Insolvency Law in Emerging Markets

Abstract

A well-functioning corporate insolvency system can serve as a valuable tool to promote entrepreneurship, innovation, access to finance and economic growth. Therefore, if having an efficient insolvency framework is essential for any country, it becomes even more important for emerging economies due to their potential for growth and their greater financial needs. Unfortunately, the academic literature has generally paid more attention to the regulation of corporate insolvency in developed countries. Thus, with some notable exceptions, it has largely omitted the debate about the optimal design of insolvency law in jurisdictions that, in addition to requiring a more active policy debate, amount to 85% of the world’s population and 59% of the global GDP, since they include some of the world’s largest economies such as China, India, Brazil, Russia and Indonesia. This article seeks to fill this gap in the academic literature by analyzing the problems and features of insolvency law in emerging markets and suggesting a new framework for financially distressed companies in developing economies. It will be argued that, even though, in an ideal scenario, any improvement of the insolvency framework in emerging markets should start by enhancing the judicial system and the sophistication of the insolvency profession, these reforms usually take time, resources and political will. In fact, due to a variety of factors, they might never occur. For this reason, this article suggests a corporate insolvency framework for emerging economies taking into account the current market and institutional features of these countries, which generally include inefficient courts, unattractive insolvency proceedings, a lack of a sophisticated body of insolvency practitioners, and the prevalence of small firms and large companies with controlling shareholders.

Keywords: insolvency, restructuring, emerging economy, institutional framework, efficiency, judicial system, insolvency practitioners, access to finance, economic growth