A Vigorous Bankruptcy Structure Law Company Business Partnership Essay

Published Date: 02 Nov 2017

A vigorous bankruptcy structure acts as a filter, making sure of the survival of economically competent firms and reallocating the resources of uneconomical ones. Cheap and fast insolvency procedures result in the businesses immediate return to ordinary operation and add to creditors’ return. As creditors and debtors expectations are improved about a well-functioning insolvency systems, access to finance can be facilitated, more viable businesses can be saved and thereby get better growth and sustainability of the economy in general.

Time, cost and outcome of insolvency proceedings relating to local entities are studied in doing business. However, individuals and financial institutions are not taken into considerations. The data are obtained from survey responses by local insolvency practitioners and confirmed through a study of rules and regulations and publicly available information on bankruptcy methods. Several assumptions are made about the business and the case. It assumes that the company [1] :

Is a domestically owned, limited liability company operating a hotel.

Operates in the economy’s largest business city.

Has 201 employees, 1 main secured creditor and 50 unsecured creditors.

Has a higher value as a going concern—and the efficient outcome is either reorganization or sale as a going concern, not piecemeal liquidation.

Mauritius

Company law provides for liquidation and winding up procedures. The applicable provisions governing the winding-up and liquidation of companies are still to be found under the Companies Act 2001 that became effective on December 1, 2001, and replaced the Companies Act 1984, which was repealed. The new Companies Act was designed to deal only with the core requirements of a company, as matters pertaining to insolvency are expected to be treated in a new insolvency law.

If the company is insolvent, the directors may lodge an application with the Registrar of Companies indicating that the company cannot continue its business, and appointing a provisional liquidator to perform the functions and given powers of a liquidator for one month from the date of his appointment or for such period until the appointment of an Official Receiver or liquidator. Shareholders then pass a resolution to wind up the company. The effect of a voluntary winding-up is that as from the date of its commencement, the company stops to oprerate its business activities, except insofar as may be necessary, in the liquidator’s opinion, for the beneficial winding-up of the company.

Between the company and its creditors there may be concessions which include: (a) revoke some debts of the company; (b) changing the terms of a debt or the rights of its creditors; or (c) relating to company's constitution being altered that have an effect on the possibility of the company being able to pay a debt. During the compromise period, secured creditors are not prevented from exercising any rights to take possession of, realize, or otherwise deal with company property over which they hold a charge.

There is no supervisory body responsible for regulating the conduct of insolvency administrators and liquidators. The general consensus appears to be that there is no need for an additional supervisory body. The Court typically supervises the activities of the insolvency administrators. Nevertheless, a regulatory framework is essential to ensuring that receivers, administrators and liquidators are competent and duly licensed and supervised in carrying their functions. This will ensure that minimum standards of practice and expertise are maintained and that the system operates with the highest level of efficiency and integrity. There should also be the introduction of codes of professional conduct for insolvency practitioners as well as a supervisory body which would oversee the conduct of such practitioners and ensure the protection of information in insolvency matters and safeguard against conflicts of interests and related party situations.

In practice, the deed creating the charge includes provisions respecting the appointment of a receiver in the case of default and the entire process is conducted outside the control or supervision of the courts. A receiver or manager of the company’s property has the obligation to put forth all reasonable care to obtain the best offer for the property at the time of the sale. The Receiver also has an affirmative duty to pay the preferential debts of which he has notice out of any assets coming into his hands in priority to all other person. Moreover, the duty of a receiver to act reasonably is somewhat subjective and efficient and effective outcomes are difficult to measure in practice.

The Court has a "droit de regard" over the activities of persons involved in the winding up of a company. The receiver or manager may be compelled by the Court to refund or return the property or money or any part thereof with interest at a rate which the Court considers fit, or to add amounts to the property of the company by way of compensation.

Indicator

2010

2011

Rank

73

76

Time (years)

1.7

1.7

Cost (% of estate)

15

15

Recovery rate (cents on the dollar)

33.6

35.1

Resolving insolvency takes 1.7 years on average and costs 15% of the debtor’s estate for both 2010 and 2011. The average recovery rate is 33.6 and 35.1 cents on the dollar for 2010 and 2011 respectively. Globally, Mauritius stands at 76 in 2011 and 73 in 2010. Even though the rate of recovery increased in 2011 Mauritius lost 3 places. This can be due to the fact that in year 2011 no reform has been undertaken whereas in 2010 a new insolvency law launched a rehabilitation system for companies as an option to winding up and described the rights and obligations of creditors and debtors as well as sanctions for those who abuse the system.

Madagascar

The laws governing insolvency in Madagascar can be found in the Bankruptcy and Collateral, Laws, Civil Codes and Commercial and Company Laws. The law provides the dissolution of a company which automatically entail into liquidation and the dissolution of a society in which all the shares are held by a single shareholder causes the transfer of assets of the company to that person, without it being necessary to liquidation. Creditors may object to the dissolution before the commercial court. In case the shareholder opts for liquidation proceedings, he will have to go through judicial proceedings.

