Evaluation of the effectiveness of insolvency frameworks: does the small business perspective matter?

Abstract

The exit of business from the market based on the rules of sound insolvency law is a necessary condition for economic growth. Effective insolvency frameworks encourage entrepreneurship. Currently insolvency laws in many countries are designed with the complexity of medium sized or even large companies in mind, but businesses are very heterogeneous in their characteristics and performance. This paper highlights the importance of taking into account the perspective of individual entrepreneurs, micro, and small enterprises (IMSE) when designing insolvency frameworks. It summarizes the theoretical and empirical literature on the objectives of insolvency law, discusses the unique challenges encountered by IMSEs when facing insolvency, and analyses international standards with the aim of discerning whether the existent instruments offer adequate guidance for policy reforms when designing effective insolvency frameworks and taking into account the needs of small businesses. The aim of this paper is to analyse the specific challenges of insolvent small business: individual entrepreneurs, micro, and small enterprises, and to consider whether existing international standards provide policy makers with sound guidelines and directions for the development of modern national insolvency frameworks that adequately address the needs of small businesses.