Policy Briefs

Avoiding the insolvency of Georgia`s Insolvency Law
Wednesday, 16 March, 2016

Georgia’s Insolvency law of 2007 is primarily oriented towards a rapid liquidation of insolvent corporate entities and private entrepreneurs’ businesses with subsequent distribution of remaining assets amongst the creditors. The number of insolvency cases dealt with by the local courts of Tbilisi and Kutaisi is fairly limited most probably due to insufficient assets in the insolvent entities to cover the costs of the insolvency procedure. The law is relatively short and leaves relevant aspects of insolvency procedures either unclear or unregulated. Areas with significant shortcomings and deficiencies are e.g. regulations on avoidance of transactions concluded prior to insolvency, the monopolistic position of the National Enforcement Bureau as trustee, the Conciliation Council, the rehabilitation procedure, the role and function of Insolvency Office Holders, the ranking of claims in the distribution process, etc.

The 2007 Insolvency Law is far away from what has emerged internationally as “best practice” for insolvency frameworks. This is clearly documented in the very bad position Georgia has received within the World Bank’s Doing Business Index 2016, sub-indicator Resolving Insolvency, where Georgia is ranked 101 out of 189 countries. European Bank for Reconstruction and Development’s assessment of Insolvency Office Holders’ regulation also shows Georgia on position 25 out of 27, far behind all neighboring countries. Smaller amendments to the 2007 law will not be sufficient to significantly change these poor results.

Profound economic research of the last decade demonstrates that a poor insolvency law framework has a clear negative impact on a country’s economic development. The effects are manifold. The largest impact is attributed to the possibility of the continuation of business activities. This requires a clear change of the insolvency law’s objective: From liquidation and asset distribution to business continuation where ever possible. This gives failing entities and entrepreneurs the “second chance” for a “fresh start”. Growing self-confidence and growing entrepreneurial dynamic are consequences as well as positive influences on economic activity and GDP growth. A predictable rescue and rehabilitation framework also helps to make new credit available and lowers financing costs. The banking sector as a whole can benefit from growing stability in the corporate business sector and reduced downward pressure from valuation adjustments in the loan book.

Georgia needs another Insolvency Law. Slight amendments will not be sufficient. Either the law is substantially redrafted or it is completely made new. No less important is a completely changed approach towards objectives and procedures, roles and responsibilities of insolvency law.

Since September 2014, the ISET Policy Institute has been working with the German Economic Team (GET). In May 2015 ISET-PI and GET extended their partnership and began working on a variety of policy briefs for Georgia's industrial development. These briefs will simultaneously advance research in the sector and provide the Georgian government a set of guidelines for the development of its own policy, exploring where Georgia's comparative advantages lie. The German Economic Team is a consulting group that provides advisory services to the Georgian government on economic policy and is supported by the German Federal Ministry for Economic Affairs and Energy.