EBRD publishes “Assessment of Reorganisation Procedures in Insolvency” report

The recent Covid-19 crisis has highlighted the importance of insolvency and reorganisation frameworks to support businesses in financial difficulties. In response, EBRD carried out a Business Reorganisation Assessment of national insolvency frameworks to provide an overview of business reorganisation practices and to propose areas where further development of national legislation is needed.

The Assessment was conducted in 38 economies of EBRD operations and the analysis of law of 40 jurisdictions, as well as domestic practices.

After almost a year-long study, in Feb 2022 EBRD has published its findings – a comprehensive report on business reorganisation practices across all the countries where EBRD operates. The main findings of assessment are presented below. Where appropriate, these findings are compared with the Mongolian legal framework:

I. EBRD economies of operations: All EBRD economies of operations allow for a court-supervised reorganisation to take place.

Mongolia: The reorganisation procedure is a fully court-supervised procedure. No hybrid reorganisations procedures exist in Mongolian law.

(FYI – hybrid procedures are where a reorganisation plan is prepared and agreed outside the court and subsequently submitted for the court’s confirmation).

II. EBRD economies of operations: Besides the court-supervised procedures, consensual out-of-court reorganisations (private workouts), as well as hybrid procedures are options in EBRD economies of operations.

Mongolia: no private workouts or hybrid procedures are currently provided for in Mongolian law.

III. EBRD economies of operations: In all EBRD economies of operations, there is at least one reorganisation procedure that provides for a moratorium or stay on creditors’ enforcement actions.

Mongolia: From commencement of insolvency proceedings, the debtor benefits from a moratorium suspending creditors’ enforcement actions, including secured creditors.

(FYI – the rationale behind a moratorium is stabilising the debtor’s business for a limited period to allow the debtor to develop a plan but without losing sight of the need to protect creditors’ rights),

IV. EBRD economies of operations: Some reorganisation procedures are further equipped with statutory protection and/or statutory priority in repayment of new financing provided during the proceedings or as part of a plan.

Mongolia: No, the Insolvency Law does not protect new financing required for the reorganisation. However, under the Civil Code, new financing provided during reorganisation are to be satisfied before unsecured creditors, but after secured creditors.

V. EBRD economies of operations: The assessment revealed weaknesses in the law and practice of the reorganisation plan confirmation processes. In the majority of EBRD jurisdictions, claims of secured as well as preferred creditors can be compromised in some way or another as part of the reorganisation plan.

Mongolia: Separate classes of creditors are recognised for voting purposes (e.g., secured creditors, employees, unsecured creditors). A simple majority vote of the creditors in each class approves the reorganisation. Confirmation of the reorganisation plan by the court is possible even if not all voting classes approve it. The plan once confirmed by the court binds all creditors that are part of the plan.

VI. EBRD economies of operations: Some of the EBRD economies of operations include SME-specific procedures or special provisions that facilitate the application of insolvency related procedures for smaller businesses (e.g., shorter timelines and fewer formal requirements for SMEs).

Mongolia: No specific procedures or provisions exist with respect of insolvency or reorganisation of SMEs in Mongolian law. Going forward, the high number of SMEs and their recognised importance for employment in Mongolia’s economy may highlight the need to focus on these enterprises.

VII. EBRD economies of operations: Evaluation of the practical application of business reorganisation tools in many economies reveals that additional work is needed. In particular, expediency, high professional and ethical standards, efficiency, and value maximisation of the reorganisation process have been identified as the four most lacking insolvency principles in the EBRD countries.

Mongolia: Mongolia is no exception. As a result, very few reorganisation cases have been undertaken up to date.

VIII. EBRD economies of operations: Availability and transparency of insolvency-related data is an issue in many EBRD jurisdictions. There is no reporting of insolvency data and no clear central authority responsible for insolvency data. Also, the assessment identified a lack of specific data on reorganisation and/or hybrid procedures, as well as generally a low number of reorganisation cases as compared to liquidations.

Mongolia: Generally, Mongolia is no exception. Insolvency data is not publicly available. However, the Insolvency Law requires the publication of the decision on opening insolvency proceedings not more than five days after the issuing date of the relevant court order.

IX. EBRD economies of operations: In addition to the Assessment, EBRD’s study ran a separate short survey on NPLs in the countries of EBRD operations. Resolution of NPLs is not only about enforcement and liquidation – in some cases, owners and investors in NPLs will want to pursue a reorganisation strategy. Main impediments identified were: weakness in the enforcement regime for debt collection; lack of a secondary market for NPLs; and an inadequate environment for multi-creditor out-of-court restructuring.

Mongolia: Mongolia lacks legal environment for effective resolution of NPLs. As a result, the financial system has a large NPL overhang. In 2019 KhanLex has published a report – “Mongolia: Strengthening the Legal Framework for Non-Performing Loans Resolution and Debt Restructuring – Gaps in Mongolian laws”. The Report contains in-depth analysis of key Mongolian laws governing resolution of NPLs and identifies gaps and recommendations for necessary amendments for their successful resolution in Mongolia. You can view the by clicking here.

You can read the full report “EBRD Insolvency Assessment on Reorganisation Procedures” by clicking here.

KhanLex has contributed to development of the Mongolia section of this assessment report. You can read the Mongolia section of the report by clicking here.

If you wish to receive further information about the above assessment or insolvency regulations in Mongolia, please contact (Mr) Enkhbat Batsukh or (Ms) Namuun Odkhuu.

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