The instrument appointing liquidators, whatever its form is issued within one month of the appointment in a newspaper authorized to publish legal notices. During the liquidation of the company, the liquidator shall, under its responsibility, the disclosure formalities incumbent on the legal representatives of the company. The liquidation of the company's overall operations consisting, after payment of liabilities over the assets, to convert this into money so that the division can be performed. Liquidation does not deprive creditors of their individual action against the company. The provisions of this chapter apply when the liquidation of the company is organized amicably in accordance with the statutes. They also apply when the liquidation is ordered by a court. However, they do not apply when the liquidation occurs within the framework of collective proceedings for wiping liabilities.

Except as otherwise provided in the instrument of appointment, if more liquidators have been appointed, they can exercise their functions separately. However, they prepare and submit a joint report. The liquidator's remuneration is determined by the decision of the shareholders or the court to appoint them. The liquidator is responsible, with respect to both the company and third parties, for the consequences of mistakes committed by him in the exercise of its functions. The social and individual liability against the liquidator is prescribed by three years, from harmful or if it was hidden, its revelation.

The completion of the liquidation must be made within three years after the dissolution of the company. The partners are convened at the end of the liquidation to approve the final accounts, the discharge of the liquidator management and discharge of its mandate and to see the completion of the liquidation.

The President of the Commercial Court Referee may decide that liquidation will be carried out in accordance with this chapter to the application: of the most involved in partnerships; of shareholders representing at least one tenth of the capital in other forms of companies with legal personality; of corporate creditors; of the representative of the bondholders.

 The powers of the board of directors, the managing director or manager shall expire at the date of the court ruling ordering the liquidation of the company. The court ruling, ordering the liquidation of the company appoints one or more liquidators and determines their powers. The term of office of the liquidator may not exceed three years, renewable by a court at the request of the liquidator. Within six months of his appointment, the liquidator shall convene the shareholders' meeting at which it shall report on the assets and liabilities of the company on the continued operation of the liquidation, the time required to complete the application and where appropriate, and any authorizations that may be required. The liquidator shall represent the company that undertakes all acts of liquidation. He is vested with the broadest powers to realize the asset, even informally.

Subject to the rights of creditors, the liquidator decides whether to distribute the available funds in liquidation. Unsuccessful after notice of the liquidator, any interested party may request the President of the Commercial Court ruling in summary proceedings to order a distribution in liquidation.

Indicator

2010

2011

Rank

183

147

Time (years)

2

2

Cost (% of estate)

30

30

Recovery rate (cents on the dollar)

14.3

14.3

Speed, low costs and continuation of viable businesses characterize the top-performing economies. According to data collected by Doing Business, resolving insolvency for year 2010 and 2011 takes 2.0 years on average and costs 30% of the debtor‘s estate. The average recovery rate is 13.5 cents on the dollar for the 2 consecutive years. Globally, Madagascar stands at 147 in the ranking of 183 economies on the ease of resolving insolvency in 2010 which did not change in 2011. No reforms were undertaken which could explain the country being stagnant. Madagascar will have to improve its insolvency system to climb up the global ladder.

Japan (Benchmark)

Japan has a civil law system based upon statutory codes.10 Voluminous "Acts" are enacted to supplement the six main codes. In some jurisdictions, debtors can be subject to different insolvency regimes depending upon how the debtor is organized or regulated. In contrast, while Japan has banking laws, broker-dealer laws and laws addressing the operation of insurance companies, 19 these industry specific Japanese laws do not include specific insolvency regimes for such regulated financial institutions. Instead, insolvent financial institutions in Japan are subject to insolvency proceedings applicable to ordinary commercial companies. Ordinary insolvency laws are not precluded from cases involving financial institutions.

It is often said that there are five different types of insolvency proceedings under Japanese law. It is, thereafter, commonly indicated that two of the five are liquidation proceedings, while the remaining three (corporate reorganization, company arrangement, and composition) involve rehabilitation of the debtor, i.e., corporate reorganization. The idea of "five" types can be confusing for an outsider. The point is that since 1922, Japan has enacted four statutes that relate to bankruptcy. They are the Bankruptcy Law of 1922, Composition Law of 1922, Commercial Code of 1938 and Corporate Reorganization Law of 1952. The Commercial Code includes two chapters, one providing for special liquidation and one for reorganization.

It is generally perceived that the Civil Rehabilitation Act (rather than the Corporate Reorganization Act) should be applied to the failure of a deposit-taking institution. This is largely because, in Civil Rehabilitation, the appointment of a trustee by the court is not mandatory. With the exception of Lehman Brothers Japan which filed for Civil Rehabilitation proceedings, securities companies in Japan tend ultimately to liquidate in a proceeding under the Bankruptcy Act. Since the amendment of the Act on Special Treatment in 2000, insurance companies tend to use Corporate Reorganization proceedings. In the case of life insurance companies, rights of policyholders are given priority over ordinary unsecured claims, and are therefore excluded from the scope of the Civil Rehabilitation Act. As a result, a Civil Rehabilitation Plan cannot affect (by haircut or otherwise) the life insurance policyholders’ rights.

