Reflections on the World Bank – Insolvency Debt Resolution in the Time of Covid-19 Seminar (19 March 2021)
By Junelle Ayettey, intern at UNCLC
We had the privilege to hear from Antonia Menezes who is a Senior Financial Sector Specialist with the Insolvency and Debt Resolution Team of the World Bank Group based in Washington DC on Friday 19 March 2021. She provides technical solutions to governments to enhance institutional frameworks around the world and in particular in countries in the Sub-Saharan Africa and the Caribbean. She has also worked alongside Prof Irit Mevorach including in St. Lucia!
During this seminar, Antonia discussed the structure and function of the World Bank Group. There are five organisations within the World Bank Group: The International Bank for Reconstruction and Development, The International Development Association, The International Finance Corporation, The Multilateral Investment Guarantee Agency and The International Centre for Settlement of Investment Dispute. They all work towards the motto to reduce poverty and to improve living standards by promoting sustainable growth and investment in people.
The World Bank works extensively with data and countries with higher recovery rates have a greater availability of credit. Those within the Insolvency and Debt Resolution Team assist countries with drafting laws to provide solutions for governments.
Insolvency reform may result in:
- Increased returns to creditors
- Increased availability of credit and lower cost of credit
- More start-ups and active entrepreneurship
The most interesting aspect of this seminar (from my perspective) involved the effect of Covid-19 on insolvency. Without a strong insolvency regime, creditors are less likely to extend loans. This is because lenders extend credit based on the trust they have just in case the loan defaults. This also links to the financial sector stability. This is crucial for investors as stable financial institutions mitigate and are resistant to economic shocks. During a crisis the financial institution continues to serve the needs of the investors in that country.
One pertinent example is the Covid-19 pandemic it has shown to governments worldwide that no country is immune from a financial crisis but critically exemplified the importance of debt enforcement and insolvency regimes. A challenge during this unprecedented time is how to flatten the bankruptcy curve. It is important for governments during this time to slow the number of insolvencies as during this time viable businesses could also go into administration. There are several key aspects or phases that may be considered in this respect:
- Phase 1: Allowing some breathing space for debtors - this may include increasing the threshold to start insolvency proceedings like Australia implemented during this crisis
- Phase 2: Preventing viable firms from insolvency – this involves restructuring and the use of out-of-court measures
- Phase 3: Protecting medium and small sized enterprises (MSMEs) – it has been found that the survival time on average for MSMEs who just cover fixed costs is between 8-19 weeks (Bosio and Ramalho, 2020) therefore it is vital to support such MSMEs especially in a case of inefficient insolvency systems