BizCLIR

When a borrower becomes insolvent and is unable to pay its debts as they become due, most legal systems provide a procedure that has as one of its primary purposes the expeditious and orderly liquidation of assets to pay the claims of creditors. Such systems are essential in countries with active economies in which credit is generally available. Without such systems, assets and the conflicting claims of creditors become hopelessly embroiled in prolonged and inefficient legal proceedings, which produce relatively small distributions in terms of recoveries to creditors. Inefficient or nonexistent bankruptcy systems also prevent the redistribution of income- producing assets and employees, with an overall negative impact on the local communities in which previously solvent businesses once operated.

While there are provisions of existing law in Afghanistan that deal with insolvency and the winding up of business enterprises, they are generally unknown even among lenders. In practice, bankruptcy is nonexistent as a viable method of dealing with insolvency in Afghanistan. In a recent survey, Afghanistan shared the lowest ranking in the world -- “No practice” -- in the bankruptcy category with Bhutan, Cambodia, Cape Verde, Comoros, Dominica, Equatorial Guinea, Grenada, Guinea-Bissau, Iraq, Kiribati, Madagascar, Rwanda, Sao Tome and Principe, Seychelles, St. Kitts and Nevis., St. Vincent and the Grenadines, Timor-Leste, Trinidad and Tobago, and West Bank and Gaza.

There is presently no active, broad-based effort to enact legislation dealing with insolvency and bankruptcy in Afghanistan. The absence of commercial credit, combined with more pressing legislative needs, has made bankruptcy legislation a low priority among the stakeholders in the commercial arena. This will change at some point, however, as the country’s economy continues to grow and bankruptcy legislation becomes necessary to deal with the defaults and insolvencies that will necessarily follow an active commercial credit industry.

Moreover, the potential possibility of increasing urbanization of Afghanistan’s tribal-based society may result in a breakdown of the traditional culture of family, tribal, and honor-based systems of debt repayment. While this may occur only gradually, it does provide time for a corresponding design and implementation of an effective statutory and judicial framework for the enforcement of commercial lending laws and provision for the inevitable bankruptcies of enterprises that fail in an emerging middle sector economy.

However, further work in the area of bankruptcy legislation should be a deliberative process that involves the various stakeholders and takes into account international standards for the drafting and implementation of insolvency laws in emerging countries. This work should involve all of the various stakeholders to include representatives of the lending and business communities through their respective representative organizations, the relevant governmental ministries, lawyers, and members of the judiciary.