Business

Outdated insolvency laws bad for business

By Nekiesha Reid Business reporter

Sunday, September 09, 2012    

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It is a commonly held belief in business that most start-ups will fail a number of times before they take hold and become profitable.

In an environment where insolvency, bankruptcy and business failure come with a stigma, few people are inclined to risk their cash and reputations to become entrepreneurs.

But "entrepreneurship is the centerpiece of any viable, long term economic growth and job creation effort", Minister of Industry, Investment and Commerce Anthony Hylton said.

However, rectifying insolvencies in Jamaica takes more than a year and costs the debtor 18 per cent of his estate with an average recovery rate of 65 cents on the dollar, according to the World Bank's Doing Business Report 2012.

Insolvent businesses - those unable to repay debts - may face legal action and see the sale of company assets to clear debts as the primary solution, said Caydion Campbell, senior manager at accountancy firm PricewaterhouseCoopers.

With the modernisation of the country's insolvency laws, "rescue" and "rehabilitation" will be provided for these companies, said Hylton at the "Booms need Busts: Reforming Insolvency Legislation" forum on Friday

Better laws will reduce the need for liquidation.

"Our statutes are based on a 19th century approach that almost treated insolvent persons as criminals, and that primarily sought to protect the rights of creditors," he said.

"The law is old and does appear to have punishment as its main objective," agreed Suzanne Ffolkes-Goldson, research associate with the Caribbean Policy and Research Institute (CaPRI).

CaPRI - an economic policy think-tank - was asked to research modern insolvency laws, which executive director Chris Tufton said is a matter of priority for the institute.

Earlier this year, the former investment minister said modernisation of the laws could have avoided or reduced the impact of the financial sector meltdown in the 1990s.

Under the current regime, no protection is provided for companies during the period of financial distress, Campbell said, adding that arrangement schemes are difficult to put into action.

The current law on personal bankruptcy is found in The Bankruptcy Act 1880 with the corporate insolvency provisions in the Companies Act 2004 based on the provisions of the UK Companies Act 1948.

This is "ill-suited for modern commerce", resulting in a negative impact on development, Ffolkes-Goldson said.

A contemporary regime that is cohesive, creates opportunities and accommodates all interests equally is urgently needed, she said.

The Ministry of Justice established the Insolvency Legislation Committee seven years ago to review the statute and make recommendations.

In 2009, Jamaica Trade and Invest (JTI) requested a review into the laws to determine reforms needed and create a unified code for bankruptcy and corporate insolvency.

"The review of the country's insolvency law and its reform initiatives must be viewed within the broader context of the country's ongoing integration into a globally competitive business environment," Hylton said.

The economic growth and job creation that will come with new business start-ups means changes have to be made to the existing law, he said.

"The success of a new venture is simply a matter of allowing entrepreneurs some 'take-off' space."

Encouraging entrepreneurship by reducing the cost of failure is critical to the creation of a dynamic business environment, he said, and should be the primary focus of new insolvency and bankruptcy laws.

"Any economy that facilitates credit must also facilitate an insolvency regime that fosters business renewal," Campbell said.

"Business failure is essential to the growth and development of the economy," he said, but only within a "business-friendly framework" where debtors are allowed, in relevant cases, to keep control of their businesses.

If rehabilitation of the debtor is not possible, chairman of the Insolvency Committee Michael Hylton said modern laws should ensure assets are distributed fairly, while penalizing those responsible for the business's state.

"Our insolvency laws [must not] punish genuine business effort," Anthony Hylton said.

"We need laws that balance the needs of entrepreneurs and business entities while protecting consumers and other stakeholders from irresponsible and imprudent business arrangements."

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