THE WORLD BANK GROUP EXPLANATORY NOTE on Principles for Effective Insolvency Regimes for Micro and Small Enterprises © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises World Bank Group TABLE OF CONTENTS Forewords...................................................................................................................... ii Introduction.................................................................................................................. 1 Principles for an Effective MSEs Insolvency Regime.................................................2 MSEs Definition.........................................................................................................................2 Simplified Insolvency Proceedings................................................................................... 3 Discharge.................................................................................................................................... 5 Institutional Considerations................................................................................................ 6 Insolvency of Micro and Small Enterprises (MSES) ............................................ 7 C18 Key Objectives and Policies.........................................................................................7 C19 Simplified Insolvency Proceedings............................................................................7 C20 Discharge.......................................................................................................................... 9 D1 Role of Courts..................................................................................................................... 9 D5 Judicial Decision Making and Enforcement of Orders...................................... 9 Endnotes......................................................................................................................10 May 2022 i World Bank Group Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises Foreword by Mahesh Uttamchandani In 1999, in the aftermath of the Asian financial crisis, the international community established The Principles for Effective Insolvency and Creditor/Debtor Regimes (Principles) to help policymakers build resilience and financial stability. The Financial Stability Board and its predecessor the Financial Stability Forum (FSF) highlighted the importance of sound Insolvency and Creditor/Debtor (ICR) systems, including the Principles as one of their 14 “Key Standards for Sound Financial Systems”. In the 22 years since the Asian financial crisis, we have come to learn considerably more about ICR systems and, in particular, the role they play in promoting growth and access to credit, as well as resolving nonperforming loans and contributing to financial stability. We have frequently also been reminded of their continued importance in mitigating and responding to crises. The previous update to the Principles focused on the lessons learned from the 2008 global financial crisis. The current update comes at a time when the world faces a unique set of challenges embodied in the need to promote a global, resilient and inclusive recovery from the COVID-19 health pandemic, and where micro and small enterprises (MSEs) are particularly experiencing significant levels of financial distress. With the support of the ICR Task Force, we began the work on MSE insolvency in 2015, which led to the development of two important reports “Report on the Treatment of MSME Insolvency” (2017) and “Saving Entrepreneurs, Saving Enterprises: Proposals on the Treatment of MSME Insolvency” (2018). These reports were key in helping inform the deliberations of the ICR Task Force, as well as other institutions considering the policy framing of small business insolvency. The results of these reports and the Task Force’s deliberations are captured in this new version of the Principles. A recent text from the United Nations Commission on International Trade Law (UNCITRAL) is expected to provide complementary, in-depth guidance to legislators. On behalf of the World Bank, I want to take this opportunity to thank the Task Force, including the many organizations represented in the Expert Consultative Group, as well as our standard-setting partners from UNCITRAL. I would also like to thank the Task Force co-chairs, Andres Martinez and Antonia Menezes, for their leadership of the process leading to these revised Principles, together with the Explanatory Note. As we begin to recover and rebuild from the COVID-19 pandemic, countries around the world will need to look at the health their financial sectors, which will serve a critical function in the recovery process. Our hope is that the ICR Principles can play an important role in guiding policymakers on this challenging journey. Yours sincerely, Mahesh Uttamchandani Practice Manager Finance, Competitiveness & Innovation Global Practice ii May 2022 Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises World Bank Group Foreword by Andres F. Martinez and Antonia Menezes Many of the world’s insolvency regimes are primarily designed for large businesses. This means that MSEs are often put at a disadvantage when it comes to navigating complicated insolvency systems that require guidance from expensive advisors. Another issue faced