# **Conversion to liquidation, if reorganization is not viable, should be swift and efficient.**

If reorganization is attempted, but fails, the conversion to liquidation should be swift, preferably automatic. In MENA countries, reorganization is rarely attempted in the formal system. Therefore, this criterion is not often invoked. Nevertheless, in most of the countries that allow reorganization, conversion to liquidation is swift, often triggered automatically. Triggers are the failure to reach a composition, settlement or agreement, or fraud or negligence (failure to keep adequate financial records, for example) of the debtor being uncovered. In Kuwait, creditors must petition for conversion. Where the judiciary is slow, conversion can face the same delays as any other aspect of the bankruptcy procedure. The majority of bankruptcies in the MENA region are liquidations.

**No MENA country can claim an efficient liquidation process by international standards** _._ Despite being the most commonly used procedure in the region, liquidation is a painstaking process in most, with varying degrees of speed involved. An efficient liquidation procedure involves swift appointment of the administrator, maximum recovery on assets, inclusion of all assets in the estate, prevention of deterioration of assets, safeguards to prevent asset stripping and fraud, a market for assets, swift procedure to sell assets, and fair, swift distribution of proceeds. Delay severely deteriorates the value of the assets and the rights of the creditors,<sup>xliii</sup>

**Delay and inefficiency plague the insolvency systems of most of the MENA countries** . Sales procedures for assets are not efficient, often requiring auctions with cumbersome procedures, such as in Kuwait and Egypt, or other detailed, time-consuming procedures to “protect” debtor‟s assets such as in Lebanon<sup>xliv</sup> . They are often subject to appeal by recalcitrant parties and delays in finalization.<sup>xlv</sup> Among MENA countries, efficient recovery and maximization of assets is not the norm. Bankruptcy is a last resort.  Creditors often expect little or no recovery and use a bankruptcy declaration (and the liquidation consequences to debtor, and attendant loss of civil rights) as a threat to motivate payment. Bankruptcy then becomes a tool for creditor collection, essentially a bilateral dispute over continuation or dismissal of the bankruptcy based on satisfying a debt.

# **Criminalization of insolvency/bankruptcy, and the fraud suspicion toward debtors, also serves to**

**slow down proceedings** _._ Bankruptcy in many MENA countries can lead to criminal prosecution, and civil penalties such as loss of freedom of movement (the court can take a debtor‟s passport) or loss of ability to manage a company.<sup>xlvi</sup> The laws and systems tend to view debtors as wrongdoers, rather than economic actors in financial distress. There is a fear of fraud and abuse of the system, based on the criminal view of insolvency, but also based on asset-concealment, asset stripping, and defrauding of creditors that has occurred in many developing countries. Many times, the fear of such fraud/abuse can lead to scrutiny of sale prices, cumbersome, inefficient auction procedures, and the over-availability of appeals of transactions within the bankruptcy (described above).<sup>xlvii</sup> These procedural obstacles slow down the bankruptcy, but often fail to effectively prevent fraud—rather, they lead to delay and loss of asset value.

**The MENA Report findings support the conclusions drawn** _._ In the report, Egypt and Kuwait report slow, protracted procedures. Oman, Palestine, Qatar, Saudi Arabia, and UAE report low usage of the bankruptcy system. Yemen and Iran do not have formal insolvency laws.<sup>xlviii</sup> DoingBusiness provides further evidence of slow systems in the region.  DoingBusiness 2010 descriptions of time for closing a

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