In most Civil Rehabilitation cases, the court will also appoint a supervisor to monitor the debtor’s affairs. The supervisor is not likely to be as proactive as a creditors’ committee in a bankruptcy proceeding under U.S. law. Japanese insolvency laws permit the court to recognize a "creditors’ committee." A stay comes into effect upon the "commencement" of a Civil Rehabilitation case. The stay prohibits, among other things, the debtor from paying unsecured pre-commencement obligations. The stay does not prevent creditors from exercising rights of set-of. Japanese law does not condition that approval on first providing interested parties with notice and an opportunity to object. Japanese court dockets are not available to the general public but only to parties with an interest in the case. The docket is not available through any online system and the docket must be reviewed at the court clerk’s office. Photocopying of filings is permitted by interested parties (or their lawyers); however, a few business days may lapse between filing and accessibility of the filing on the docket.

Japan does not have separate courts for insolvency proceedings. Although insolvency proceedings will theoretically be held on an entity-by-entity basis, with respect to group companies, it is customary for the same judge to preside over all the insolvency proceedings for the group entities. Japanese court rules do not technically provide for "consolidated cases"; however, this effectively occurs in practice.

Indicator

2010

2011

Rank

1

1

Time (years)

0.6

0.6

Cost (% of estate)

4

4

Recovery rate (cents on the dollar)

92.5

92.7

On the ease of resolving, Japan is currently number 1 in the ranking of 183 economies and takes 0.6 years on average in resolving insolvency and costs 4% of the debtor’s estate. 92.5 in 2010 and 92.7 in 2011 is the average recovery rate. There has been an increase in recovery rate as in 2011, Japan made it easier to deal with insolvency by establishing a new entity, the Enterprise Turnaround Initiative Corporation, to support the revitalization of companies suffering from excessive debt but professionally managed.

Comparing with benchmark

2010

2011

Indicator

Mauritius

Madagascar

Japan

Mauritius

Madagascar

Japan

Rank

73

183

1

76

147

1

Time (years)

1.7

2

0.6

1.7

2

0.6

Cost (% of estate)

15

30

4

15

30

4

Recovery rate (cents on the dollar)

33.6

14.3

92.5

35.1

14.3

92.7

Compared to Japan who takes less than 1 year Mauritius and Madagascar takes more than 1.5 year to resolve an insolvency case in both 2010 and 2011. Time shows the period for creditors to recover their credit from time the company starts defaulting until the payment is made to the bank for the sum owed. Possible delay strategies by the parties, such as requests for additional time or the filing of dilatory appeals are taken into account. Mauritius and Madagascar have to improve its system be among the best. The longer it takes, more costly it is. This can affect the second criterion which is cost.

The cost of the proceedings is recorded as a percentage of the value of the debtor’s estate. To calculate cost questionnaire responses are used which includes court fees and government levies; auctioneers, fees of insolvency administrators, evaluators and lawyers; and all other fees and costs. The total cost for Mauritius is 15% of the estate while for Madagascar it is 30%. However, Japan cost is only 4% of the total estate. For both 2010 and 2011 it is the same.

The recovery rate is calculated as cents on the dollar recovered by creditors through restructuring, liquidation or foreclosure proceedings. It takes into account whether the business comes out from the proceedings as a going concern or the properties being are sold gradually. Mauritius recovers only 33.6 and Madagascar event less with 14.3. However Japan recovery rate is 92.5. In 2011 both Mauritius and Japan seen an improvement in their recovery rate unlike Madagascar. The rise for Mauritius can be explained by the reform undertaken in 2010. However, Japan is far ahead the rate of Mauritius and Madagascar. The 2 countries will have to do considerable improvements to increase their recovery rate to Japan’s level.

Mauritius is currently 76th and Madagascar 147th. Improving their systems to take less time resolving an insolvency case, less cost and increase the recovery rate will allow Mauritius and Madagascar will be able to increase their global rank.

http://www.worldbank.org/ifa/Mauritius-ICR%20ROSC.pdf

http://www.doingbusiness.org/law-library

Loi n° 2003-036 du 30 janvier 2004 sur les sociétés commerciales

http://www.droit-afrique.com/images/textes/Madagascar/Mada%20-%20loi_2003-036%20societes.pdf

Loi n° 2003-042 sur les procédures collectives d'apurement du passif

http://www.droit-afrique.com/images/textes/Madagascar/Mada%20-%20Loi%20procedures%20collectives.pdf

Bankruptcy and Collateral Laws

Civil Codes

Commercial and Company Laws