This explains the World Bank’s new Business Ready initiative, which will report on the business systems of up to 180 country economies including their insolvency systems. Some limitations on the methodology used by the World Bank are raised here.
The World Bank Group has begun work to issue its new Business Ready (B-READY) report, which will report on the business systems of up to 180 country economies. Business Ready (B-READY) (worldbank.org) This will replace its former Doing Business report.
B-Ready will focus on 10 topics covering the lifecycle of a firm in the course of starting, operating, or closing or reorganizing its activities: Business Entry, Business Location, Utility Services, Labour, Financial Services, International Trade, Taxation, Dispute Resolution, Market Competition, and Business Insolvency.
“B-READY assesses an economy’s business environment by focusing on the regulatory framework and the provision of related public services directed at firms and markets, as well as the efficiency with which regulatory framework and public services are combined in practice”.
Over the next three years, the project will grow to cover about 180 economies worldwide annually, starting with 54 economies in 2023-24, 120 economies in 2024-25, and reaching 180 economies in 2025-26.
Australia is being reported on in the second group in 2024-2025.
Business Ready is said to improve upon the Doing Business report in reflecting “a more balanced and transparent approach toward evaluating a country’s business and investment climate …”.
In its Methodology Handbook, the World Bank explains the approaches taken to each of the issues.
Chapter 11 – Business Insolvency – explains the methodology of approach of assessing a country’s insolvency system. It refers to the fact that the
“efficient and rapid exit of nonviable firms plays an important cyclical role in renewing the economy by removing firms that are not productive and making way for more productive ones” with the “purpose of an efficient insolvency framework is to ensure that nonviable firms are swiftly liquidated, and viable firms are effectively restructured in a sustainable way. … Efficient insolvency systems can boost job creation and growth, including by spurring the reallocation of productivity-enhancing capital through the exit of nonviable firms”.
However, as it explains, large-scale and updated comparable data about how well insolvency regimes are operating around the world are scarce with the B-READY project aiming to fill that void.
The Business Insolvency topic measures key features of insolvency systems at a regulatory level. It also assesses the institutional and operational infrastructure associated with insolvency proceedings (judicial services), as well as the efficiency of insolvency proceedings in practice across three different dimensions, referred to as pillars. The first pillar assesses the effectiveness of regulation of insolvency proceedings, the second measures the quality of institutional and operational infrastructure for insolvency processes; and the third pillar measures the time and cost required to resolve in-court liquidation and reorganization proceedings. Each pillar is divided into categories and then subcategories.
Issues to be reviewed and assessed include the quality of the insolvency law, processes for pre-commencement and commencement of insolvency proceedings, the insolvency administrator’s expertise, management of the debtor’s assets, processes for creditor participation, dealing with MSEs, digitalization and online insolvency services, the courts, public availability of information, specialization of Bankruptcy Courts and Judges, and time and cost involved.
In my view, there are two or more limitations of this project in so far as insolvency is concerned. One, it focuses only on corporate insolvency; and two, it ignores the role of government in the role of official receiver common in many countries. That leads into a related third limitation, that it does not address assetless insolvencies, commonly administered by official receivers. Even if a company is not assetless, a reality can be that there are not enough remaining funds for a private practitioner to properly administer the insolvency.
Corporate insolvency only
The Business Insolvency indicators measure the insolvency legal framework and insolvency practice related to
“commercial or corporate insolvency only, as it focuses on business insolvency of the firms. Other types of insolvency regulations and practices, such as personal insolvency (which relates to debt resolution mechanisms available to natural persons) …. are excluded”.
The justification given for this is that
“the limited liability company (LLC) is the most prevalent legal form of company adopted worldwide to conduct business. LLCs can also shield the personal assets of its members from legal claims related to the business. In other types of firm arrangements, the members and/or partners are held personally liable, which would entail individual and/or personal insolvency—which falls outside the ambit of corporate insolvency examined in the B-READY project. Focusing solely on limited liability companies allows the relationship between creditors and debtor to be examined within the insolvency framework alone without other forms of liability arising”.
In Australia at least, many small businesses – up to 50% – are operated as sole traders or partnerships. And even if there is a company, personal guarantees and blending of personal assets and liabilities are common. Corporate insolvency processes generally specifically exclude protection for personal liability of directors. Australia also has a legal system whereby directors can be liable for the unpaid taxes of the company.
To say that limited liability companies are “a safe legal vehicle to protect the personal assets of the business owners” [5.1.2] is not quite right in many cases.
These features are acknowledged both by UNCITRAL, and the World Bank, in their respective guidance on the laws concerning the insolvency of small business.
In so far as the government is acknowledged in the project it is in respect of the courts and registries. However, insolvency is a rather unique and difficult industry for private sector involvement. Its inherent lack of funds almost necessitates some government role for those many estates where it is not profitable for the private profession to administer them. Many comparable jurisdictions have a government official receiver – England, Singapore, New Zealand – both in recognition of the lack of funds and also in recognition of the public interest nature of insolvency law, that it is not merely about the private interests of creditors. Australia lacks an official receiver in corporate insolvency only by default. The World Bank does not seem to contemplate any such government role, nor how it might be needed in relation to assetless administrations, for example.
Under-funded and assetless insolvencies
An option for the insolvency of a business that is assetless, even if with significant creditors and employee claims, is to simply allow its deregistration. At a practical level, it is recognised, by UNCITRAL for one, that such an approach is ill-advised, for two reasons. One, the perception that an assetless insolvent company will not be examined when it may have transferred all its assets prior to its insolvency should not be supported; and two, impecunious directors of a failed assetless business should have the option of having the affairs of their company properly administered for the sake of their further endeavours.
Even if there are remaining funds in an insolvent company, in many cases these will not be enough to properly fund the administrator, let alone pay any dividend to creditors. In Australia at least, around one third of insolvencies pay no or inadequate remuneration to the practitioner. That has flow through effects, including on creditor engagement.
In the end, the World Bank corporate firm approach must be understood as being generally consistent with most of the analyses of insolvency law, to see insolvency from the perspective of lawyers and accountants, rather than from that of the business constituents – however structured – impacted by financial stress and failure. There is a similar consistency of approach in ignoring the underside of insolvency, and the commercial realities of limited funds. Those with a broader perspective will need to keep these limitations in mind when the country reports are issued.
Australia will be surveyed by the World Bank in the second round in 2024-2025. In its context, the report will provide an interesting and useful comparison with the laws of comparable jurisdictions, said to be an improvement upon the World Bank’s Doing Business report. Australia’s 2019 ranking under that Report was 20th out of 190 countries.
The Parliamentary Joint Committee’s report on our corporate insolvency laws is to be tabled by 30 May 2023. It has taken submissions on international insolvency laws and has noted Australia’s ranking. Whether or not any of Australia’s laws will have been changed by 2024-25 in response to the Committee’s recommendations, it will be useful to see if the B-Ready report of the World Bank is consistent with what the Committee says about Australia’s insolvency system, and how we rate internationally.
 Generally, see Rebuilding the structure of the Australian insolvency system (2022) 22 (1&2) INSLB 14, M Murray and J Harris
 Treasury001 World business rankings insolvency.pdf