by struggling MSEs is that, in comparison to large corporations, the capital at stake is relatively small. Banks and other creditors often adopt a passive attitude rather than allocating sufficient resources to the restructuring of those companies. Following the insolvency process, debtors may still find themselves with outstanding obligations brought about by the piecemeal liquidation of the enterprise as a result of creditor’s passivity. The new MSEs Principles aim to bring the needs of struggling MSEs into full focus and to provide solutions to those needs. Their goal is to facilitate the rescue and restructuring of all viable MSEs by preserving entrepreneurial initiative and efficiently liquidate non-viable ones. Broadly, the Principles address the reduction of barriers to MSE debtors’ use of insolvency systems through the introduction of simplified, affordable, and quick processes, whilst protecting creditors’ rights. MSEs Principle C18 details the key objectives and policies for effective insolvency systems for MSEs. Principle C18 provides for easier access for MSEs to the system, encouragement of early utilization of out-of-court restructuring procedures, hybrid procedures, in-court simplified insolvency proceedings, and more. Principle C19 expands on the meaning of ‘simplified insolvency proceedings.’ Included are the following key features; eligibility, commencement criteria, conversion of proceedings, procedural formalities and deadlines, management in simplified reorganization proceedings, management in simplified liquidation proceedings, reorganization plans, personal guarantees, and mechanisms for covering costs of proceedings. Principle C20 provides for a discharge regime for natural person entrepreneurs. Rather than offer detailed prescriptions for national systems, the MSEs Principles are deliberately flexible and are based on widely accepted good practice. This flexibility means that States retain the discretion to simply adjust some features of their ordinary insolvency law or to establish a wholly separate legal framework for MSEs in distress. We sincerely hope that countries adopting legislation aimed at facilitating the rescue and exit of small businesses will consider incorporating these new principles, recognizing the importance of MSEs for both emerging and developed economies. Yours sincerely, Andres F. Martinez Antonia Menezes Co-Chair ICR Task Force Co-Chair ICR Task Force May 2022 iii Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises World Bank Group Introduction In the aftermath of the Asian financial crisis, the Financial Stability Board mandated the World Bank Group to identify and develop internationally recognized best practices for assessing effective insolvency and creditor rights systems. In response, in 1999, the World Bank Group organized the Insolvency & Creditor/Debtor Regimes Task Force (ICR Task Force) comprising more than 70 leading international experts. The ICR Task Force informs the World Bank Group’s role as a joint standard setter (together with the United Nations Commission on International Trade Law, UNCITRAL) in the field of insolvency and creditor/debtor rights. Since 2001, the principles developed by the Task Force have been applied in the World Bank’s assessments of country insolvency systems and in providing technical assistance. These principles have been periodically revised and updated to reflect evolving best practices and new or emerging areas of insolvency of particular concern to the World Bank Group’s member nations. There is increasing recognition that addressing the needs of insolvent micro and small enterprises (MSEs) is vital for economic growth. MSEs form the majority of enterprises in most economies. Accordingly, many governments and regional trading blocs around the world are currently examining policies to address this large but fragile group of economic actors to maximize value preservation and facilitate market exit where necessary. The World Bank Group’s Finance, Competitiveness and Innovation (FCI) Global Practice helps develop credit infrastructure to assist MSEs with entry, growth, and exit, and the role of insolvency regimes is considered key in promoting both entrepreneurship and financial sector stability. The ICR Task Force has advised the WBG Insolvency Team that it is necessary to address this issue by adding to the World Bank Principles for Effective Insolvency and Creditor/ Debtor Regimes new principles that will provide specific guidance for dealing with MSE insolvency and identify core concepts and principles that any effective MSE insolvency regime should incorporate. MSEs Principles have been drafted that take into account earlier discussions at WBG ICR Task Force meetings and several background materials, including the Principles for Effective Insolvency and Creditor/Debtor Regimes (WBG 2016), Report on the Treatment of MSME Insolvency (WBG 2017), Saving Entrepreneurs, Saving Enterprises: Proposals on the Treatment of MSME Insolvency (WBG 2018), and “Insolvency of micro, small and medium-size enterprises” (UNCITRAL WG V Draft text on simplified insolvency regime discussed on December 2018 A/CN.9/ WG.V/WP.163, May 2019 A/CN.9/WG.V/WP.166, December 2019 and A/CN.9/ WG.V/WP.170, dated March 3, 2020). May 2022 1 World Bank