Resolving Insolvency

Resolving Insolvency

A robust bankruptcy system functions as a filter, ensuring the survival of economically efficient companies and reallocating the resources of inefficient ones. Fast and cheap insolvency proceedings result in the speedy return of businesses to normal operation and increase returns to creditors. By clarifying the expectations of creditors and debtors about the outcome of insolvency proceedings, well-functioning insolvency systems can facilitate access to finance, save more viable businesses and sustainably grow the economy.

To make the data on the time, cost and outcome comparable across economies, several assumptions about the business and the case are used:

  • A hotel located in the largest city (or cities) has 201 employees and 50 suppliers. The hotel experiences financial difficulties.
  • The value of the hotel is 100% of the income per capita or the equivalent in local currency of USD 200,000, whichever is greater.
  • The hotel has a loan from a domestic bank, secured by a mortgage over the hotel’s real estate. The hotel cannot pay back the loan, but makes enough money to operate otherwise.

WHAT THE RESOLVING INSOLVENCY INDICATORS MEASURE?

  • Time required to recover debt (years)
  • Measured in calendar years
  • Appeals and requests for extension are included
  • Cost required to recover debt (% of debtor’s estate)
  • Measured as percentage of estate value
  • Court fees
  • Fees of insolvency administrators
  • Lawyers’ fees
  • Assessors’ and auctioneers’ fees
  • Other related fees
  • Outcome
  • Whether business continues operating as a going concern or business assets are sold piecemeal Recovery rate for creditors
  • Measures the cents on the dollar recovered by secured creditors
  • Outcome for the business (survival or not) determines the maximum value that can be recovered
  • Official costs of the insolvency proceedings are deducted
  • Depreciation of furniture is taken into account
  • Present value of debt recovered
  • Strength of insolvency framework index (0-16)
  • Sum of the scores of four component indices:
    • Commencement of proceedings index (0-3)
    • Management of debtor’s assets index (0-6)
    • Reorganization proceedings index (0-3)
    • Creditor participation index (0-4)

Where does the economy stand today?

Globally, Iran, Islamic Rep. stands at 156 in the ranking of 190 economies on the ease of resolving insolvency. The ranking of economies on the ease of resolving insolvency is determined by sorting their distance to frontier scores for resolving insolvency. These scores are the simple average of the distance to frontier scores for the recovery rate and the strength of insolvency framework index. The resolving insolvency indicator does not measure insolvency proceedings of individuals and financial institutions.

Recovery of debt in insolvency

Data on the time, cost and outcome refer to the most likely in-court insolvency procedure applicable under specific case study assumptions. According to data collected, resolving insolvency takes 4.5 years on average and costs 15.0% of the debtor’s estate, with the most likely outcome being that the company will be sold as piecemeal sale. The average recovery rate is 17.9 cents on the dollar. Most indicator sets refer to a case scenario in the largest business city of an economy, except for 11 economies for which the data are a population-weighted average of the 2 largest business cities.

Source: Doing Business database.

Strength of resolving insolvency index

The strength of insolvency framework index is the sum of the scores on the commencement of proceedings index, management of debtor’s assets index, reorganization proceedings index and creditor participation index. The index ranges from 0 to 16, with higher values indicating insolvency legislation that is better designed for rehabilitating viable firms and liquidating nonviable ones. Iran, Islamic Rep.’s score on the strength of insolvency framework index is 5.0 out of 16.


Source: Doing Business database./p>

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