Insolvency and Creditor Rights Systems in MENA Breakfast Briefing Latham & Watkins 1 June 2009 Dr. Nasser Saidi Director, Hawkamah Institute for Corporate Governance Chief Economist, DIFC Authority

AGENDA  Global Crisis & MENA Countries’ Challenges  Role of Insolvency Systems in Mitigating Impact of the Crisis  Initial Results of Hawkamah-WB-INSOL-OECD Survey of Insolvency Systems in MENA Countries  Lessons and Recommendations 2

Global Crisis and MENA Challenges Global crisis effects on MENA countries:  Credit Markets  Equity and Bond Markets and Capital Flows  Real Economy  Legal & regulatory  Social & Political 3

Policy Responses & Mitigating the Impact of the Crisis MENA countries have taken a variety of monetary, fiscal & financial measures to counter the economic & financial impact of the crisis. MENA countries are going through an adjustment process; need to ensure a ‘soft landing’ MENA countries should focus on institutional, legal and regulatory reforms as preventative & prudential measures Effective insolvency systems, based on developed legal frameworks, relying on a sound judicial system and on the availability of lawyers and accountants experienced in insolvency proceedings, play a critical role for orderly exit of insolvent corporations and for the efficient reallocation of resources. Well established Insolvency regimes & Creditor Rights Systems and frameworks are a key standard for sound financial systems Strengthening insolvency laws is crucial. 4

“ Because for years I thought what was good for the country was good for General Motors and vice versa“, Charles Erwin Wilson, GM president, confirmation hearings 1953 FT : GM to file for Chapter 11 protection General Motors will file for Chapter 11 bankruptcy protection in New York on Monday in a humiliating fall from grace for a symbol of America’s industrial might and the world’s biggest carmaker for much of the 20th century. Prior to the filing, which will mark the largest bankruptcy in history of an industrial business, US President Barack Obama and Fritz Henderson, GM’s chief executive, will seek to reassure workers, suppliers, dealers and car buyers that a leaner, reinvigorated GM will emerge from a court-supervised restructuring. GM employs 230,000 people around the world, building more than 20,000 vehicles a day. GM will say that it aims to emerge from Chapter 11 by August 1, shorn of much of its debt, four of its eight brands, and surplus plants and dealers. 5

Closing a Business in MENA,

Hawkamah-World Bank-INSOL-OECD Task Force Hawkamah launched a Task Force on Insolvency and Creditor Rights System with the World Bank, INSOL and the OECD Objectives  Take stock of the Insolvency Regimes existing in the MENA countries  Develop a MENA Policy Brief on Insolvency and Creditor Rights Frameworks  Identify priorities and propose concrete policy recommendations. 7

Summary 2008 Hawkamah/ World Bank / INSOL/ OECD survey: 11 MENA Jurisdictions Insolvency Systems -DIFC-Palestine -Egypt-Saudi Arabia -Jordan-UAE -Kuwait-Yemen -Oman-Qatar -Lebanon Countries scored out of a total of 155 possible points Survey questionnaire responses filled by lawyers, insolvency professionals and governments 8

Hawkamah-WB Survey of MENA Insolvency Systems 172 Questions based on World Bank: Principles for Effective Insolvency & Creditor Rights Systems (Revised) 2005: -Legal Framework for Creditor Rights Security over Movable and Immovable Assets Enforcement of Secured Rights -Risk Management and Corporate Workout Credit Information System Liability of Directors, Managers and Third Parties Informal Workout Procedures -Legal Framework for Insolvency Insolvency Law Objectives Due Process Management of Insolvency Proceedings Creditors, Creditors’ Committees, and Priority of Creditor Claims Avoidable Transactions -Reorganizations Proceeding Rehabilitation Legislation Plan Preparation, Formulation, Approval and Implementation Cross-Border Recognition -Implementation of the Insolvency System Role, Efficiency, and Integrity of the Court System Qualification and Integrity of other Participants Regulatory and Supervisory Bodies 9

Overall Survey Results: scored out of a total of 155 possible points OECD Average (124) MENA Average (88) 10

Results for Gulf v. Non-Gulf States Gulf States have stronger insolvency laws in all but four areas Both Gulf and Non-Gulf States have room for improvement. 11

Hawkamah-WB Survey of MENA ICR Systems I Enforcement is a serious challenge in many countries, particularly extrajudicial enforcement for secured claims (ie ‘self-help’). Insolvency laws are typically antiquated and inconsistent with modern business needs, particularly as they relate to business rescue. Many countries still view the purpose of insolvency legislation as being limited to winding-up bankrupt companies, without providing an opportunity to revive them. 12

Hawkamah-WB Survey of MENA ICR Systems II There is a strong stigma in many countries that is attached to the use of formal insolvency proceedings to save a troubled company. As such, informal or consensus- based proceedings are often preferred. The courts in many countries lack the institutional capacity to effectively implement reorganization legislation and are predisposed to liquidation. 13

Hawkamah-WB Survey of MENA ICR Systems III There is insufficient understanding in many countries of the importance of the regulatory component of insolvency systems. Specifically, many countries under-regulate insolvency practitioners (the professionals -- typically accountants -- who act as receivers, trustees, liquidators, etc.), thereby leaving an important component of the system unchecked and resulting in lower overall confidence in the system. 14

Some lessons and takeaways 1.Gulf States have stronger insolvency laws in all but four areas. 2.Both Gulf and Non-Gulf States have room for improvement. 3.MENA countries have focused more on access to than on exit from market 4.DIFC insolvency framework is robust and highest rated in the region 5.Given MENA’s exposure to the crisis, countries must take preventative measures to mitigate the economic impact of the crisis. 6.Strengthening and modernising insolvency laws is crucial to mitigate risks and effects of economic & financial crisis on MENA countries. 15

Institutional & Structural Change & Reform Develop Central Credit Reporting Organizations to provide information on bank and non-bank credit (including supplier credit). CCROs can collect, organize and analyze valuable material information in an efficient manner; Promote the establishment of “Companies Houses” in the countries of the region, allowing the electronic registration of companies and filing of documents and reports Develop local Credit Rating Agencies, as they can provide a valuable service to conduct risk assessments and credit ratings for companies and governments. This is also particularly important for capital market development as they provide credit benchmarks for local markets. Develop and modernize Registries of Security, for both immovable and moveable collateral Develop Special Financial Courts able to facilitate adjudication of highly technical financial issues, particularly those related to insolvency law; Build Judicial Capacity and establish or provide sufficient resources for the administration of liquidation cases, and the development of trained and experienced private sector practitioners to take prominent roles in various aspects of reorganization of the affected businesses. 16

Hawkamah Declaration & Next Steps 1.ESTABLISH a Regional Forum on insolvency and creditor rights which will aim to engage, educate, and inform more stakeholders into the reform process and will serve as a platform for sharing of international and regional best practices on both policy and infrastructure areas on insolvency and creditor rights 2.Finalize the regional survey of insolvency and creditor rights conducted by the Hawkamah, World Bank, OECD, and INSOL International, to include advancing a set of policy recommendations. 3.Disseminate the publication to the widest audience possible to include Ministers, regulators, lawmakers, accountants, auditors, bank and non-bank corporate sector, academia, and media and make the publication a reference manual for the improvement of national systems and effective implementation. 4.Develop a series of sector-specific programmes on regional and national bases to facilitate benchmarking and sharing of best practices that would help elevate and advance the insolvency and creditor rights agenda. 5.Develop and design public awareness and training programmes for practitioners, regulators and judges 17