Group Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises Principles for an Effective MSEs Insolvency Regime The MSEs Principles aim to facilitate rescue and restructuring for all viable MSEs, with the objectives of preserving entrepreneurial initiative and businesses that can continue to operate and add value in an economy and of liquidating non-viable ones effectively. The MSEs Principles contemplate specific key objectives and policies that countries should consider when designing and implementing effective insolvency systems for MSEs (Principle C18). These objectives are pursued, in particular, by minimizing the complexity and costs of ordinary insolvency proceedings and creating favorable conditions for debt restructuring and discharge while preserving adequate safeguards for protecting the rights of all parties affected by the MSE insolvency proceedings. An effective MSEs insolvency regime, applicable in the broadest range of countries and contexts, should be streamlined and cost-effective, and it should include the following main components: (i) out-of-court (informal), hybrid, and simplified procedures applicable to both natural and juridical persons (Principles C18 and C19), and (ii) a discharge regime for natural person entrepreneurs (Principle C20). These Principles highlight specific aspects of MSE insolvency that partially modify or complement the respective general ICR Principles. The latter will remain relevant and will continue to apply in MSE insolvency, unless they are expressly replaced by MSEs Principles. MSEs Principles are designed to be flexible in their application and thus do not offer detailed prescriptions for national systems. The principles embrace practices that have been widely recognized and accepted as good practices internationally. States may decide, as a matter of policy, to include a streamlined insolvency regime in their legal system, either by adjusting some features of the ordinary insolvency law or by establishing a separate legal framework for MSEs. MSEs Definition The term “MSEs” may have different definitions depending on the socioeconomic context and jurisdiction in which it is used. Countries may conceptualize MSEs according to different local criteria (e.g., number of employees, annual sales amount, etc.) and may also differentiate categories of businesses to which a simplified insolvency regime and MSEs Principles will apply —for example, separating small-size enterprises from micro ones. Consequently, the definition of MSEs is a policy decision of each State that must be rooted in the relevant domestic context. Notwithstanding this, MSEs Principles aim to identify aspects of insolvency regimes that impact MSEs, however defined, whether as an individual natural person operating as an entrepreneur or as a legal entity running an enterprise. 2 May 2022 Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises World Bank Group Simplified Insolvency Proceedings Principle C19 contemplates the key features of simplified insolvency proceedings. An out-of-court arrangement or a hybrid procedure should ideally resolve the MSE’s financial distress or insolvency. However, a streamlined regime should also offer simplified insolvency proceedings for reorganizing viable MSEs or liquidating non-viable ones. Eligibility Taking into account the similarities between smaller juridical entities and natural person entrepreneurs, the same simplified insolvency procedures should be available to both. Moreover, all personal and business debts of a natural person should be included in a simplified insolvency proceeding. Each country should clearly define the criteria to determine which debtors are eligible for access to simplified insolvency proceedings. The most common quantifiable criteria are thresholds such as the amount of total debt or liabilities, maximum number of employees, assets and income below a certain level, annual turnover, and/or number of unsecured creditors. Some well-defined qualitative eligibility criteria may be added. States may also decide if simplified insolvency proceedings are mandatory or optional for use by eligible debtors. Commencement criteria Commencement criteria for MSEs initiating simplified insolvency proceedings should provide convenient, inexpensive, and quick access. Requirements that restrict access or are cumbersome may lead to unnecessary litigation at the outset of insolvency cases and render the system ineffective. Delays regularly destroy value for a debtor and its creditors and make it more likely that a proposed rescue will result in a liquidation. Debtors should have access to simplified reorganization proceedings in case of insolvency and also at an early stage of financial difficulty. In the case of voluntary filings by debtors, the law should establish a debtor’s filing showing proof of basic criteria as a rebuttable presumption of insolvency or financial difficulty. Simplified liquidation proceedings may be commenced on a creditor’s application only if it is established that the debtor is insolvent. Conversion of proceedings Simplified insolvency proceedings should be converted to ordinary insolvency proceedings where well-defined circumstances such as complexity of a case or improper use of a simplified proceeding so warrant. Such conversion will usually be decided by a court at the request