TAILORED INSOLVENCY PROCESS FOR SMES: WHY THEY ARE IMPORTANT AND WHAT COUNTRIES ARE DOING

Small businesses play a critical role in almost every economy. In Singapore, for example, government statistics show that small and medium-sized enterprises (SMEs) account for 99% of total enterprises, employing 72% of the entire workforce. Yet, despite their economic relevance, SMEs in most jurisdictions do not have a process dedicated to resolve their insolvency in a distress situation.

Changes are happening in the Asia Pacific region, however. A simplified insolvency programme was introduced in Singapore in October 2020 to assist micro and small companies by providing a less costly and more efficient restructuring process. And eight months earlier, the Insolvency Law 2020 was enacted in Myanmar, under which there is a tailored rescue and liquidation process for SMEs. The Asian Business Law Institute (ABLI) spoke to Mr Scott Atkins, the Australian Chair, Partner and Head of the Australian Risk Advisory Practice of Norton Rose Fulbright, about his experience implementing the law reforms in Myanmar and how this seminal work has influenced the reform in his home country, Australia.

ABLI: Over a three-year period, you led a team working with the Asian Development Bank and the Union Supreme Court of Myanmar to draft a new insolvency and restructuring framework for Myanmar, culminating in the enactment of Myanmar's Insolvency Law in February 2020. Tell us about some of the highs (and perhaps lows) of the journey to advance law reforms in Myanmar.

Scott Atkins (SA): I led a team from Norton Rose Fulbright which, together with the Union Supreme Court of Myanmar and the Asian Development Bank, drafted and oversaw the enactment of the Insolvency Law in Myanmar.

To me, this was a very exciting opportunity to build a best-practice insolvency process in a developing country with tremendous, yet still largely untapped, economic potential from the ground up for the security and prosperity of Myanmar and its population. 

The whole process was no easy feat. Indeed, Myanmar's (then) existing insolvency regime was very outdated, and this operated as a significant deterrent to cross-border investment. 

We also had the challenge in Myanmar of designing a new insolvency law that was reflective of international best practice, but which could also be integrated into the existing regulatory, economic and social framework of the country, where the experience of financial distress was very limited and the economy itself was (and remains) very much in a state of transition, turning from a traditional command economy with a rudimentary system of credit into a market economy. Institutional knowledge of insolvency law has also been very limited up until the passage of the new laws.

While challenging, the process of engaging, consulting and building constructive and enduring relationships with multiple entities and sectors during the legislation design and implementation process – from public sector entities such as the Central Bank of Myanmar, the Ministry of Planning and Finance, the Directorate of Investment and Company Administration, the Departments of the Auditor-General and Attorney-General and the Law Reform and Bills Committees of the Myanmar Parliament, to private businesses and the judiciary, as well as UNCITRAL, the IMF and other international bodies, was immensely invigorating and rewarding. 

Indeed, the chance to create and implement best practice insolvency processes is perhaps the greatest reward of all in the industry I am most passionate about. These reforms have the potential not only to benefit Myanmar, but to serve as a model for other developing and developed nations alike across the world. 

ABLI: One of the key features of the Insolvency Law is its tailored procedures for small businesses. What made you and your team feel that it was imperative to include such procedures in the drafting process?

SA: In my mind, a best practice insolvency regime is one that balances fairness and efficiency. A critical aspect of that balance is to have in place not a "one size fits all" liquidation and rescue process for all companies but, rather, different processes for different types of entities. This achieves flexibility, reduces costs and, ultimately, increases the prospect of saving a viable business, or at least quickly and cheaply ending its existence where that is not possible.

Dedicated processes for SMEs are especially important in this context because they are the lifeblood of any economy and a degree of flexibility – balancing rescue and rehabilitation with the need to liquidate when there is no realistic prospect of viable trade – is required to take into account the different operating models and groups of creditors small businesses invariably have.

ABLI: What would you say is the one feature that stands out in this dedicated SME process which really sets it apart from the "general" process? How will SMEs in Myanmar benefit from this?

SA: The dedicated rescue process for SMEs is a debtor-in-possession (DIP) model. That is the most critical feature of the reforms – it enables a distressed business to work with an insolvency professional to develop a restructuring plan in coordination with creditors, reflecting a model of cooperation and engagement that saves costs and maximises efficiency and, in the end, benefits not only creditors but all stakeholders including employees, suppliers and the broader community that depends on the essential services provided by SMEs and has a vested interest in their survival.

Encouraging this rescue framework – at least where a business is viable in the long-term – can, I hope, become the entrenched practice and expectation as a pillar and backbone of Myanmar’s entire economy and financial system.

The simplified liquidation process for SMEs as part of the reforms in Myanmar is also very beneficial in recognising the reality that not all businesses can be saved and, where there is no prospect of resumed trade, capital is better invested in more productive ventures that create wealth and value for the benefit of the economy and overall improved living standards in Myanmar.

ABLI: The work you and your team carried out in Myanmar has garnered extensive global and regional attention, and we understand, influenced the development of a dedicated rescue and liquidation procedure for SMEs in your home country Australia. What is your assessment on the Australian approach?

SA: The dedicated rescue and liquidation process for SMEs came into effect in Australia on 1 January 2021. 

These reforms are the most significant in Australia's insolvency process since 1993 and respond to calls for SME-specific measures from industry bodies and practitioners for over a decade. The reforms are very similar to what is in place in Myanmar – a DIP rescue and rehabilitation process and a simplified liquidation process to maximise efficiency and increase the return for creditors.

I think the reforms do have a very real prospect of enhancing Australia's rescue culture and building a greater entrepreneurial spirit in the economy more broadly in the long run. However, there are still a lot of issues that we will need to see play out, and it remains the case that a rescue attempt for a SME will not succeed without the support of major secured creditors (who are entitled to enforce their rights even if a restructuring plan is agreed to under the new laws).

So I think the next step is to seek to develop a greater collectivist culture among creditors in Australia of the kind we see in the US and the UK – and other reforms to enhance flexibility and increase the prospect of a successful rescue such as informal restructuring moratoria (similar to UK reforms introduced in June 2020) and DIP finance would also be beneficial as we embark on the economic recovery process in response to the pandemic.

Mr Atkins will be speaking at a webinar co-organised by ABLI and the Singapore Global Restructuring Initiative (SGRI) at 3pm (SGT) on 3 March to discuss insolvency for micro and small businesses. Alongside his co-speakers Assistant Professor Aurelio Martinez from Singapore Management University and Smitha Menon, Partner of WongPartnership, he will share more about the experiences he took away from Myanmar, the latest developments in Australia and his vision for more insolvency support for small businesses. Sign up here.