LAW, JUSTICE AND DEVELOPMENT WEEK 2011

INNOVATION AND EMPOWERMENTFOR DEVELOPMENT

November 14-17, 2011 Washington DC

LJD LAWJUSTICE andDEVELOPMENT

Innovative Approaches to Insolvency & Restructuring

Non-performing loans, debt enforcement

and the impact of the legal framework

Frederique DahanEBRD, Office of the General Counsel

Financial crisis in the ECA region

NPL level in the region is high (but differs from country to country)

First time since transition began

Creditors (mostly banks) trying to deal with the problem (with various success and mixed motivation)

Feedback is invaluable to: get a sense of problems that creditors face

analyse impact (or lack of) legal systems

suggest revised agenda for reform in more ‘mature’ jurisdictions

1. Problems faced by creditors/banks

NPLs require organisation changes: new work-out units, policies, distinction between large corporate and SME/consumer lending

Difficult to recruit right staff – lawyers biased towards liquidation of collateral

Recognition that under-writing standards had been lax – contract drafting, borrower information and collateral

Collateral over-evaluated and some markets now very depressed

1. Problems faced by creditors (cont.)

Out of court enforcement is not used by banks

Assumption that they require debtor collaboration, difficult to obtain in distressed times

Court procedures lengthy and costly

Sales at auctions generate low proceeds

Opening of insolvency proceedings against corporates avoided if at all possible

Statutory moratorium of mortgage loans in some cases

2. Impact of legal framework

Premises which underpinned reform:

Enforcement should enable prompt realisation of assets at market value

Out of court enforcement clauses in contract

Courts need not be involved - can be replaced by quasi-public institutions, such as notaries

Security right effective and enforceable after debtor insolvency

2. Impact of legal framework (Cont.)

Start of enforcement should be formal but straightforward

Debtor should be allowed to object but not to derail or unduly delay the process

Realisation means should be flexible – sale at auctions remains inefficient, especially when market is inactive

Ultimately, legal framework is backdrop of bargaining between creditor and debtor

3. Agenda for reform

Revised agenda Out of court enforcement should not require debtor

collaboration – needs to function unless debtor actively obstructs

Outsource legal services to qualified professionals (receivers, insolvency practitioners)

Creditors need to be actively involved in all stages (including insolvency proceedings)

Creditworthiness is key : credit information reporting system

3. Agenda for reform (cont.)

New agenda

Debt collection agencies

Distressed debt market

Appraisal / evaluators

Tax issues

Debt equity swaps

Private work-outs

EBRD committed to provide support (technical assistance and investment)

Financial Law Unit within the Legal Transition Programme, OGC