of a creditor or other party in interest. Reverse conversion—from ordinary to simplified proceedings—and conversion from reorganization to liquidation (and vice versa) should also be contemplated. The law should address the implications of conversion of proceedings. May 2022 3 World Bank Group Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises Procedural formalities Unlike out-of-court and hybrid procedures, simplified insolvency proceedings typically require more formalities, such as publicity requirements, notifications, and strict time limits. Nevertheless, the proceedings should be characterized by fewer and simpler formalities and shorter deadlines than those used in ordinary insolvency proceedings and, in some cases, complex requirements of general insolvency proceeding may be waived. The use of electronic tools and data to simplify processes should be encouraged to streamline and simplify processes. If practicable, online filing and standardized forms should be established. Management MSEs’ managers should continue to administer the business in simplified reorganization proceedings. They should cooperate, assist, and provide necessary information pertaining to the business, and they should preserve and protect the assets of the estate. Where supervision is needed to ensure that the process is not subject to abuse and the insolvency estate is protected, an independent supervisor should oversee the debtor’s management. Adequate supervision may also contribute to preserving creditors’ confidence, which is vital to negotiating and approving a reorganization plan. The risk of being displaced from management could create a powerful disincentive for most MSEs to timely apply for simplified reorganization proceedings. In these proceedings, removing the debtor or its management from administration of the business should be exceptional and based on limited grounds well defined by the law, such as mismanagement and fraudulent activities. In MSEs simplified liquidation proceedings, management should be replaced by an independent insolvency representative with authority to administer and liquidate the insolvency estate as specified in Principle C6.1. However, the law should specify under which exceptional circumstances an insolvency representative may not be appointed in simplified liquidation proceedings. Reorganization plans In simplified reorganization proceedings, requirements for creditor approval of reorganization plans should be less complex than in ordinary reorganization proceedings. Notwithstanding this, creditors and interested parties should receive timely and proper notice of a reorganization plan that could affect their rights (C2). Principle C14 will remain applicable in simplified reorganization proceedings; in particular, creditors’ voting and acceptance of the plan by a majority of impaired creditors will be required (C14.3). However, in simplified reorganization proceedings, creditors’ silence or lack of a negative vote on a duly notified reorganization plan will be considered as acceptance of the plan and counted as an affirmative vote. The law should also establish simplified voting requirements, including use of electronic means where appropriate. 4 May 2022 Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises World Bank Group MSEs Principles also address basic treatment of (i) personal guarantees, and (ii) main consequences of lack of assets or insufficient assets in MSEs’ insolvency proceedings. Although the mentioned issues are not exclusive to MSEs insolvency cases, they are more frequent and potentially more concerning where the insolvent debtor is an individual entrepreneur or a small or micro enterprise than in regular insolvency proceedings of large or medium enterprises. Subprinciples C19.8 and C19.9 address the main issues that usually arise in the mentioned areas. Discharge Discharge of the natural person entrepreneur is a primary feature of an MSEs insolvency regime. A debt discharge for consumers is not contemplated because the WBG ICR Principles do not deal with insolvency of natural persons not engaged in business activities. According to Principle C20, a liquidation process of existent assets (not including assets excluded from the insolvency estate and future income) will be considered a necessary prerequisite to discharge because it would be unjustified to discharge a debtor’s unpaid obligations without at least giving creditors a chance to partially collect claims over nonexempt property that could be liquidated. Principle C20 will adopt the emerging trend of broader, less restricted access to discharge and swifter, less burdensome requirements for honest debtors to obtain that discharge. Access to discharge should not be barred by cost, excessive formalities, or other obstacles. Limitations on serial filing may be appropriate to prevent abuse, but debtors should enjoy open access at least the first time they seek relief in an MSE insolvency procedure. Under Principle C20, good faith will be an implicit requirement for discharge, but debtors will have no obligation to prove their good faith to gain access to discharge because the law should establish a legal presumption of good faith. However, if a creditor or other party in interest has a reasonable basis for suspecting fraud or other