Definition
Doing Business studies the time, cost and outcome of insolvency proceedings involving domestic entities. The data are derived from survey responses by local insolvency practitioners and verified through a study of laws and regulations as well as public information on bankruptcy systems. The ranking on the ease of closing a business is based on the recovery rate.
To make the data comparable across economies, several assumptions about the business and the case are used.
Assumption about the business
The business:
- Is a limited liability company.
- Operates in the economy’s largest business city.
- Is 100% domestically owned, with the founder, who is also the chairman of the supervisory board, owning 51% (no other shareholder holds more than 5% of shares).
- Has downtown real estate, where it runs a hotel, as its major asset. The hotel is valued at 100 times income per capita or $200,000, whichever is larger.
- Has a professional general manager.
- Has 201 employees and 50 suppliers, each of which is owed money for the last delivery.
- Has a 10-year loan agreement with a domestic bank secured by a universal business charge (for example, a floating charge) in economies where such collateral is recognized or by the hotel property. If the laws of the economy do not specifically provide for a universal business charge but contracts commonly use some other provision to that effect, this provision is specified in the loan agreement.
- Has observed the payment schedule and all other conditions of the loan up to now.
- Has a mortgage, with the value of the mortgage principal being exactly equal to the market value of the hotel.
Assumption about the case
The business is experiencing liquidity problems. The company’s loss in 2009 reduced its net worth to a negative figure. It is January 1, 2010. There is no cash to pay the bank interest or principal in full, due the next day, January 2. The business will therefore default on its loan. Management believes that losses will be incurred in 2010 and 2011 as well.
The amount outstanding under the loan agreement is exactly equal to the market value of the hotel business and represents 74% of the company’s total debt. The other 26% of its debt is held by unsecured creditors (suppliers, employees, tax authorities).
The company has too many creditors to negotiate an informal out-ofcourt workout. The following options are available: a judicial procedure aimed at the rehabilitation or reorganization of the company to permit its continued operation; a judicial procedure aimed at the liquidation or winding-up of the company; or a debt enforcement or foreclosure procedure against the company, enforced either in court (or through another government authority) or out of court (for example, by appointing a receiver).
Assumptions about the parties
The bank wants to recover as much as possible of its loan, as quickly and cheaply as possible. The unsecured creditors will do everything permitted under the applicable laws to avoid a piecemeal sale of the assets. The majority shareholder wants to keep the company operating and under its control. Management wants to keep the company operating and preserve their jobs. All the parties are local entities or citizens; no foreign parties are involved.
