Insolvency Reform for Jamaica — Part 1
Towards a rehabilitation framework for Jamaica
IN economies where most cases of insolvency are resolved via reorganisation, rather than receiverships or liquidation, recovery rates are greatest (about ninety cents in the dollar). In economies, like Jamaica, where receiverships and liquidations are the predominant methods of dealing with insolvencies the recovery rates tend to be less than fifty cents in the dollar. Those were the findings of a comparative analysis of recovery rates under insolvency in the Doing Business 2014 Report published by the International Financial Corporation and the World Bank.
Jamaica is in the process of modernising its insolvency framework and as we progress this reform agenda, in a global environment of scarce capital competing for investment opportunities, it is imperative that we are aligned with international best practices. Resolving insolvency by way of reorganisation is an area where we can quickly get up to first world standards and the opportunity should not be missed. The difference that this could make for our economy is great. A very simplified example, based on the data from Doing Business 2014 Report, is this, under a reorganisation framework a creditor that is owed $1 million may receive a settlement of up to $900,000 as against less than $500,000 if the company is liquidated. Further, under reorganisation the business and jobs are preserved rather than the company being wound up.
To create such opportunities there needs to be a paradigm shift in our insolvency framework and in this regard a Joint Select Committee of Parliament is deliberating a Bill entitled "The Bankruptcy and Insolvency Act, 2014". The objectives of the Bill are to:
"...make new provisions for the regulation of bankruptcy and insolvency; to make provisions for corporate and individual insolvency; to provide for the rehabilitation of the insolvent debtor; to create the office of Supervisor of Insolvency;..."
One of the areas of concern expressed with the Bill is a perceived reduction of the rights of secured creditors, landlords and lessors. Some may argue that the existing rights (under debentures, mortgages, bills of sale, leases etc) of these classes of creditors should be preserved absolutely and that there should be no stay in the exercise of such rights in cases where the debtor has committed an act of bankruptcy or served notice of an intention to file a proposal for a composition, an extension of time or a scheme of arrangement.
An alternate position, which is more in keeping with recent insolvency reforms across the world, where insolvent debtors are given enhanced protection from all classes of creditors to facilitate their rehabilitation may be more appropriate for a small emerging economy like Jamaica's, competing fiercely for scarce capital. To do otherwise would be to defeat an explicit objective of the Bill which anticipates provision for the rehabilitation of the insolvent debtor. This policy framework is consistent with the data which suggests that recovery rates are likely to be better under rehabilitation than either a receivership or liquidation option.
While the Bill will go a far way in facilitating opportunities for rehabilitation, it could be strengthened by incorporating specific provisions related to the rehabilitation of the troubled entity. To examine this in a bit more detail, some of the provisions from the Australian Corporation Act 2011 - Part 5.3A - Administration of a company's affairs with a view to executing a deed of company arrangement ("the Australian Model"), may be instructive for our circumstances. The stated purpose underlying Part 5.3A is as follows:
"... to provide for the business, property and affairs of an insolvent company to be administered in a way that:
* maximises the chances of the company, or as much as possible of its business, continuing in existence; or
*if it is not possible for the company or its business to continue in existence-results in a better return for the company's creditors and members than would result from an immediate winding up of the company."
Under the Australian Model, the Court may order a secured creditor of the company not to realise or otherwise deal with the security or may order the owner or lessor of property that is used or occupied by, or is in the possession of the company not to take possession of the property or otherwise recover it.
However the Court may only make an order ... if satisfied that:
(a) for the creditor to realise or otherwise deal with the security (or for the owner or lessor to take possession of the property or otherwise recover it) would have a material adverse effect on achieving the purposes of the deed; and
(b) having regard to: the terms of the deed; the terms of the order; and any other relevant matter; the creditor's (owner's or lessor's) interests will be adequately protected.
While on the face of it the provisions appear to be reducing the rights of secured creditors and landlords/lessors, the provisions are, in fact, more likely to strengthen their position and the prospect for recovery from an entity that is insolvent or facing "looming insolvency".
A key hurdle for the approval of a proposal and the Court to limit the rights of secured creditors, owners or lessors is that interest of such creditors/owners/lessors will be adequately protected.
The premise is that the company is allowed some "breathing space" to restructure its operations with there being no intent to defeat the interest of secured creditors or landlords. It would be anticipated that the proposal would seek to maintain, if not increase, the value of the underlying security. The overarching purpose of the proposal is to lead to a better realisation for the creditors than if the company was wound up. If that is unlikely to be the case, it would be incumbent on the appointed Trustee to recommend the liquidation of the company.
The Bill is an important first step in moving towards a framework where the survival of distressed but viable companies is a more likely outcome rather than liquidating companies that may only have needed a little latitude and breathing space to survive.
Caydion Campbell is a chartered accountant and insolvency practitioner with over 20 years experience. He is a Senior Manager at PricewaterhouseCoopers Tax and Advisory Services Limited and may be contacted at email@example.com