E-Knjižnica FET "Dr. Mijo Mirković"

Bankruptcy laws in transition economies: A comparative analysis

Balcerowicz, Ewa and Hashi, Iraj and Lowitzsch, Jens and Szanyi, Miklos (2003) Bankruptcy laws in transition economies: A comparative analysis. In: Globalization and Entrepreneurship: Fears, Challenges and Opportunities, 24-26.4.2003, Pula, Croatia.

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It is now well recognised that one of the main causes of the slow process of transition in former socialist countries is the low level of development of some of the basic institutions of the market economy. One of the most fundamental changes witnessed in these countries was the introduction of a new legal framework, based on private property and its supporting institutions, which was designed to encourage, facilitate, protect and regulate the operation of the new system. However, in many areas the change has been slow and the relevant institutions remain undeveloped, acting as major barriers to the further development of the market system. The bankruptcy law, which is a basic and inseparable element of the private law system, is one of these undeveloped areas with strong ramification for the transformation process. A major feature of a market system is its dynamic selection mechanism whereby the strong and efficient units replace weaker and less efficient ones, and new processes and products replace older ones. Some entrepreneurs and firms are unable to withstand the competitive pressure and exit the market, enabling their resources to move to more efficient employment. The Schumpeterian concept of creative destruction encapsulates this dynamism. The establishment of the new system in transition countries accentuated the selection process and gave it more prominence than in mature market economies. The inherited economic structure was unsuitable to a market system and had to undergo a dramatic change, requiring the closure of many enterprises and changes to the operation of many others. The extensive private sector development in the early transition period, and the high rate of entry and exit of new firms, also highlighted the operation of the selection mechanism. The aim of the bankruptcy law (or the insolvency proceedings) is to regulate the selection mechanism. It establishes the procedures for the orderly exit of failed enterprises and the re-entry of their assets and other resources into new firms and new activities. Moreover, the insolvency procedures provide a legal assurance for potential investors and creditors that even in the case of financial distress and business failure, there will be legal processes at work to prevent a rush on the assets of the distressed firm and to regulate the distribution of the estate of the bankrupt firm amongst its creditors. The systemic transformation in CEE countries is closely bound with changes in the behaviour of enterprises and their managers and the creation of an environment conducive to new investment (by domestic and foreign investors). For this reason, the insolvency procedures play an even more important role than in established market economies. The greater uncertainty, the lack of experience with market mechanism, and the greater information asymmetry put shareholders, financiers and creditors at a serious disadvantage in comparison to the managers of distresed firms. Furthermore, the opportunity for fraudulent behaviour, which is greater in early transition than in an established economy, discourages individuals and companies from developing relationships with new firms. A well functioning insolvency law provides a reasonable guarantee for financiers, creditors and suppliers of such firms. In transition economies, the insolvency process is closely linked to two other fundamental processes of early transition: restructuring and privatisation. Restructuring requires the former state owned enterprises to change into market oriented firms by altering their behaviour from a passive administrative unit in the planning apparatus to an active independent agent making value maximising decisions for their own. There was also a need for the radical change of the government’s aproach to state-owned companies in order to make them market oriented and not government protected at the expense of tax payers. The restructuring process, invariably, involved financial distress and potential or actual insolvency and the exit of resources (reductions in the output of unwanted products and the resources employed in those activities, downsizing or closure of plants or enterprises, etc.). The bankruptcy law would facilitate the restructuring process. The privatisation process (which is also of fundamental importance to the systemic transformation), on the other hand, highlighted the plight of heavily indebted firms which could not be privatised as going concerns. The bankruptcy law provided the opportunity to deal with past debts and insolvency in order to speed up the privatisation of – in fact- bankrupt firms (for example, the so-called “liquidation” route in Poland). The opportunity was of course not utilised in all countries. Apart from the above, bankruptcy laws play an important role in the transformation process itself: they provide credibility for the regime change by signalling to the enterprises that if they cannot withstand the competitive process on their own, they will not survive (and that the previous soft budget constraint regime which made their survival possible has come to a definite end). Only then will enterprise managers change their expectation and become subject to the bankruptcy constraint. However if the bankruptcy laws are defficient or the administrative capacity is underdeveloped, there will be much room for fraudulent behaviour by managers and other stakeholders and the insolvency process will be used for the purpose of fraud. This paper focuses on the development of bankruptcy laws and accompanying institutions in selected transition economies and compares them with the provisions in mature market economies. The paper presents the deficiencies of insolvency procedures and institutions and their impact on the behaviour of companies and their managers, and the security of creditors’ interests. It will allso assess the mechanisms designed to reduce the cost of managerial opportunism, prevent fraud, and improve corporate governance. In the first section, we will discuss the economic importance of the bankruptcy laws. The second section presents the coverage of insolvency laws in the countries under consideration, highlighting the attempts by some government to limit the applicability of the law for political reasons. Section III discussses the importance of the obligation by, and incentives of, the debtor company to initiate the insolvency proceedings. Section IV analyses the insolvency process once it is initiated. Section V reviews the rules governing the disposal of the assets in bankruptcy. Section VI considers some institutional aspects of the insolvency proceedings and Section VII concludes.

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Tip objekta: Materijal konferencije ili radionice (Paper)
Dodatne informacije: 2/2003
Ključni pojmovi: insolvency law, bankruptcy, reorganisation, liquidation, creditors’ rights, exit, zakon insolventnosti, bankrot, reorganizacija, likvidacija, kreditorska prava, izlaz.
Teme: 3 Društvene znanosti > 34 Pravo. Pravna znanost > 347 Građansko pravo > 347.7 Trgovačko pravo. Pravo trgovačkih društava > 347.736 Stečaj. Uskratna plaćanja. Nesolventnost. Bankrot. Otvaranje stečajnog postupka
Odjeli: Odjel za ekonomiju i turizam "Dr. Mijo Mirković"
Datum pohrane: 08 Jan 2013 07:19
Zadnja promjena: 08 Jan 2013 07:19
URI: http://eknjiznica.unipu.hr/id/eprint/1805

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