KEY reforms to insolvency laws could fuel the formation of businesses, say directors of the Caribbean Policy Research Institute (CaPRI).

“As you can imagine a very important factor in determining whether you are willing to get into something is the risk you take in getting out of it,” said Damien King, an economist and a co-executive director of CaPRI.

Using international comparisons, the perceived cost of failure is lowest where there is the most entrepreneurial activities and the highest rate of investment, he added.

A business essentially becomes insolvent when it cannot meet its debt payments, which ultimately impacts its day-to-day operations.

Key stakeholders are pushing for legislation that is geared towards rehabilitation rather than punishing businesses that may find themselves in a financial rut.

Much like in developed countries, such as the US with its Chapter 11 mechanism, they want to see measures that make it easier for companies to restructure their debt and continue operating rather than winding up.

But legislative reform measures aimed at modernising insolvency laws, which is also a key requirement of the International Monetary Fund (IMF), have not yet gone to parliament.

According to Christopher Tufton, a co-executive director of the economic policy think-tank a reform bill should have been tabled this year, but he figures that it won’t happen in 2013.

Changes to bankruptcy legislation could also encourage venture capital investment in Jamaica.

“There is the potential for insolvency legislation to massively matter to venture capital in Jamaica,” said King.

Venture capitalists more than anybody else in an economy are not interested in the particular business that they are in, they are interested in turning their capital around, he explained.

At the same time, Tufton reckoned that the reform would significantly enhance risk assessment on the part of venture capitalists.

“Every investor looks at the environment to support bringing some clarity to solutions to what was not originally intended, whether it’s a foreign or a local investor”, said Tufton. “So I suspect it would be positive.”

“In terms of assessment, you all have to remember that a business may fail initially but it may not be on the part of the action of the individual,” added Suzanne Ffolkes Goldson, associate research fellow at CaPRI. “Circumstance may change on the part of the environment.”

There is general consensus among the critical stakeholders, the International Monetary Fund (IMF), internal stakeholders, CaPRI, the Jamaica Bankers’ Association (JBA) and the Private Sector Organisation of Jamaica (PSOJ) that the insolvency legislation is archaic, its outdated has not served the best interest of entrepreneurship and economic activity in the country.

Representatives from CaPRI, the JBA, and the PSOJ were speaking at the Jamaica Observer’s weekly Monday Exchange to reiterate the importance of a reformation of the insolvency legislation that date back to the 1880s and 1940s.