Insolvency law reform and capacity building in emerging markets: Bhutan, Armenia and Myanmar lead the way

Law reform designed to strengthen local insolvency processes has become a key focus area as we continue to face challenging economic and financial circumstances across the world. As interim COVID-19 insolvency relief measures have come to an end, governments are now turning their attention to implementing permanent measures that enhance efficiency, flexibility and predictability in the insolvency process.

It is generally considered that a best-practice insolvency system should seek to achieve two key outcomes: the effective restructure of distressed but viable businesses, and the simple, efficient reallocation of the assets of unviable businesses towards more productive uses.

But predictable, well-designed insolvency laws are not just about what happens when a business fails. Rather, as the World Bank has noted, insolvency laws focused on the end of the business life cycle also have a profound impact on the beginning. Specifically, banks and investors are more willing to advance funds to businesses when they know there are clear and effective processes in place that will coordinate their claims and allow them to maximise their recoveries in the event of financial distress. Effective insolvency laws also encourage a greater entrepreneurial culture, without the stigma of business failure and the risk of losing everything if things do not work out as planned.

In that sense, insolvency law reform drives an active investment market, with greater access to credit for companies at lower cost – which in turn supports job creation, innovation, productivity and economic growth. In periods of economic downturn, insolvency laws help to ensure financial stability, the maintenance of jobs and the preservation of livelihoods and communities.

These outcomes are especially important now in emerging market and developing economies (EMDEs). In its latest Global Economic Prospects Report issued in January 2023, the International Monetary Fund (IMF) estimated that, by the end of 2024, GDP levels in EMDEs will be around 6% below the levels expected before the pandemic, with challenges for business and investor confidence and incentives to generate long-term growth.

In that context, Scott Atkins (Global Chair, Australia Chair, Global Co-Head of Restructuring, Head of Risk Advisory and President of INSOL International) and John Martin (Partner and President of the International Insolvency Institute) are currently leading a team from Norton Rose Fulbright (which also includes Rodney Bretag and Sophie Timms) for the Asian Development Bank (led by Nicholas Moller) that is helping in the design and implementation of new insolvency laws in the Kingdom of Bhutan.

Scott and John visited Bhutan from 6-11 February 2023 and met with a broad range of government, institutional and business stakeholders as part of the initial reform consultation process. At the same time as their work in Bhutan, Scott and John are also undertaking a similar insolvency law reform project in the Republic of Armenia for the Asian Development Bank. Since early 2022, Scott and John have been involved in extensive stakeholder consultation sessions, and a program for law reform is now being designed in collaboration with government, judicial, institutional and business officials.

These projects follow the five year insolvency law reform and capacity building project that Scott and John led for Norton Rose Fulbright in the Republic of the Union of Myanmar between 2016 and 2021 for the Asian Development Bank. Together with the Asian Development Bank and the Union Supreme Court of Myanmar, the team from Norton Rose Fulbright helped to draft and oversee the enactment of Myanmar's Insolvency Law 2020, which came into effect on 25 March 2020.

The challenge in Myanmar was to design a new insolvency law that was reflective of international best practice but which could also be integrated into the existing regulatory, economic and social framework, where the experience of financial distress was very limited and the economy itself was in a state of transition. This challenge is also shared in the current Bhutan project.

During the Myanmar engagement, after comprehensive project phases involving research and analysis of the most efficient and effective insolvency frameworks and policy development and consultation with public and private stakeholders, legislative drafting was undertaken, together with feedback from the World Bank and the IMF, before the Insolvency Law was passed by Myanmar's Parliament on 14 February 2020.

Myanmar's Insolvency Law has since become regarded as a leading example of best practice insolvency processes across the world. The end result – and the work that was undertaken to get there – will inform the current work Scott and John are leading in Bhutan and Armenia, subject, of course, to local social and cultural traditions, influences and practices.

In terms of the substantive design of best practice insolvency processes, of particular note is the inclusion of a dedicated rescue procedure, and a simplified liquidation procedure, for micro and small enterprises (MSEs) in Part VI of Myanmar's Insolvency Law. Tailored MSE processes are among the key recommendations in the design of modern insolvency regimes outlined in the World Bank's Principles for Effective Insolvency and Creditor/Debtor Regimes, UNCITRAL's Legislative Recommendations on the Insolvency of Micro and Small Enterprises and the Asian Principles of Business Restructuring. This is because MSEs account for the substantial majority of businesses worldwide (up to 95% on the World Bank's latest estimate), and play a key role in contributing to job creation and global economic development. In real terms, MSEs are the lifeblood of any economy.

Subsequent to the introduction of Myanmar's Insolvency Law, bespoke MSE insolvency processes have been introduced in other jurisdictions – including the United States, Singapore, Australia and Indonesia.

Also significant in Myanmar's Insolvency Law is the ability for a rehabilitation advisor acting during a MSE restructuring process to appoint a mediator to help in resolving creditor disputes and to guide creditors towards the adoption of a negotiated restructuring plan. Contained in section 118 of the Insolvency Law, this may be the only specific [statutory] power of its kind in the world, and it could serve as a useful model for other jurisdictions. Mediation is already a common and successful feature encouraged by many US Bankruptcy Judges and used in US chapter 11 cases to achieve negotiated restructurings. Indeed, the World Bank, UNCITRAL and INSOL International have all recognised mediation as having the potential to support more effective restructuring outcomes for distressed entities, whether informally or in tandem with hybrid and formal court-based restructuring processes.

The implementation of the UNCITRAL Model Law on Cross-Border Insolvency as part of Myanmar's Insolvency Law is also a key feature of a best practice insolvency process – having been shown to enhance foreign investment and business confidence due to the predictable, principled system for cross-border recognition and cooperation that promotes efficiency, minimises costs and increases the likelihood of successful restructuring outcomes. This is highly appealing for both creditors and debtors in determining where and how to invest funds and structure businesses in a globalised, interconnected world.

Prior to the military coup in Myanmar, Norton Rose Fulbright's engagement also involved capacity building – working with international commercial judges to help train the local judiciary in the administration of the new laws, and also engaging with government, business and NGO stakeholders to explain modern insolvency concepts and the processes required to support the new laws.

Similar institutional building efforts are also envisaged in the Bhutan and Armenia projects. After all, the effectiveness of an insolvency regime correlates directly with the strength of the institutions responsible for interpreting, regulating and administering the underlying laws and the skills and specialised knowledge of the practitioners at the coalface.

Further updates will be provided as the Bhutan and Armenia projects continue over the next few years. It is an exciting time for Norton Rose Fulbright to be helping to lead the design and implementation of new insolvency systems across the world, which will directly contribute to economic growth and community development in EMDEs in the future.