World Bank Group's Proposals on Small Business Insolvency
At long last, the World Bank Group's insolvency and debt resolution team has finally released to the public its report on the treatment of the insolvency of micro-, small-, and medium-sized enterprises, Saving Entrepreneurs, Saving Enterprises : Proposals on the Treatment of MSME Insolvency. The team worked for over a year on this report, concluding with a meeting of its Insolvency & Creditor/Debtor Regimes Task Force in May in Washington, D.C., where the report and its proposals were vetted. There was a surprising degree of consensus on the proposals developed here, and the final version reflects a fairly widely shared viewpoint on three key points.
First, most MSMEs are not business entities, they are people with beating hearts and families. Corporate restructuring proceedings, with all their classical (and expensive) British formality, are ill-suited to resolving the distress of these business people. Rather, a discharge and fresh start is what these people need to get back to being entrepreneurs, and potential entrepreneurs are much more likely to take the plunge if they know a discharge is available and all will not be lost if their plans go pear-shaped. Controlling access to this extraordinary relief (that it, minimizing "abuse" by can-pay debtors seeking an easy way out) remains and will remain a political challenge, but I am heartened by the rising degree of agreement that fear of abuse is an issue that does not deserve center stage. Most debtors are honest and deserving of relief and restart, and unless creditors or a system administrator (trustee) can come up with evidence to the contrary, these proceedings should follow a straight path to discharge.
Second, for small entrepreneurs who want to retain assets and/or preserve an ongoing business, simplified out-of-court proceedings are the optimal solution in most contexts (along the lines of the English Individual Voluntary Arrangement proceeding). While court-driven processes that allow a court to cram-down compromise plans work well in advanced economies like the U.S. and Korea, the institutional infrastructure is too heavy for most countries to bear. And modifying the court-driven corporate restructuring regime for MSMEs does not seem to enjoy nearly the success that is achieved by diverting such cases to an out-of-court process where the court plays only a supporting role.
Third and finally, the division of the insolvency world into natural and juridical person debtors is not as neatly sensible as it might seem. The purpose of complex corporate restructuring regimes is to sort out complexity and/or to deal with significant value. Insolvency cases involving MSME debtors who are juridical persons (small corporation, LLC, GmbH, SAS, etc.) likely pose no greater complexity and involve no greater value than cases involving natural persons, so a similar out-of-court process should be the default for juridical entities, as well. Complex restructuring proceedings are appropriate only if the debtor-entity chooses the complex restructuring route, or creditors or a system administrator (trustee, regulator?) identify the need for such a complex and/or value-distributing process. Again, modifying the corporate reorganization process for "small businesses" does not seem to have produced positive results, as opposed to routing MSME cases to a vastly simplified, often out-of-court process.
The report contains detailed overviews and a bit of statistical/empirical data on a variety of current insolvency systems around the world designed for MSME debtors, and it goes into much greater detail on the points outlined above. It also offers a historical retrospective to situate the current conversation in the context of significant changes to insolvency philosophy over fairly recent time. This report is certainly not the concluding point of the conversation, and the team hopes that this report and its proposals will be a focal point for future development of that conversation. Please read and enjoy!