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	Table of Contents
p. 19 of 58 BACK | NEXT Purpose and Structure of the Toolkit Part One: Introduction and Overview Part Two: Preconditions and Infrastructure for Financial Sector Development I. Preconditions for Financial Sector Development II. Institutional and Market Infrastructure A. Insolvency B. Corporate Governance C. Financial Information D. Payment and Settlement E. Market Functioning Part Three: Financial Regulation and Supervision Part Four: Regional Financial Integration Part Five: ADB's Intervention in the Financial Sector Bibliography Glossary and List of Abbreviations Acknowledgements

Financial Sector Legal and Regulatory Toolkit : Part Two: Preconditions and Infrastructure for Financial Sector Development

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A. Insolvency

A functioning legal framework for insolvency management is crucial for the operation of a modern market-based economy and is linked with most of the major areas of concern in an economy.

The corporate sector cannot function well as a whole without effective mechanisms which govern the exit of insolvent market participants from trading. The general objectives of a system of corporate insolvency are reduction of uncertainty, promotion of efficiency, and fair and equitable treatment. A functioning insolvency regime thus helps reduce the risk of lending and the cost of debt service, thereby, increasing the availability of credit and entry of investments generally.

Further, a properly administered insolvency system operates as a valuable instrument for the promotion of market discipline. An effective insolvency regime provides the means for the ultimate identification of non-competitive market participants by other entities in the market and their controlled exit from trading. It also provides for an effective "penalty" for the least competitive. While these considerations stress the "retroactive" character of insolvency law, it also has a considerable "preventive" element in that it creates a strong incentive for the insufficiently competitive to strive for efficient and cost-effective performance so as to avoid administration by a third party on behalf of their creditors in the context of insolvency. Functioning insolvency procedures are at the very core of a legal and institutional environment for sound finance in any market-based economy.

A number of international organizations and associations have become involved with the development of standards for modern insolvency laws. The most significant and developed of these to date are those of the World Bank and UNCITRAL. In fact, UNCITRAL has adopted the UNCITRAL Legislative Guide on Insolvency Law. The Guide is intended to be used as a reference by national authorities and legislative bodies when preparing new laws and regulations or reviewing the adequacy of existing laws and regulations.

In addition to the World Bank and UNCITRAL, among others, ADB has been very active in insolvency law reform across the region. One of ADB's initiatives in this area is a Regional Technical Assistance Program (RETA 5975) on Promoting Regional Cooperation in the Development of Insolvency Law Reforms [ PDF ].

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