The new insolvency law and our global competitiveness

With the advent of globalization and the continually increasing integration of economies, domestic legal systems have become more complex. Laws are no longer just intended to promote and maintain order in society.  They now serve as catalyst, directly or indirectly, of economic growth.

Not surprisingly, international organizations now use the existence or non-existence of certain laws as an indicator of the soundness of a country’s economic fundamentals and the ease of doing business therein. In turn, these ratings are relied upon by businessmen who are constantly in search of countries besides their own to invest their money in.

The Philippines, as a developing economy, should therefore be conscious, albeit not too wary, of how it performs in these evaluations.

WEF Global Competitiveness Index

A good example is the Geneva-based World Economic Forum (WEF). This think thank comes up annually with the Global Competitiveness Index (GCI) report that identifies the drivers of economic performance of more than 140 economies and measures their competitiveness vis-à-vis each other. It groups the indicators into 12 pillars. Among them is the Legal Rights Index under Pillar 8 on Financial Market Development, which basically measures “the degree to which collateral and bankruptcy laws protect borrowers’ and lenders’ rights and thus facilitate lending.”

In the most recent (2012-2013) GCI report of the WEF, the Philippines’ rank rose from 75 to 65. However, under the Legal Rights Index, the Philippines received only a score/value of 4 on a 0-10 scale. The Philippines shares ranks with Lebanon, Iran and Sri Lanka. Some other Asian countries fared better, with Singapore, Hong Kong and Malaysia all obtaining a perfect score of 10.

Index of Economic Freedom

Another competitiveness index worth minding is the “Index of Economic Freedom,” which is premised on Adam Smith’s proposition that, “[w]hen institutions protect the liberty of individuals, greater prosperity results for all.”

This index factors in 10 economic freedoms grouped into four broad categories, namely: rule of law, limited government, regulatory efficiency and open markets. It is in the area of business freedom, which is subsumed in regulatory efficiency, where efficient and effective insolvency systems are critical, inasmuch as forward-looking businessmen consider not only the ease of starting their enterprise but also the contingency of having to fold up, if necessary.

Significantly, in 2013, the Philippines ranked 97th out of 185, and was categorized, together with India, Brazil and Greece, among the “mostly unfree” economies.

IFC’s Ease of Doing Business Index

Finally, in the latest report (2013) of the International Finance Corp. (IFC), which measures the “Ease of Doing Business Index,” the Philippines ranked 138th out of 185 countries. With regard to resolving insolvency, the Philippines’ ranking is at 165.

The IFC index measures the health of an economy’s investment climate based on factors that include: starting a business; dealing with construction permits; registering property; getting electricity; protecting investors; paying taxes; trading across borders; enforcing contracts; getting credit; and resolving insolvency.

As the technical note of the report explains, variation in performance across the indicator sets is not at all unusual, as it is simply reflective of the variation among national governments as regards the prioritization of certain areas of business regulation in their jurisdiction. The same document also sheds light on the possible reasons for a low ranking (as in the case of the Philippines with respect to resolving insolvency), that is, the ranking is pulled down when an economy receives a “no practice” or “not possible” mark, which signifies either the absence of laws or regulations covering a specific area, or the actual lack of practice due to competing regulations.

The challenge

Clearly, a good insolvency system is extremely important as it contributes to economic growth to the extent that such set of laws increases investor confidence, encourages entrepreneurship, and generally fosters the efficient allocation of resources in the economy. The ability of an insolvency system to rehabilitate viable businesses and to balance the interests of a company’s stakeholders and its creditors is one important consideration that each country should look into.

The good news is that our country has already taken steps towards strengthening the insolvency system, foremost of which is the enactment of Republic Act No. 10142, otherwise known as the “Financial Rehabilitation and Insolvency Act (FRIA),” in 2010, spearheaded in Congress by Sen. Edgardo J. Angara and his son, Juan Edgardo Angara.

This innovative piece of legislation not only replaced our more than century-old Insolvency Law but, more importantly, adopted best practices, as outlined in several publications of reputable international organizations such as the United Nations Commission on International Trade Law Legislative Guide on Insolvency Law, the World Bank Principles for Effective Creditor Rights and Insolvency Systems, and the Asian Development Bank Promoting Regional Cooperation in the Development of Insolvency Law Reforms.

The challenge that remains is how this new law (and its implementing rules that are currently being prepared by the Supreme Court) will be implemented in the years to come. The hope is that it will boost the efforts to increase the country’s global competitiveness and to attract meaningful investment which, in turn, would contribute to achieving economic development.

(The author, formerly the president and CEO of the Philippine Stock Exchange, is now the co-managing partner and head of the corporate and special projects department of the Angara Abello Concepcion & Regala Law Offices (Accralaw).  He can be contacted through [email protected].)