BizCLIR

The law should have a clear, easy-to-use procedure for closing a business when it becomes insolvent and unable to pay its debts. The procedure should include understandable rules for orderly liquidation of the business’s assets to pay its creditors, and understandable rules for establishing all creditors’ rights and priorities. The law should also encourage starting the procedure early – before the business is “run into the ground” – to maximize recovery and to allow for reorganization and survival of the business when that is possible.

Without a reliable system to deal with insolvent businesses, assets and creditors’ conflicting claims become hopelessly embroiled in prolonged proceedings that end in small distributions and recoveries. An unreliable system also prevents the redistribution of income-producing assets and employees, which hurts local communities in which previously solvent businesses once operated. It also deters lending. Lenders will not extend credit freely unless their rights as creditors are respected when their borrowers cannot or do not pay.

Tanzania has a new insolvency law, effective April 2006, which is not well known and which its few users have described as unclear and as not fulfilling international best practices. Other factors also make for an inefficient insolvency system in Tanzania. Lenders see the laws and practices dealing with commercial credit are seen as inadequate. There is a general perception in the business and banking community that the key implementing institution – the court system – is not effective; it is perceived as slow, costly, and not conversant with business issues, especially complex financial and insolvency issues. Just as important, an efficient registry for recording of liens on collateral has yet to be developed. There are also no specialized professional insolvency associations or other supporting institutions, such as workout and turnaround consultants experienced with the law’s operation, or liquidating firms experienced in selling a business and monetizing its assets. These and other reasons have limited commercial credit in Tanzania.

Reform of the insolvency law and its administration are needed, but these should accompany resolution of institutional problems with the court system, creation of an efficient collateral registry, and other steps that can lead to increased availability of commercial credit.