Resolving Insolvency

Establishing or clarifying rules for commencing insolvency proceedings 
The possibility for both the debtor and the creditors to initiate judicial liquidation or judicial reorganization together with a concrete mechanism which identifies parties who can apply for the procedure and establishes a formal process for submitting the application as well as the timing of the application should be clearly addressed by the law. Some commencement criteria (for example: a debtor which is unable to pay its debts as they become due may be made subject to formal insolvency proceedings) and presumptions about insolvency should be clearly defined in the law.
Establishing effective reorganization proceedings 
The highest recovery rates are recorded in economies where reorganization is the most common insolvency proceeding. Reorganization aims to restore the financial well-being and viability of a debtor's business so that the business can continue to operate through means that may include debt forgiveness, debt rescheduling, debt-equity conversions and sale of the business (or parts of it) as a going concern. The ultimate purpose is to allow the debtor to overcome its financial difficulties and resume or continue its business operations. The UNCITRAL’s Legislative Guide on Insolvency Law and the World Bank Principles on Effective Insolvency and Creditor/Debtor Regime, as well as other authoritative texts, recommend reorganization proceedings that are formally structured and have the following elements:
a. The possibility for both the debtor and the creditors to initiate reorganization procedures and a concrete mechanism to commence reorganization proceedings, identifying parties who can apply for reorganization, establishing a procedure for submitting the application as well as the timing of the application;
b. A mechanism to manage the property of the debtor while reorganization proceedings are on-going, this usually involves the appointment of an administrator or a manager to oversee the debtor’s assets and operation and a moratorium preventing creditors from enforcing their rights outside the reorganization process;
c. Minimum standards for a reorganization plan, including its content and treatment of creditors;
d. A mechanism for implementation of a reorganization plan and equity considerations for approval of a reorganization plan. In that sense, when voting reorganization plan, only creditors whose rights are affected by the plan should vote. The rights of certain secured creditors may be unaffected by a given reorganization plan. If that is the case, those creditors should not vote to approve the reorganization plan.
e. Enable creditors to vote reorganization plan in classes and establish that creditors of the same class receive the same treatment under the reorganization plan. Good international practice recommends dividing creditors into classes and having each class vote separately to approve a rehabilitation plan. This approach helps in preparation of the reorganization (rescue) plan and ensure fair voting procedures.
f. Based on the possibility that the majority of creditors can impose a plan on the dissenting minority, a generally accepted principle is that dissenting creditors must receive at least as much under the reorganization plan imposed on them as they would have received in liquidation proceedings.
g. An element of restructuring. The debtor’s business undergoes a change based on the approved reorganization plan, whereby some restrictions are imposed on the debtor as to how its assets and business should be managed or structured until the debts are repaid in accordance with the plan.
It is noteworthy that one-third of economies around the world have no formal judicial reorganization proceeding, and in only 19 economies is reorganization the most common proceeding as recorded by Doing Business. However, this number is rising—since 2013, 28 economies have introduced reorganization proceedings, including Cyprus, the Arab Republic of Egypt, Malaysia and the United Arab Emirates.
Jordan provides a good example of successful reforms aimed at implementing reorganization proceedings. In line with international good practices, the government of Jordan adopted Insolvency Law No. 21 of 2018 under which the option of reorganization for commercial entities as an alternative to previously available liquidation procedure was introduced. It also stipulated specific rules on how creditors vote on the reorganization plan—all creditors must vote on the plan, regardless of its impact on their interests. Finally, the Law improved provisions on the treatment of contracts during insolvency by, for example, providing for the rejection by the debtor of overly burdensome contracts.
Promoting creditor participation 
Research shows that if creditors are not protected or allowed to participate in insolvency proceedings, they will have less incentive to lend in the future, leading to less-developed credit markets.²
Creditors are key participants in insolvency proceedings—the maximized value of the assets is closely tied to the recovery of creditors, whether financial lenders, employees or trade creditors. Thus, it is key that creditors play an important role in insolvency proceedings as well as the powers, liabilities and rights in the rescue process. Good practice suggests that legal frameworks establish specific and direct provisions allowing the following creditor’s rights:
· The right to select the insolvency representative.
Because the insolvency practitioner’s fees are deducted from creditors’ returns, they are highly motivated to seek out a professional who is familiar with the nature of the debtor’s business, activities or type of assets, or who has special knowledge to handle the particular circumstances of the case. The risk that an insolvency practitioner might favor the creditor who nominated him or her can be mitigated by provisions that allow for other creditors to move to replace the insolvency practitioner, for example at the first creditor’s meeting. Moreover, once a strong framework for regulating insolvency practitioners is in place, an insolvency practitioner can be held accountable for his or her professional conduct.
· The right to approve the sale of substantial assets of the debtor.
The law should incorporate a number of procedural safeguards to make sure that the procedures are fair, transparent, well publicized and that the manner of sale chosen maximizes the value for the estate. To that end, where assets of the insolvency estate are to be sold, the law should require that the creditors are notified and consulted on the sale of assets (outside of the ordinary course of business). Good practice suggests that creditors should be allowed to challenge the sale of the assets (either with the insolvency representative or the court, as appropriate) if they disapprove, to ensure that their interests are also protected. As such, the creditors will be able to require that neutral, independent professionals value the assets and that collusion between the debtor and prospective bidders is discouraged.
· The right to request information at any time from the insolvency representative on the debtor's business and financial affairs.
Good practice suggests that individual creditors should have the right to request information about the financial state of the debtor on a continuous basis throughout the insolvency proceedings without significant impediments. The most common way to gain access to such information is through a request to the insolvency representative who manages the business affairs of the debtor.
· The right to object to the decision accepting or rejecting its own claims and claims of other creditors.
The law should establish specific and direct provisions allowing the right of individual creditors to object to the decision of the insolvency representative regarding acceptance or rejection of its own claims, as well as object to the decision of the insolvency representative regarding the acceptance and value of claims of other creditors.
Several recent insolvency reforms have addressed these concerns. In 2019, Serbia granted individual creditors the right to access information about insolvency proceedings relating to the debtor’s business and financial affairs and provided that all creditors during their first meeting are allowed to give consent to the appointment of the insolvency representative. Brunei Darussalam introduced the possibility for creditors to object to the decision of the court or of the insolvency representative to approve or reject claims against the debtor brought by the creditor itself and by other creditors.