misbehavior, they should be allowed to object to the debtor’s discharge, and some investigation into the debtor’s affairs should be facilitated. The court, on its own motion, should also be allowed to recognize and declare lack of good faith. The law should also clearly define the circumstances that could serve as grounds for challenging a debtor’s good faith, such as having acted fraudulently, engaged in criminal conduct, withheld or concealed information related to assets or claims, or participated in similar bad faith activities. The law should also contemplate sanctions for demonstrated abuse of the good faith presumption, such as by imposing a temporary restriction to obtain a discharge in the future. Given the fungible nature of money and credit, and the inevitable commingling of the personal and business affairs of a natural person, it is usually very difficult to accurately categorize debts as either business or personal in many cases. This is why Principle C20.5 specifies that the discharge should encompass all debts of a natural May 2022 5 World Bank Group Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises person, whether related to business activity or not. Exclusions from discharge (such as debts based on alimonies, fraud, and criminal sanctions) should be limited and clearly defined by the law. The period before discharge is granted should be short enough to reduce any stigma associated with insolvency proceedings and allow prompt return of debtors to productive activities (“fresh start”). If a search for assets in a liquidation process will extend beyond a short period, the discharge should be granted while the search continues. Upon discharge, the assets found or recovered in a liquidation process should be realized and the proceeds applied to satisfy the unpaid obligations of the debtor. Finally, discharge should produce effects on both a debtor’s obligations and personal disqualifications or restrictions. Obligations partially or totally unpaid with the proceeds of assets realized in liquidation proceedings will be extinguished; personal disqualifications or restrictions—if any—will be minimized or cancelled. Institutional Considerations Part D sets forth fundamental principles for the design and functioning of the institutions and participants invested with authority over ordinary commercial insolvency proceedings. A strong institutional framework is also crucial to an effective MSEs insolvency regime. Therefore, Principles in Part D will remain applicable to MSEs insolvency proceedings but a new subprinciple (D1.6) will be added to Principle D1. According to D1.6, the role and functions of the institutions and participants in simplified procedures should be modified according to the complexity level, size, or other relevant features of MSEs in a particular jurisdiction. Available institutional resources and professional capability should also determine the design of a framework able to implement an MSEs insolvency regime effectively. In particular, independent administrative agencies or other independent institutions should be allowed to perform roles and functions for implementing MSEs simplified proceedings. The law should also establish procedures for review of decisions that may substantially affect the rights of parties involved in MSEs simplified insolvency proceedings. The legal system should support and encourage the use of alternative dispute resolution techniques in simplified procedures for dealing with MSEs insolvency. Mediation, conciliation, and arbitration are of particular importance in simplified procedures because such alternative techniques may resolve disputes expeditiously and cost-effectively. This approach can save resources, expedite case disposition, foster compromise and cooperation, reduce the adversarial nature of disputes, and moderate the risk of failure of MSEs rescue. Principle D5.4 will address these issues. 6 May 2022 Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises World Bank Group INSOLVENCY OF MICRO AND SMALL ENTERPRISES1 (MSES)2 PART A. CREDITOR/DEBTOR RIGHTS C18 Key Objectives and Policies3 Though country approaches may vary, effective insolvency systems for MSEs should aim to:  Lower the barriers to access, and encourage early utilization of out-of-court restructuring procedures,4 hybrid procedures5 and in-court simplified insolvency proceedings. ▪ Design and implement a streamlined regime6 that reduces the complexity and costs of ordinary insolvency proceedings, providing for expeditious and flexible mechanisms to rehabilitate and/or reorganize viable insolvent or financially distressed MSEs, and to effectively liquidate nonviable ones. ▪ Establish favorable conditions and adequate safeguards for debt discharge and a fresh start for natural person entrepreneurs. ▪ Reduce the stigma associated with insolvency. Promote entrepreneurship and growth increasing access to credit. ▪ Maintain basic safeguards for protecting the rights of creditors, debtors and all parties involved in or affected by MSEs insolvency proceedings. ▪ Implement an effective regime to prevent and sanction fraud, improper use and abuse of MSEs insolvency proceedings. ▪ Establish mechanisms of assisting MSEs to provide early signals of financial distress to MSEs and increase financial and business management