court regimes for SMEs are not widely available, however, some countries do have them (e.g., India).

• Where they do exist, they tend to be ineffective (e.g., lack of incentives).

Availability

• Some countries recently adopted special out-of-court regimes for SMEs (e.g., Spain and Portugal)

• Their effectiveness remains untested.

Recent Developments

Page 14: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

Special Regimes for SMEs

Spain (9/2013) – Out-of-Court Procedures

Access limited to individual entrepreneurs and legal entities with fewer than 50 creditors and liabilities below €5m

Enforcement actions stayed up to 3 months (excluding secured or public creditors)

Mediator appointed by the Commercial Registrar

Payment plan with a mandatory cap of not more than 25% on haircut and deferral of 3 years

Approval by creditors of 60% in value

Not affect secured or public creditors

Page 15: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

Special Regimes for SMEs

Portugal (2012) – Out of Court Procedures

SIREVE targeted at SMEs

Facilitated by IAPMEI, a mediation entity associated with MoE

Tax and social security authorities required to participate in the negotiations

Standstill applicable to creditors participating in the SIREVE

No cram down

Page 16: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

Page 17: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law

Preliminary Observations

Increasing Importance

• Account for a large share of the economy

• Macro-economically critical

• Ineffective current legal regime for market exit

• Need a targeted insolvency regime to help preserve SMEs

Tailored Legal Regime

• Simplified procedures

• Speedy process

• Lower costs

• Fresh start for individual entrepreneurs

• Early rescue of viable SMEs

• Out-of-Court procedures

Supporting Factors

• Efficient exit needs support of other laws (e.g., tax incentives)

• Provide for additional financing (e.g., from government)

• Raise awareness and make available information

• Need efficient institutional framework (mediation, arbitration, insolvency administrators, court system)

Page 18: Exit Strategy For SMEs Macro- economic Relevance …...entrepreneurs •Early rescue of viable SMEs •Out-of-Court procedures Supporting Factors •Efficient exit needs support of

UNCITRAL United Nations Commission on International Trade Law


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