Oct. 2014—Until recently, outdated Mozambican insolvency laws dating back more than a century made the process to dissolve a business unduly complicated, slow and costly. These factors can impair growth, competitiveness, and the prevention and resolution of financial crises.

When a business is insolvent, its debts exceed its production and/or ability to pay those debts. The business will face insolvency proceedings and a bankruptcy court may determine that the business cannot raise the funds to pay all of its debts. Legal actions will be taken against the insolvent entity, and assets may be liquidated to pay off outstanding debts. In Mozambique, the likelihood that businesses could recover assets once the process was completed was also extremely low. 

USAID’s Support Program for Economic and Enterprise Development (SPEED) identified this as an area where legislative reforms would yield significant benefit, particularly for small and medium enterprises. As a result, the program partnered with the Mozambican Business Confederation and local legal advisers Sal e Caldeira to advocate for new insolvency legislation.

While the process to reform Mozambique’s insolvency laws has been long, it has been successful. In 2011, USAID helped draft legislation that was submitted to Parliament that year and enacted in 2013. The new legislation facilitates potential recovery for struggling businesses and establishes legal methods to declare bankruptcy, if necessary. Rather than being forced to immediately sell assets or declare insolvency, entrepreneurs now have options to recover normal economic activity and maintain jobs. The new laws also protect the creditors of the companies that ultimately declare insolvency.

With the implementation of the legislation, Mozambique is also expected to improve its position in the World Bank’s Doing Business ranking as a result of an anticipated reduction from approximately five to three years to resolve insolvency cases and a higher recovery rate by creditors.

While the approval of insolvency legislation by the Council of Ministers in June 2013 marked a major milestone, there was much work to be done. Within 90 days of the approval of the legislation, the Government of Mozambique had to enforce the new laws. Partnering with the Mozambican Business Confederation and Sal e Caldeira, USAID launched an ambitious training program for commercial judges throughout the country. Between October and December 2013, the program trained 45 judges and mediators, more than double the goal set by the government. The program also published and distributed a guidebook on the new insolvency laws as an educational resource for both public and private sector audiences.

“This initiative is a testament to the power of collaboration between the public and private sectors, and the persistence and patience required to see business reforms in action,” said Brigit Helms, the SPEED program’s chief of party.

USAID continues to assist the Government of Mozambique with the enforcement of the new laws while advocating for the establishment of insolvency administrators—people trained and accessible to business owners who need to be advised through the insolvency process.

“By training judges, advocating for the creation of a cadre of insolvency administrators, and launching education directed towards both the public and private sectors, USAID made an enormous contribution to the business community and assisted the Government of Mozambique tremendously,” said Jeremias Manjate, Sofala province’s chief judge, who participated in the insolvency training.

The SPEED program, which runs from August 2010 to February 2015, aims to improve the business environment in Mozambique by having more companies doing more business, resulting in increased trade and investment and a stronger competitive position.

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