literacy among MSE managers and owners.7 C19 Simplified Insolvency Proceedings The law should establish simplified insolvency proceedings for reorganization and liquidation of MSEs, which should include the following key features: C19.1 Eligibility Simplified insolvency proceedings should apply to both juridical and natural persons classified as MSEs by each particular country, according to well defined and simple eligibility criteria specified by the law.8 All personal and business debts of a natural person should be included in simplified insolvency proceedings. Simplified insolvency proceedings may be made mandatory or optional for use by eligible debtors. C19.2 Commencement Criteria Debtors should have easy access to simplified reorganization proceedings in case of insolvency and also at an early stage of financial difficulty. The law should establish a debtor’s filing showing proof of basic criteria as a rebuttable presumption of insolvency or financial difficulty. MSEs liquidation proceedings may be commenced on the application of a creditor provided that it is established that the debtor is insolvent.9 May 2022 7 World Bank Group Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises C19 C19.3 Conversion of Proceedings The law should define specific circumstances which enable conversion of: i. Simplified insolvency proceedings to ordinary insolvency proceedings and vice versa; and, ii. Simplified reorganization proceeding to simplified liquidation and vice versa. The law should address the implications of conversion of proceedings. C19.4 Procedural Formalities and Deadlines The law should specify information and minimal procedures by which simplified insolvency proceedings should be commenced and closed, keeping them straightforward, speedy and cost- effective. Simplified insolvency proceedings should require fewer and less complex procedural formalities and shorter deadlines than those required in ordinary insolvency proceedings. In particular, complex and costly rules on notice, publications, creditors’ committees and assemblies, filing and resolution of claims, liquidation of assets of the debtor and distribution of proceeds to creditors should be disabled or streamlined. The law should allow the use of electronic tools and data to simplify processes. If practicable, online filing and standardized forms should be established. C19.5 Management in simplified reorganization proceedings The preferred approach should be management of the business remaining invested in the debtor or the debtor’s management. Removing the debtor or its management from administration of the business should be exceptional and based on limited grounds well-defined by the law. The debtor should cooperate, assist and provide necessary information pertaining to its business,10 and should preserve and protect the assets of the estate. Where supervision is needed to ensure that the process is not subject to abuse and the insolvency estate is protected, an independent professional should oversee the debtor’s management.11 C19.6 Management in simplified liquidation proceedings In simplified liquidation proceedings, the law should specify under which exceptional circum- stances an insolvency representative or liquidator may not be appointed.12 C19.7 Reorganization Plans13 In reorganization plans, the law should establish simplified voting requirements, including by using electronic means where appropriate. Creditors silence or lack of negative vote on a duly notified14 reorganization plan should be considered as acceptance of the plan and counted as an affirmative vote. C19.8 Personal guarantees A simplified insolvency system should address, including through procedural consolidation or coordination of linked proceedings, the treatment of personal guarantees provided for business needs of the MSE debtor.15 C19.9 Mechanisms for covering costs of proceedings The law should contemplate mechanisms for covering the costs of implementing simplified insolvency proceedings where assets and sources of revenue of the debtor are insufficient to meet those costs. 8 May 2022 Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises World Bank Group C20 Discharge The legal system should grant debt discharge to all good faith debtors who are natural person entrepreneurs17 following a liquidation proceeding.17 This discharge should have the following key features: C20.1 Discharge should be attainable at a reduced cost and with limited formalities. Requirements to a debtor’s discharge should be kept to a minimum and should be clearly specified in the law. The law may establish stricter requirements to subsequent discharges. C20.2 Good faith should be presumed but the law should allow creditors and other parties in interest to challenge a debtor’s good faith based on specific circumstances.18 If the parties have not raised the issue, the court should be allowed to appreciate and declare lack of good faith on its own motion. Bad faith or fraud should be grounds for delaying, refusing or revoking a discharge, and should be sanctioned by law. C20.3 Both personal and business debts that were, or could have been, addressed in the insolvency proceedings should be dischargeable. Debts excluded from discharge should be kept to a minimum and should be clearly defined by the law.19 C20.4 The