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This introductory chapter provides an overview of the Modular Approach to the insolvency of micro, small, and medium enterprises (MSMEs). The Modular Approach shares with standard insolvency regimes the core objectives of preserving and maximizing value in the insolvency estate, ensuring distribution over an appropriate period of time of the highest feasible proportion of that value to those individuals and entities entitled to it, providing due accountability for any wrongdoing connected with the insolvency, and enabling discharge of over-indebted natural persons. The Modular Approach differs from standard processes, however, in the way it pursues these objectives. Its basic assumption is that the parties to an insolvency case are best placed to select the tools appropriate to that case. The role of the legal regime should be to make these tools available to the parties in a maximally flexible way, while creating the correct incentives for their deployment.

This chapter examines specific challenges faced by MSMEs. These challenges arise from factors such as size, lack of available collateral, undiversified nature, and lack of suitable external governance mechanisms, all of which contribute to a high MSME failure rate. As such, it is crucial for insolvency regimes to be responsive to MSMEs’ particular requirements. The chapter then discusses the need for cost-effective insolvency regimes tailored to these requirements, and the problems inherent in the development of such regimes. Cost-effective insolvency proceedings can encourage non-viable distressed firms to exit the market and efficiently recycle their assets to new uses, provide viable distressed firms with the chance to reorganize their operations and liability in order to continue in business, provide higher returns to MSME creditors and thereby incentivize lending in this sector, and encourage greater entrepreneurial activity and new firm creation. Ultimately, an effective MSME insolvency regime can alleviate the downside risk of a venture, in turn increasing the number and variety of people pursuing entrepreneurial activities.

This first annex presents a basic checklist of steps that should be completed to implement reform that incorporates the Modular Approach. The process should have three stages, all of them complementary, each of them with less value if considered individually. They should follow a predefined order. The first part of the sequence would be to conduct an assessment. Second, and based on the results of the assessment, a drafting stage would be initiated. Third, following approval of the reform, an implementation stage would be commenced. Each part of the process is equally important, and, surprising as it might be, the seemingly more ancillary stages (assessment and implementation) usually take longer and require the most resources.

The second annex offers an example of how one jurisdiction identified the policy needs for reform of the treatment of the insolvency of MSMEs by working with individuals on the ground to develop ideas for a fairer and more effective system. In Canada, it is generally acknowledged that the insolvency system works relatively well, particularly for consumer debtors and large enterprises. However, as in other jurisdictions, regulators have had questions as to whether the system adequately serves MSMEs. A study commissioned by the Industry Canada Marketplace Policy Branch of the Canadian Government resulted in Janis Sarra conducting a study on MSME insolvency in Canada in 2015 and 2016, with the goal of identifying challenges that MSMEs face within the existing Canadian insolvency regime. Part of Sarra’s methodology was to undertake a survey of more than sixty practitioners who deal on a daily basis with MSME insolvency, including insolvency professionals and loan officers.

This chapter examines the structure of non-agricultural employment in Ghana over the last 60 years through the lenses of different models of enterprise development and informality. Ghana’s post-Independence development strategy emphasized capital-intensive state-owned and import-substitution industries, which were not competitive and dynamic enough to sustain growth, let alone absorb the fast-growing, urbanizing labour supply. Increasing regulation and distortion of the economy in the 1970s fostered informalization of many economic activities. Despite liberalization in the late 1980s, employment in informal micro, small, and medium enterprises (MSMEs) grew in concert with the overall economy. While formal wage employment (public and private) has recovered since 2006, informal enterprises provide more wage jobs, and informal self-employment has surpassed agriculture in absorbing labour.