LAW, JUSTICE AND DEVELOPMENT WEEK 2011 INNOVATION AND EMPOWERMENT FOR DEVELOPMENT November 14-17, 2011 Washington DC LJD LAW JUSTICE and DEVELOPMENT Innovative Approaches to Insolvency & Restructuring

Non-performing loans, debt enforcement and the impact of the legal framework Frederique Dahan EBRD, Office of the General Counsel

Financial crisis in the ECA region NPL level in the region is high (but differs from country to country) First time since transition began Creditors (mostly banks) trying to deal with the problem (with various success and mixed motivation) Feedback is invaluable to:  get a sense of problems that creditors face  analyse impact (or lack of) legal systems  suggest revised agenda for reform in more ‘mature’ jurisdictions

1. Problems faced by creditors/banks NPLs require organisation changes: new work-out units, policies, distinction between large corporate and SME/consumer lending Difficult to recruit right staff – lawyers biased towards liquidation of collateral Recognition that under-writing standards had been lax – contract drafting, borrower information and collateral Collateral over-evaluated and some markets now very depressed

1. Problems faced by creditors (cont.) Out of court enforcement is not used by banks Assumption that they require debtor collaboration, difficult to obtain in distressed times Court procedures lengthy and costly Sales at auctions generate low proceeds Opening of insolvency proceedings against corporates avoided if at all possible Statutory moratorium of mortgage loans in some cases

2. Impact of legal framework Premises which underpinned reform:  Enforcement should enable prompt realisation of assets at market value  Out of court enforcement clauses in contract  Courts need not be involved - can be replaced by quasi-public institutions, such as notaries  Security right effective and enforceable after debtor insolvency

2. Impact of legal framework (Cont.)  Start of enforcement should be formal but straightforward  Debtor should be allowed to object but not to derail or unduly delay the process  Realisation means should be flexible – sale at auctions remains inefficient, especially when market is inactive  Ultimately, legal framework is backdrop of bargaining between creditor and debtor

3. Agenda for reform Revised agenda Out of court enforcement should not require debtor collaboration – needs to function unless debtor actively obstructs Outsource legal services to qualified professionals (receivers, insolvency practitioners) Creditors need to be actively involved in all stages (including insolvency proceedings) Creditworthiness is key : credit information reporting system

3. Agenda for reform (cont.) New agenda Debt collection agencies Distressed debt market Appraisal / evaluators Tax issues Debt equity swaps Private work-outs

EBRD committed to provide support (technical assistance and investment) Financial Law Unit within the Legal Transition Programme, OGC