period before discharge is granted should be short to encourage a fresh start, continued entrepreneurial activities and reduce stigma. C20.5 Upon discharge, claims that could not be satisfied in the insolvency proceedings should be rendered extinguished and personal disqualifications minimized or cancelled.20 PART D. IMPLEMENTATION: INSTITUTIONAL AND REGULATORY FRAMEWORKS D1 Role of Courts D1.6 Small and Micro Enterprises Insolvency Proceedings. The role and functions of the institutions responsible for implementing MSEs insolvency proceedings should be established according to the size and complexity of MSEs cases, and the legal system and resources available in each jurisdiction. In particular, independent administrative agencies or other independent institutions may perform roles and functions for implementing MSEs insolvency proceedings, and there should be procedures for review of decisions.21 D5 Judicial Decision Making and Enforcement of Orders D5.4 MSEs simplified proceedings. The legal system should support and encourage the use of mediation, conciliation and other alternative dispute resolution techniques in simplified procedures for dealing with MSEs insolvency. May 2022 9 World Bank Group Explanatory Note on Principles for Effective Insolvency Regimes for Micro and Small Enterprises Endnotes  hese principles emphasize specific aspects of the insolvency of MSEs that partially modify or 1. T complement the respective general ICR Principles. The latter will for the most part continue to apply in the insolvency of MSEs (whether or not there is explicit cross-reference to them in the following footnotes), unless they are expressly replaced by MSEs Principles. Countries may conceptualize MSEs according to different local criteria (e.g., number of 2.  employees, annual sales amount, etc.) and may also differentiate categories of business to which a simplified insolvency regime will apply. Notwithstanding this, MSEs principles aim to identify aspects of insolvency regimes that impact MSEs however so defined, whether as an individual natural person operating as an entrepreneur or a legal entity running an enterprise. C18 highlights key objectives and policies that specifically apply in MSEs insolvency regime but 3.  key objectives in C1 remain applicable in these regimes as well. Principles B3 – B5 will mostly apply to out-of-court voluntary negotiations and arrangements to 4.  effectively restore financial viability of MSEs. Hybrid procedures are akin to the “formal proceedings … to quickly process the informal, pre- 5.  negotiated agreements” contemplated in B4.2. States may decide, as a matter of policy, to include a streamlined insolvency regime in their legal 6.  framework, either by adjusting some features of the ordinary insolvency law or establishing a separate legal framework for MSEs insolvency. For example, providing debt counseling services. 7.  The most common quantifiable criteria are thresholds such as the amount of total debt or liabilities, 8.  maximum number of employees, assets and income below certain level, annual turnover, and / or number of unsecured creditors. Some well-defined qualitative eligibility criteria may be added. Otherwise, Principles C4.1, C4.2 and C4.4 fully apply to commencement on creditor application. See Principle C2.2. 9.  For reorganization proceedings, compare C19.5 with C6.2. 10.  Otherwise, Principle C6.1 will fully apply. 11.  Principle C19.6 complements C14, which remains applicable in simplified reorganization 12.  proceedings. In particular, acceptance of the plan by a majority of impaired creditors should be required. Creditors and interested parties should receive timely and proper notice of a reorganization plan 13.  that could affect their rights (see Principle C2). Procedural consolidation or coordination is aimed at facilitating the administration of insolvency 14.  proceedings exclusively. It does not involve substantive consolidation of assets and liabilities. A discharge for consumers is not contemplated because the WBG ICR Principles do not deal with 15.  insolvency of natural persons not engaged in business activities. In MSEs reorganization proceedings, Principle C14.5 fully applies. 16.  Laws typically restrict the availability of discharge for debtors that have acted fraudulently, 17.  engaged in criminal conduct, withheld or concealed information related to assets or claims, and similar bad faith activities. Certain types of debts, such as claims of creditors not notified of the commencement of the 18.  insolvency proceedings and having not joined the proceedings, debts based on alimonies, fraud, and criminal sanctions tend to be excluded from discharge. Assets found or recovered in a liquidation process upon discharge should be realized and the 19.  proceeds applied to satisfy the unpaid obligations of the debtor. See Principle C2.1. 20.  10 May 2022 For further information on the ICR Principles, the ICR ROSC or the World Bank Group Insolvency & Debt Resolution Technical Assistance Program, please contact: Fernando Dancausa fdancausadiaz@worldbank.org Andres F. Martinez amartinez3@worldbank.org Antonia Menezes amenezes1@ifc.org Nina Mocheva nmocheva@ifc.org Will Paterson wpaterson1@worldbank.org Mahesh Uttamchandani muttamchandandani@worldbank.org www.worldbank.org/insolvency